There is nothing wrong with trying to earn some extra money to pay off debts or advance in savings. Last year, it was estimated that almost half of Americans had problems. If you don't have an additional job, you probably know some people who do.
While earning some extra money can be a good thing for your pockets, it has an impact on your, too. This is what you can expect at the time of taxes when it comes to your hustle and bustle.
1. You will get some additional forms
Wait for about 1099 forms in the mail or in your inbox. A copy goes for you and the IRS. Do not throw these! You will need them whento show the income you earned from a certain company.
Even if a customer has not sent you a 1099, you must report that income in your taxes. Failure to report your taxes, even if paid in cash, is a form of tax fraud.
2. You will spend extra time filing
If you do not have a separate business established for your secondary job (such as an LLC), you are working as a sole proprietor. While this type of company does not have to file business taxes, it does have to complete some additional tax forms.
For example, most sole proprietors must complete an Annex C form. This is where they report the profits and losses of their business. But if your hustle comes from property rentals, you must complete a form in Annex E. This reports gains and losses on rental real estate, along with other types of partnerships, trusts and properties.
Both forms must be submitted with your personal tax returns.
3. You could pay the self-employment tax
When you work for your daily job, you already pay the Medicare and Social Security taxes. This is something that you and your employer divide the bill for. But when you work for yourself, you are on the hook of everything.
The tax rate of self-employment is 15.3% and is based on their combined wages and net earnings of the previous year. If your net earnings were $ 400 or more last year, you must pay the self-employment tax. For self-employment tax, you must complete a form in Annex SE.
4. You can pay taxes more frequently
If you work for yourself, you may have to start paying quarterly taxes. This is when you pay taxes on your earnings throughout the year, or "payment for use." In your daily work, taxes are withheld on each paycheck. At your side, you will have to make estimated tax payments every few months.
If you wait until Tax Day to file taxes for the earnings you get from your secondary job, you could face fines and pay interest on the amount you owe.
5. You may qualify for deductions and credits
Running a business means that you can enjoy some new deductions on your tax return, which include:
- Internet and telephone bill: You can deduct part of your invoices that are directly related to your business. So, if you use 25% of your Internet time for work, you would deduct it from your taxes. If you use your phone a lot, you may consider buying a second phone so you can deduct 100% of that cost for your business.
- Home Office Deduction: You should detail that a space in your home is used specifically for business-related activities. You can also claim costs related to your home office space. For example, if your home office is 10% of your home, you can also deduct 10% of your annual electricity costs. If you rent office space, you could deduct those costs instead.
- Health insurance premiums: This is an option if you do not have health insurance through your employer and pay it out of pocket for your coverage. You can deduct medical, dental and even long-term care premiums.
- Contributions to the retirement plan: Maybe already when you make contributions to your IRA. But if you have a business, you can make qualified contributions to your Solo 401 (k), Simple IRA or SEP-IRA to reduce your tax bill.
How to avoid a huge tax bill from your concert
If you do not want to be charged with a large tax bill, take some steps now to limit what you owe.
- Reserve tax money. Independent workers must reserve between 20% and 40% of their income to pay taxes. Therefore, if you earn $ 1,000 each month with your additional work, you would save $ 200 to $ 400 to allocate to your estimated quarterly taxes. If you pay in excess, generally that excess can go to your next quarterly payment. The IRS will not know how much you overpaid until you file a tax return in April. But if you overpaid, it will send you a refund.
- Open a separate business account. If you have your own business, it's time to treat it as such. Making all your business income go through your business account can save you an exceptional amount of time and inconvenience at the time of taxes. You can avoid classifying bank statements to see what is "business" and what is "personal." It is also a good place to pay for business-related expenses, in case you have any. You can also consider incorporating your business so that it is completely separate from personal income and expenses.
- Talk to a professional. Taxes are not simple, especially because the rules can change every year. Whether you use or , you don't have to do it alone. A professional can help you make sure you are doing your taxes right away without facing fines. They can help you reduce your tax bill and possibly increase your return.