Picking up a side hustle or becoming your own boss full time can change a lot in your life, including your taxes. If you did any freelance or independent contract work last year, here are five ways things might shift this tax-filing season.
You may get 1099s in the mail
Form 1099-MISCs show how much your clients paid you during the year. You’ll need these forms to tally and report your income. If you receive a 1099, don’t shove it in a drawer — whoever sent it to you also sent a copy to the IRS, so it wouldn’t be a good idea to leave that information off your tax return. Also, if you did work for a client that hasn’t sent you a 1099, you probably still need to report the money you earned there.
You’ll probably need to file a Schedule C
This is where sole proprietors can report their business income and expenses. If you had less than $5,000 of business expenses, you might be able to use the shorter Schedule C-EZ instead. At tax time, a lot of your record-gathering and number crunching will revolve around completing this form. As a result, you may need to spend more on advanced tax software or human tax preparers.
You may need to pay self-employment tax
The IRS imposes a 12.4 percent Social Security tax and a 2.9 percent Medicare tax on your net earnings. Self-employed people pay the whole thing. A 0.9 percent additional Medicare tax may also apply if your net earnings exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. To calculate how much you’ll owe, you may need to add Schedule SE to your tax filing to-dos.
You might get a sweet new tax deduction
This year you may qualify for a new deduction of up to 20 percent of your side-gig income. You could end up with a lower tax bill. If your total taxable income is below $157,500 for single filers or $315,000 for joint filers, you’re more likely to get this tax break. People over the limit may still get a partial break, but the rules get more complicated. Don’t be shy about seeing a qualified tax pro for guidance.
You may need to make estimated tax payments
When you earn money, the IRS wants its piece as soon as possible. That’s why employers withhold taxes from employee paychecks. But because you’re not an employee, you may need to make estimated tax payments during the year. Every quarter or so, you may need to estimate your tax liability and pay the IRS. Waiting until April could mean paying penalties and interest.