I have a full-time job and a side hustle. After work, I start my side job as a freelance writer, crafting articles for clients after hours and on weekends.
Having a side business allows me to earn more income and save for future goals while also enabling me to do what I love and develop my skills.
Although working a 9-to-5 and a side gig is extremely fulfilling, there’s one thing I absolutely hate about it: taxes. If you have an additional income stream or run a small business outside of your regular job, taxes can get complicated — and expensive — quickly.
Find out how to manage your taxes if you have a side gig and simplify the process.
Freelancing and taxes
If you freelance or have a side gig on top of your regular job, your earnings are still taxable. Many people believe that you don’t owe taxes on income if the amount is less than $600, but that’s not true. The IRS expects you to pay taxes on all of your extra earnings, no matter how small.
It’s important to calculate what you owe accurately. Make a mistake and you can get hit with a huge tax bill and underpayment penalties.
What are estimated taxes?
If you’re self-employed or do any sort of freelancing, the IRS requires you to pay taxes on income as you earn it throughout the year. When a client sends you a 1099-MISC form with how much you earned, the company doesn’t hold any money from your check for taxes. You’re responsible for doing that yourself.
That means you either need to withhold it from your pay from your main job (more on that later) or send in estimated taxes.
The IRS says you have to make estimated tax payments — sometimes also called quarterly taxes — if you expect to owe more than $1,000 when you file your return. That can be difficult to know in advance, so many freelancers opt to file their taxes quarterly even if they’re unsure of their income.
With estimated taxes, you send the IRS a check for your earnings four times a year. This can become complicated and difficult, especially if your side income fluctuates. With my writing gig, I can have months where I earn a lot of money and others where I earn none at all. That can make estimating what I owe challenging.
Tax alternatives to quarterly payments
Because underpaying on your estimated taxes can cause expensive penalties, I opt for the easier version of managing by earnings. Instead of sending a check every quarter, I just change my withholdings with my full-time employer.
When you work as an employee, you fill out a W-4 form and complete your number of allowances. At any time, you can adjust your W-4 withholdings to take out more or less of your paycheck each pay period.
Opting to take out more from your check means you can save yourself the trouble of doing estimated taxes and prevent a large tax bill later on.
How to adjust withholdings and avoid paying estimated taxes
I use my side hustle earnings from last year to help me gauge how much I need to set aside for taxes this year. Divide your annual side hustle or freelance earnings by the number of pay periods there are at your full-time employer. Once you have your income per pay period, you can set aside a percentage for your taxes.
For example, let’s say I made $12,000 last year in my side gig and my full-time employer pays me once a month. That means I earned an average of $1,000 per pay period. Tax experts recommend that you set aside 30 percent of your side income for taxes. In this example, that means I’d need to adjust my W-4 to take out an additional $300 each month.
By simply adjusting my W-4, I fulfill my tax obligation as I go and I don’t end up owing the IRS a ton of money at tax time. Best of all, I don’t need to remember to file estimated taxes every quarter.
If my income fluctuates, I can change my W-4 to accommodate the difference. For example, if my income jumps up to $1,500, I’d just change my withholding to take out $500 a month instead of $300. If I stop freelancing or if my income drops, I can reduce my extra withholdings to compensate.
Using the W-4 from my full-time job to manage my freelance income makes my life much easier. If you have a part-time or full-time job working for someone else, it can be a great lifehack for handling taxes.
Juggling a side gig
Having a side gig is a terrific way to boost your income and meet your goals, but it does present unique challenges and responsibilities. Effectively handling your taxes is essential for your financial success.
For more information about managing a side hustle and filing your taxes, find out how a business bank account can help.