Like millions of other Americans, you probably have a side gig that is your own small business. It’s also likely that the business is making a profit. It can be easy to forget about taxes. However, ignoring your tax responsibility may land you in trouble.
How do you calculate the taxes?
Income earned through a side gig is considered self-employment, and you must file taxes with your personal income tax return. Self-employment taxes for side hustles are different from traditional employment taxes because when you’re self-employed, you are responsible for paying both the employee and employer portions of your Social Security and Medicare tax (15.3%). Therefore, you must pay double what an employee usually pays since you pay both sides of the tax.
Throughout the year, track all your expenses and deductions so you don’t pay more than necessary. You should also be setting aside a percentage of your gig income so you don’t find yourself faced with a large tax bill with no money to pay it. A tax professional can help you determine what that percentage should be.
Mistakes in filing taxes for your side hustle can lead to penalties from the IRS. Some of these potential mistakes may include:
- Failing to file or pay your taxes on time
- Underpayment of estimated taxes
- Incorrect calculation of taxes.
Filing your taxes late can result in a penalty of 5% per month up to 25% of the unpaid tax debt, while failure to pay estimated taxes can result in an additional penalty of 0.5-1% per month, depending on the amount you owe and how long you have owed it. Additionally, incorrect calculations on your tax return could result in an accuracy-related penalty of 20% of any underpaid taxes.
A side hustle can be an enriching experience both financially and personally. However, it’s imperative to pay your taxes. Staying organized and keeping track of receipts and maintaining proper books and records will help you avoid tax problems.