Side Hustlers: Are You Putting Enough Aside for Taxes?

Side Hustlers: Are You Putting Enough Aside for Taxes?

When starting out, most freelancers have no idea that they can deduct their home office (even when it is not a separate room). They do not know that if they travel miles to see a client, that is a business expense. 

The IRS will never bother telling you when you miss deductions so you have to educate yourself.

Other than deductions, gig workers, self-employed people and independent contractors are at a risk of falling into other tax pitfalls. One of the biggest issues is not knowing what amount you should pay in taxes. 

What Kind of Taxes Do You Have to Pay as a Side Hustler?

Unlike employed people, gig workers do not receive their paycheck with the taxes already deducted. They are the ones that decide how much they will pay to the IRS.

The self-employment tax (Medicare and Social Security taxes combined) is fixed at 15.3%. If you look at an employee’s paycheck, you will see that they pay almost half of this—it is because their employers pay half of it for them. Being both the employee and the employer, you have to take care of the amount all by yourself.

On to federal income tax. The amount you pay in taxes depends on what you make annually. See the 2018 single filer tax brackets:

  • 10% (earning $1 – $9525)
  • 12% ($9526 – $38700)
  • 22% ($38701 – $82500)
  • 24% (82,501 – $157,500)
  • 32% ($157,501 – $200,000)
  • 35% ($200,001 – $500,000)
  • 37% (Over $500,000)

These rates apply to your taxable income (after factoring in deductions, eligible tax credits and self-employment tax). 

Unfortunately, there are still more taxes that you have to pay as a side hustler apart from those mentioned above. In some states, you will be required to pay state income tax. There are some areas where you have to pay local income tax too. Check the tax rate of your state.

What Does the New Tax Cuts and Jobs Act Mean for Side Gigs?

The 2017 Tax Cuts and Jobs Act offers freelancers additional deductions to take advantage of. You can check them out on the IRS website.

How Much Money Should You Set Aside for Taxes?

For every dollar you earn, save 30%. It is better to overpay and get a refund than have to pay more. 

Do You Need to Pay Estimated Quarterly Taxes?

Self-employment taxes and federal income taxes are on a “pay-as-you-go” basis. Pay quarterly if you expect to owe $1000+ in annual taxes. 

Here are the quarterly taxes due dates:

  • April 15 for January 1 to March 31
  • June 15 for April 1 to May 31
  • September 15 for June 1 to August 31
  • January 15 for September 1 to December 31

What Forms Should You File for Your Freelance Taxes?

The IRS considers you self-employed. 

You will need the following forms:

  • Form 1040
  • Schedule C
  • Schedule SE
  • Form 1040-ES

Always monitor the expenses that you can deduct.

Leave a Reply