It feels absolutely great to work side-hustles. Receiving money from multiple income streams is empowering, and watching your bank account balance increase from side-hustles can be extremely gratifying. One could easily reason that all of the money earned from side-hustles can be used to pay down student debt, especially since most side-hustles do not withhold any money for the “tax man.”
However, sooner or later tax authorities will get a good share of all the money you make from part-time gigs. Forking over hard-earned money made from side-hustles can be extremely soul-crushing. However, with some planning, you can be best-prepared to deal with the tax implications of working side-hustles.
I did not think about taxes at all during the first year I worked side-hustles. I always assumed that I would have to pay some taxes on the money I earned from part-time gigs. However, I usually received a tax refund in prior years, and I thought this amount would offset any liability I had from working side-hustles. I was dead wrong!
By tax season my first year working side-hustles, I realized that I had not sent enough money to the “tax man” throughout the year. As a result, I had to pay a hefty sum to state and federal tax authorities after submitting my tax returns. Fortunately, I had enough money saved up to pay my taxes immediately, but with better planning, I could have avoided this situation in the first place.
If you work side-hustles, you will likely be classified as an independent contractor. This means that you will probably be issued a 1099 tax form from each employer at the end of the year listing the amount of money you earned. It should be noted that you will not be issued a 1099 if you made less than $600 from an employer, and there is a good chance that if you work smaller side-hustles like InboxDollars, you will make less than this amount. However, even if you are not issued a 1099 from an employer, you still need to declare any cash you earn on your tax returns and pay taxes on this money.
As an independent contractor, your part-time employers will likely not withhold taxes from your paychecks. You will simply be paid 100 percent of the money you make, and it is your responsibility to pay taxes on this cash. Another liability you have as an independent contractor is the self-employment tax, and this expense caught me completely by surprise my first year working side-hustles.
When you are an employee rather than an independent contractor, your employer pays 6.2 percent of your income in social security taxes, and you pay the other 6.2 percent. However, when you are an independent contractor, you have to pay the full 12.4 percent yourself. In addition, when you are an employee rather than an independent contractor, your employer pays 1.45 percent of your income in Medicare taxes and you pay the other 1.45 percent. However, when you are an independent contractor, you have to pay the full 2.9 percent yourself. All told, as an independent contractor, you will have to pay 15.3 percent of any money made from side-hustles in self-employment taxes on top of any federal and state income tax you may owe. It should be noted that you do not owe social security taxes above a certain annual limit ($127,200 in 2017), but you will owe the Medicare tax on all income.
In addition, any extra money you make from side-hustles will be taxed at your highest marginal tax rate. This is because all the income you make from your primary job will be taxed at each of the lower tax brackets until you reach your highest marginal tax rate. All told, nearly 40 percent or more of your income from side-hustles might be taken away by tax authorities.
There are a few different strategies you can employ to prepare for the tax liabilities of working side-hustles. If you make enough money, it might be worth it to file estimated taxes every quarter. Services like H&R Block have great platforms that allow you to estimate how much money you made each quarter from side-hustles, and pay the taxes on these sums before the end of the year. If you make a significant amount of money, this is the best option, since estimating taxes will ensure you do not have any surprises when you file tax returns.
Another option is to pay more money in taxes with every paycheck. Usually, if you list “0” for exemptions on tax forms, your employer will take more money out of your paychecks and send this additional cash to tax authorities. This withheld money will be used to offset any tax liability you might have from working side-hustles. This is generally a better option if you do not make a large amount of money in side-hustles, since there is a limit to the amount of tax liability you can offset with this strategy. If you make around five figures or more from side-hustles it is better to estimate taxes and pay tax authorities every quarter. If you underpay your taxes too much throughout the year, not only will you have to pay any taxes owed after filing your returns, but you may be assessed an underpayment penalty as well.
All told, taxes are a major consideration when working side-hustles, and it can be extremely soul-crushing to fork over a sizable percentage of your hard-earned money to tax authorities. As a result, it is best to have a plan in place so that you do not upset the “tax man” while working side-hustles to pay off student loans.