How much tax do I have to pay with a side job?

how to avoid paying taxes on side jobs

how to avoid paying taxes on side jobs

The gig economy covers the budgets of millions of Americans, but there are tax implications to taking a side job. Fortunately, you can reduce taxes on your side jobs, depending on your situation.

To help you understand how a side job will affect your taxes, consider working with a financial advisor.

Do you need to report your income from side jobs?

Federal tax law requires you to report income from side jobs. While taxes might automatically come out of your paycheck from your day job, your side hustle creates self-employment income. Accordingly, it is up to you to report this income when filing your taxes. Failure to comply can result in heavy financial penalties.

The only exception to this rule is if you are under 65 and meet any of the following conditions:

  • You file your unique taxes and earn less than $12,550 this year.

  • Apply jointly and earn less than $25,100, or $26,450 this year if one spouse is over 65 and one is under 65.

  • You report as the breadwinner and earn less than $18,800 this year.

  • You are married and making less than $5 this year.

  • You file as a qualified widow or widower and are earning less than $25,100 this year.

In general, it’s a good idea to file taxes even if you’re within the income threshold to file a return. You may qualify for specific tax credits, such as the Earned Income Tax Credit, which can create a lucrative refund from the government. Therefore, reporting income from side jobs is mandatory if you’re above the income threshold for your type of deposit, and likely financially beneficial if you’re below it.

How much tax do you have to pay with a side job?

Typically, you’ll pay self-employment tax of 15.3%. Additionally, you will pay income taxes for your tax bracket. Income taxes range from 10% to 37%, depending on your income level and filing status. Therefore, it is recommended that you allocate at least 25% of your income to paying taxes.

You’ll likely receive a 1099 form for your secondary earned income (as opposed to the W-2 you’ll receive from your employer for nine to five years) by January 31. While a W-2 shows your income with taxes already deducted, a 1099 form shows how much money you’ve made as an independent contractor.

Remember, you will receive a 1099 form for side hustle. For example, if you’re an Uber driver and you run an Airbnb, you’ll get a 1099 from each company detailing how much money you’ve made working with each. If you earned less than $600 on one of your secondary stilts, you may not receive a 1099. In this case, you’ll still need to report the income if it’s more than $400.

How to pay your estimated tax bill

You will pay your estimated self-employment income tax quarterly. Therefore, you will have to pay taxes according to the following schedule:

  • You pay taxes on April 15 for income received from January 1 to March 31.

  • You pay taxes on June 15th for income received between April 1st and May 31st.

  • You pay taxes on September 15th for income received from June 1st to August 31st.

  • You pay taxes on January 15 for income received from September 1 to December 31.

To send the payment, you have several options:

  • Pay on the IRS website (irs.gov/payments) with a debit or credit card.

  • Business owners can pay by phone and online after signing up for federal tax electronic payment services.

  • Download the IRS2Go app and pay on your smartphone or tablet.

  • Send a check or money order to your local IRS office.

Also, after the tax year, you will file your taxes as usual on April 15th. You will use Form 1099-NEC from each of your side businesses. This module defines how much money you have earned as a non-employee of a company. For example, if you are an Instacart driver in 2022, you will receive Form 1099-NEC from the company by January 31, 2023, showing your income. Then, you have until April 15 to file your 2022 taxes. The income from 1099-NEC will go on Form 1040 Schedule C when you file. Remember, you will be making quarterly deposits and year-end filing.

What happens if you don’t pay taxes on your side job?

how to avoid paying taxes on side jobs

how to avoid paying taxes on side jobs

Failure to pay taxes on your side job will result in financial penalties from the IRS. Specifically, the IRS will charge the income taxes owed plus the effective interest rate for that quarter. As a result, you will pay the taxes due plus a percentage as a penalty. Additionally, you could incur a 0.5% penalty for each month you haven’t paid your taxes.

That said, the IRS won’t penalize you if you make slightly off-target quarterly tax payments. As long as you pay at least 90% of your taxes owed throughout the year, you won’t face fines for unpaid taxes (provided you make up the difference on your annual tax return).

How to avoid paying taxes on side jobs

While you can’t completely avoid paying taxes on your side, listing deductions when you file taxes can minimize your tax burden. For example, the following strategies can reduce taxes:

Ordinary and necessary expenses for your business

As a self-employed tax reporter, some of your expenses are considered routine and necessary. Routine expenses are unavoidable costs of running your business. For example, the costs of office supplies and statutory insurance policies are tax deductible.

On the other hand, necessary expenses are useful but not vital to your job. For example, you can deduct 50% of the costs for meals you discuss business over. So, it’s critical you keep every receipt for ordinary and necessary expenses to maximize this deduction.

Business expenses

While W-2 employees have limited access to work-related deductions, the self-employed have more freedom. For example, numerous side hustles require the use of the vehicle. Therefore, it is usually possible to deduct the costs for fuel, repairs, registration taxes and insurance.

You can also deduct cell phone costs if you use your phone for work. For example, if half of your phone usage is work-related, you can deduct 50% of your monthly phone bill from your taxes.

Home Office Deduction

If you use your home to run your side hustle or small business, you can take advantage of the home office deduction. To do this, you must have a designated space that you use exclusively and regularly for work. Also, this space needs to be the primary place where you run your business. Certain types of businesses, such as storage, daycare, and hospitality, don’t qualify for this deduction.

Track your expenses

Keeping detailed records is essential to maximizing your deductions. Additionally, you’ll need to back up your tax figures if the IRS checks you out. Therefore, it is recommended that you record all receipts related to your business, record your expenses, and create a system that helps you organize this information. If you have a complex tax situation or need help maximizing your tax return, it helps to work with a tax professional.

The bottom line

how to avoid paying taxes on side jobs

how to avoid paying taxes on side jobs

Side scams can be profitable, but they also impose taxes on earned income. Additionally, failure to pay these taxes quarterly can incur financial penalties from the IRS. However, by paying the correct amount of taxes on time and maximizing deductions for business-related expenses, you can reduce taxes from side jobs and pocket more hard-earned cash.

Tax tips for side jobs

  • Running multiple jobs can make tracking expenses and filing them in at the right time challenging. A financial advisor can help you organize your finances properly and file your taxes. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.

  • Understanding your taxes can be overwhelming. SmartAsset’s income tax calculators will help you calculate federal, state and local taxes.

Photo credit: ©iStock.com/gahsoon, ©iStock.com/SB Arts Media, ©iStock.com/Antonio_Diaz

The post How to Avoid Paying Tax on Side Jobs first appeared on the SmartAsset Blog.

Leave a Reply

Your email address will not be published. Required fields are marked *