Picking up some extra cash by doing work on the side can be a great way to supplement your paycheck. Earnings from side work are considered self-employment income by the Internal Revenue Service. This means you have to report what you make on your tax return and pay income tax, Social Security tax and Medicare tax. You might have to file an estimated tax return and make periodic payments during the year as well since there’s no employer to withhold taxes for you.
File an estimated tax return if you expect to owe the IRS $1,000 or more when you file your yearly tax return or if you owed more than $1,000 when you filed last year’s taxes. Complete IRS Form 1040-ES, Estimated Taxes for Individuals, to estimate the taxes you owe on side work. You can file a paper form, but the IRS suggests you use its online Electronic Federal Tax Payment System to file and pay estimated taxes. A 1040-ES must be filed for each reporting period. The filing deadlines are April 15, June 15, September 15 and January 15.
Use Schedule C or C-EZ (Form 1040), Profit or Loss from Business, to report income and expenses from side work if the work is done as an independent contractor or as a sole proprietor. Add your earnings from self-employment as calculated on Schedule C to your salary and other income on your tax return.
Complete Schedule SE (Form 1040) to report self-employment income of $400 or more and calculate self-employment tax. You must do this even if you don’t owe any income taxes or need to file an estimated tax return. Self-employment tax means Social Security and Medicare taxes. The catch is that there is no employer to pay the employer’s portion of these taxes, so you get stuck with the whole thing. You pay self-employment tax on net earnings left after you subtract business expenses from your revenues from side work. As of 2013, the self-employment tax rate was 15.3 percent of net earnings. For example, if your net earnings amount to $2,000, multiply by 15.3 percent to calculate self-employment tax of $306.
Deduct the portion of the self-employment tax that an employer would have paid from your net earnings. The employer-equivalent portion is exempt from federal income tax. As of 2013, the employer-equivalent rate was 7.65 percent. Suppose net earnings are $2,000. The employer-equivalent portion of self-employment tax is $153, so the amount you report and pay federal income tax on comes to $1,847.
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