This website has already discussed how student debt borrowers need to pay a significant amount of money in taxes if they work side-hustles to pay off student loans. Indeed, workers typically must pay even more taxes on side-hustle income than on cash they earn from their main job, due to the self-employment tax and other issues. However, if you keep some things in mind, setting money aside for taxes can be easier, and tax season can be a little less daunting.
The first year I worked side-hustles, I did not think about taxes that much. I knew that I would have to pay taxes on my side-hustle income, but I just increased the amount of money that was deducted from the cash I earned at my main job to pay for these taxes. I did not think much about setting money aside for taxes, since I expected that the cash deducted from my paycheck would cover most of my extra tax liability.
Boy, was I wrong! During tax season, I discovered that I owed thousands of dollars in taxes because I did not deduct enough during the year. It was extremely difficult for me to come up with the money to pay for these taxes. I had to liquidate investments and temporarily reduce the amount of money I devoted to my retirement accounts to make sure that I had enough cash available to pay for taxes.
Thankfully, I was able to come up with enough money to pay my state and federal taxes, and I resolved that I would not be in this situation in coming years. In each subsequent year that I worked side-hustles, I made sure to have a substantial amount of cash stocked away to pay for taxes. It is extremely tempting to spend available money that is just sitting around, so I broke up this amount in a few different bank accounts. As a result, I convinced myself that I had less money in the bank than I actually had, and I was able to save this cash for tax season.
As I began to make more money at side-hustles, I needed to rethink my tax strategy. Once I started to earn a substantial amount of money through side-hustles, I could not deduct enough money from my salary throughout the year to even come close to covering the tax liability of the cash from my side-hustles. I even had to pay a penalty of a few hundred dollars to the government a few of the years, since even if you square up with the tax man during tax season, you still need to account for not paying taxes throughout the year.
In order to ensure that I paid enough taxes on my side-hustle income, I began to make estimated tax payments. The IRS has an extremely easy electronic system that allows taxpayers to pay estimated taxes online. In addition, most states also have convenient online systems that also make it easy to pay estimated taxes for state income tax. It is important that you keep all records related to estimated payments, and provide this information to tax professionals, so that you get credit for making these payments before tax season.
Estimating your tax liability can be extremely tricky. The IRS has forms that can be filled out to determine how much money you should pay in estimated taxes, but the forms are only accurate if you correctly predict how much money you will make from side-hustles. Depending on your part-time job, it can be extremely difficult to accurately predict how much money you will make from side-hustles.
For instance, I worked one side-hustle that paid me one amount one year and 2.5 times this amount a few years later. This was an extremely different amount of money, and it was hard to predict how much I would eventually earn at this job in a given year. Of course, tax authorities expect that estimates will not be completely accurate, so it is fine to make your best prediction when estimating taxes.
It can be very difficult to mentally assess just how much taxes an individual needs to pay on money they earn through side-hustles. When you have taxes deducted from a paycheck, the process seems seamless, but when you receive money without deductions from side-hustles, it might be easy to think that you will keep a larger amount of this cash than you should.
Throughout the year, as I got an accurate picture of my income from side-hustles, I would use online calculators to determine how much taxes I could reasonably expect to pay on this cash. This helped me mentally adjust to the fact that I would have to part with a significant portion of the money that I was paid through part-time work. Each student debt borrower who works side-hustles should also use such calculators so there is less heartache when tax season rolls around in the spring.
In the end, taxes are an unpleasant aspect about working side-hustles, and student debt borrowers should expect to pay a significant amount of the cash that they earn from part-time jobs to the government. If you earn a small amount of money through side-hustles, it might be fine to simply deduct more taxes from your salary at your main job. However, if you earn a significant amount of money part-time, you should make estimated tax payments throughout the year.