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Working a side gig may be a financial necessity for some, a passion project for others. Whatever the reason for working more than one job, it’s important to understand what impact the extra income can have on taxes.
From freelance consultants to NIL athletes, any type of self-employment comes with a different set of rules than a standard W-2 pay check. It is easy to assume that this is a matter of paying more income tax, but the reality is not so simple.
two-way tax bill
In a traditional W-2 job, the employer pays half of the Social Security and Medicare taxes while the employee pays the rest. So what happens when there is no employer?
Sherman Standberry, Certified Public Accountant (CPA) and CEO my cpa coachexplained that “In addition to the federal and state ordinary income tax rates, the self-employment tax is a 15.3% tax assessed on self-employment income.”
This applies to net earnings to the extent that ir 12.4% is earmarked for Social Security and 2.9% for Medicare taxes.
recently Youtube videoStandberry shared that liability can be reduced by, for example, reclassifying self-employment income by forming an S corporation. However, more casual side hustlers like dog walkers, rideshare drivers, or gig workers won’t get much benefit from that approach.
push into higher tax bracket
Additional income from a side gig adds to one’s total taxable income, therefore potentially pushing them into a higher marginal tax bracket. While the higher rate is only paid on amounts falling into the new tax bracket, it means the extra money earned may feel like much less than expected.
losing credits or deductions
Extra income can quietly reduce the tax exemption. Credits such as the child tax credit or education benefits gradually decrease as income increases, meaning earning “a few extra dollars” may save less money overall. Tax Policy Center.
Strategies to have more cash
Staying ahead of the tax bill involves more than just saving money in an extra account. It requires active management throughout the year.
“Individuals need to understand the tax consequences of their type of income,” Standberry said. “And they should make estimated tax payments throughout the year to avoid surprise tax bills in the future.”
Apart from down payments, it is essential to maximize deductions. Unlike W-2 employees, those with side businesses can often forgive common and necessary expenses, such as equipment or professional software.
audit risk
Failing to report additional income or overstating deductions increases the chance of an IRS audit. David A. Perez, Enrolled Agent and CEO Tax Maverick AIsaid, “Freelancers who face audits often guess rather than document.”
Keeping careful records of every business-related purchase is the best way to reduce the total taxable amount. Treating extra work like a serious business is the only way to ensure that extra work is truly profitable.