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 a few ways things might shift this tax-filing season.
1. You may get 1099s in the mail
How it works: Your clients may send you a Form 1099-MISC showing how much they paid you during the year. You’ll need these forms to tally and report your income.
What it means: “If they get a 1099-MISC with box 7 filled out, which is nonemployee compensation, that’s de facto self-employment income,” says Micah Fraim, a certified public accountant in Roanoke, Virginia. 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. Income, even if it’s paid in cash, generally has to be reported unless the law specifically exempts it.
2. You’ll probably need to file a Schedule C
How it works: 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.
What it means: 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.
3. You may need to pay self-employment tax
How it works: The IRS imposes a 12.4 percent Social Security tax and a 2.9 percent Medicare tax on your net earnings.
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Typically, employees and their employers split that bill. But self-employed people pay the whole thing. (For 2018, only the first $128,400 of earnings is subject to the Social Security portion.) A 0.9 percent additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly.
What it means: To calculate how much you’ll owe, you may need to add Schedule SE to your tax filing to-dos.
4. You might get a sweet new tax deduction
How it works: Because of the recent changes to the tax law, this year you may qualify for a new deduction of up to 20 percent of your side-gig income.
What it means: 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. “I’d say 90 percent of people should be able to expect to get that 20 percent deduction,” Fraim says. Don’t be shy about seeing a qualified tax pro for guidance.
5. You can set up your own retirement plan and cut your tax bill
How it works: Going solo usually means saying goodbye to employer-sponsored retirement plans, but who says you can’t start your own? Solo 401(k)s and Simplified Employee Pension Individual Retirement Accounts (known as SEP IRAs) offer ways to build a nest egg, and the contributions could be tax-deductible.
What it means: “It lessens the pain of how much you’re having to shell out to the government if you’re funding your own retirement account,” Fraim says.
6. You may need to make estimated tax payments
How it works: Taxes are a pay-as-you-go arrangement in the United States. 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.
What it means: Every quarter or so, you may need to estimate your tax liability and pay the IRS. Waiting until April to do it all at once could mean paying penalties and interest, Fraim warns.
If you have a partner with a regular job and you’re filing jointly, you might be able to avoid the quarterly hassle. “What we’ll typically recommend is that you get an estimate of what your total tax liability is going to be from all income sources and then just jack up your withholding from work. That way it’s automating it for you and you don’t have to go through this really conscious effort every quarter,” he says.
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