Let me guess. You had an incredible year growing your side hustle and getting a raise at your full-time job. You’re razor-focused and ready to give it your all next year to grow your freelance gig and finally pay off those loans or take a dream vacation. Hello, extra income!
I don’t mean to put the brakes on your excitement, but an increase in income does come with a price tag. Remember, Uncle Sam wants a cut. Has your success bumped you into a new tax bracket? If so, you may owe more than you did last year when April 15th comes around.
If you generated more than $400 with your side hustle, it’s officially income — and no longer a hobby — in the eyes of the United States government. That means you’ll have to pay self-employment taxes on it.
Extra Work Means Extra Taxes
With your side gig, you now have two jobs. And as your freelance work starts to take off, it’ll increase your overall income.
For example, let’s say a full-time teacher sells handcrafted pottery at art fairs every weekend. The owner of a local bistro sees her work and wants her handmade bowls, plates and coffee mugs on the tables of her growing restaurant chain. Boom: Our teacher-artist now has a regular buyer. She suddenly went from making a little extra money each month to signing a contract with a buyer who places a monthly order to replenish restaurant supplies.
Our teacher’s total income just increased dramatically, and she’s too busy working with clay and glazes to think about the financial responsibilities of growing her side business. When she meets with her tax preparer in the spring, she’s going to be pretty surprised: Not only does she now owe self-employment taxes, but she’s also entered a new tax bracket.
So, How Much Do I Owe Now?
Each year, new tax laws are passed or amended. It’s best to talk with your tax preparer for the most up-to-date information. The Internal Revenue Service (IRS) recently posted an article, In 2018, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Unchanged, to help you understand deductions and exemptions that may affect your reported income and tax bracket.
To figure out how much you’ll potentially owe for 2017, check out the draft copy of the 1040 Tax Tables and locate your income and filing status on the chart — it’s that easy.
If our teacher in the example above is single and makes $45,000 per year with no deductions or exemptions, she’ll owe $6,995. Since this salary is from her full-time job, tax is calculated by her employer and deducted from her paychecks. But if she estimates $10,000 in income from pottery sales in the upcoming year, her total income becomes $55,000, which means her total tax liability would jump to $9,495 for the next year. A portion of that would still be deducted by her employer, but she’d be responsible for the overage by paying estimated self-employment taxes each quarter using a Form 1040.
If your side business is growing, plan to increase the withholding from your employer or save for self-employment taxes. Always check in with your financial advisor to identify salary changes and updates to your tax bracket. And if you need help figuring out how much you owe, try an automated tax assistant app that’ll help you save and pay for taxes — so you don’t even have to think about it. A successful side gig is supposed to make your life easier, not harder. Stay on top of your new finances, and you’ll be ready for anything your accountant throws at you.