If you’ve started earning money from a side hustle, freelance work, or your own business, make sure you have a handle on your new tax situation, because it just got more complicated.
As a freelancer, you’re responsible for managing your own taxes. When you’re used to an employer helping out, like by automatically taking taxes out of each paycheck, doing that work yourself can be an adjustment.
“That’s the first thing: You are responsible for paying taxes on that income,” says certified public accountant Jeffrey Levine, director of financial planning at BluePrint Wealth Alliance in Garden City, New York.
That’s not always easy. People who make money as independent contractors and don’t have taxes withheld from their pay by employers tend to make two big tax mistakes:
Both errors can be expensive and lead to surprise bills and penalties. They can also be easy to avoid with some planning.
Our video below can help you get started:
And here are some tips to help you avoid those common mistakes.
Keep good records throughout the year, documenting all your earnings. At tax time, those detailed records will help ensure sure you have all the right documents in hand before you file.
Your records can also help you fill in any gaps: Businesses are only required to issue you a 1099 if they have paid you more than $600 in a given year. But you’re still required to report the income.
There’s no one-size-fits-all answer on how much of your earnings you should set aside. “It’s such a spitball thing,” says Levine.
All the same, putting aside about one-third of your gross 1099 income for taxes is a conservative bet for many workers who aren’t in a high tax bracket, he says. That’s likely enough to cover your federal and state taxes, as well as your self-employment taxes. Save that cash in a separate account so that you have it ready at tax time.
But using that kind of broad estimate can still leave you open to over- or under-paying. Your ultimate tax bill—or refund—will depend on other aspects of your situation, like what deductions you claim and the income and taxes from your 9-to-5, if you have one. Those factors will also be important in figuring out if you need to pay estimated taxes over the year on your side hustle income to the IRS each quarter, or if you can wait until tax time to pay up.
To get the most accurate assessment of how much you need to pay in taxes for your side hustle, talk with a tax pro. They can help you avoid setting aside too little, or too much. “The actionable advice is, understand your full tax picture,” he says. “Ask yourself, ‘How can I make the most of this?’”
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