As the gig economy grows, more and more Americans rely on income from side jobs. Working for yourself is empowering. It allows you the flexibility to set your own schedule, and it can provide an additional income stream if you have full-time employment elsewhere.
You may wonder, with all these perks, what's the downside? Whether you work in direct selling, freelance writing, ride-sharing, or another side job, you are responsible for paying your own income taxes. Here's everything you need to know about when and how to pay your own taxes.
Income taxes as an employee vs. side job
If you've ever worked as an employee for another person, you know your employer withheld income taxes from your paycheck each pay period. The employer withholds taxes and pays them to the Internal Revenue Service (IRS) on your behalf. The amount of income taxes the employer withholds from your paychecks are based on the information you provided to the employer when you filled out Form W-4, Employee's Withholding Certificate upon hire or during orientation.
On the other hand, as an independent contractor—typical with a side job—you are solely responsible for paying your income taxes. There is no employer to pay them on your behalf. Because you must pay your own taxes, you also have additional responsibilities. First, you need to accurately track your income and expenses.
Track your income and expenses
As a contractor, you don't have the luxury of a boss setting aside and paying income taxes on your behalf. Instead, you must track your own income and expenses and estimate your total tax liability based on your projected earnings for the year. Using your projected earnings, you can back into what you need to pay each quarter to ensure you've paid your full tax liability by the final quarterly payment. If you don't, the IRS may charge you penalties and interest.
Pay income taxes on your side job
In addition to tracking your income and expenses from your side job, you'll also need to know how to pay your own income taxes. You'll need to pay the IRS directly via quarterly estimated tax payments. Here's an overview of how to calculate your estimated tax payments, when they are due, how to pay, and how to avoid penalties and interest.
How to calculate estimated tax payments
To calculate your estimated tax payments, you should consider your projected adjusted gross income (AGI), taxable income, deductions, and tax credits for the year. This is why having accurate income and expense records are so important.
It helps to look at your prior year's tax return as a gauge and adjust accordingly for changes in the current year. You can also use the Estimated Tax Worksheet from the informational section of Form 1040-ES.
When are estimated tax payments due?
Estimated quarterly tax payments are due on April 15, June 15, September 15, and January 15. If one of these dates falls on a holiday or weekend, the due date is pushed to the next business day. You will notice these dates are not exactly three months apart. Below is the payment period covered by each due date.
Due Date and Payment Period
- April 15: Jan. 1-Mar. 31
- June 15: Apr. 1-May 31
- Sept. 15: June 1-Aug. 31
- Jan. 15 (of the following year): Sept. 1-Dec. 31
How to pay estimated taxes
There are a few payment options for your quarterly payments. You can send estimated tax payments online, by mail, by phone, or on the IRS2Go mobile app. If you're paying online, by phone, or on the app, you will need basic personal information from your prior years' tax returns to confirm your identity.
If you're mailing in your payment, you should send in the check or money order—no cash allowed—payable to "United States Treasury" along with the corresponding quarterly payment voucher from the Form 1040-ES. The payment voucher provides your identity information and allows the IRS to correctly apply your payment toward your tax liability.
How to avoid penalties and interest
The IRS may apply an underpayment of estimated tax penalty if you do not pay your tax liability in full via withholdings from your employer or estimated tax payments. There are a few exceptions to this rule. If you paid at least 90% of the current year's tax liability or 100% of your prior year's tax liability, whichever is lower, you may avoid this penalty. If your total tax liability for the year is less than $1,000, you may also avoid this penalty.
If you pay your quarterly estimated taxes late or underpay any quarterly payment, you can also expect a penalty from the IRS. This is the case even if the IRS owes you a refund by the time you file your tax return. The interest rate varies, but it is based on the quarterly due date and the amount that remains unpaid. The longer a payment remains outstanding, the larger your penalty will be. This is why you shouldn't plan to just pay your taxes at the time you file your tax return.
To minimize your risk of penalties, you should always pay your tax liability in full over the four quarterly estimated tax payments. Typically, you will pay four equal installments. However, there are exceptions for seasonal workers who have significant fluctuations in income over the quarters. If this is the case for you, look into the annualized income installment method. It requires more documentation, but it can limit your underpayment penalty for quarters where your income—and quarterly estimated tax payment—is lower.