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How to Manage Taxes with a Full-Time Job and a Side Gig

Gig Workers Self-Employed Taxes Self-Employment Tax Planning Self-Employment Tax Tips
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The first year I started a side gig in addition to my day job, I had no clue about quarterly estimated taxes.

I also didn’t have much need to worry because I only grossed about $1,700 the first year. Even though I reported that money as required, the taxes I paid from my day job covered the bill.

However, as my side gig income increased, it became apparent that I needed to start paying Uncle Sam his cut or face a penalty.

Do you need to file quarterly tax payments?

Your first question when earning side gig income is probably, “Do I really need to pay quarterly estimated taxes?” In your first year, like me, there’s a chance you can avoid them depending on how much you earn.

The IRS states, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”

Don’t get it confused though, you still owe taxes on the money you earned, but you can simply file an annual tax return like normal. The amount you’ve been paying from your day job paycheck may be enough to cover what you owe on your side gig income. However, if you usually break even when you file your return, that plan may not work. In that case, you could end up with a hefty tax bill and have to pay a penalty.

One way to avoid quarterly tax payments

Your day job automatically withholds taxes from each paycheck throughout the year to cover your tax responsibilities. As a result, you typically owe nothing to the government or receive a refund for paying more than you needed to when you file your tax returns.

Instead of paying quarterly estimated taxes, you could increase how much you’re paying in taxes with your full-time paycheck to compensate for the taxes you aren’t paying on your additional income. Simply go to your human resources department or check an online tax calculator and adjust your tax withholdings on Form W-4 before your next pay period. You’ll receive less money in your paycheck, but it should help offset a big tax liability at the end of the year. That ultimately keeps you from paying an underpayment penalty for not paying quarterly taxes.

One trick to this method is to be sure you’re appropriately adjusting your tax withholdings as you start to earn more side gig income. You may eventually decide it’s not worth constantly manipulating your full-time paycheck to adjust taxes withheld and choose to calculate and pay estimated quarterly payments instead.

Determining how much you owe

IRS Form 1040-ES is the document used to calculate how much you need to pay in quarterly estimated taxes.

You won’t receive any Forms 1099 from your clients until after the end of the fiscal year. Therefore, it’s important to meticulously keep track of your income and expenses each quarter to know how much you will expect to owe in order to accurately pay estimated taxes and avoid underpayment penalties.

Also, be sure to keep records of any business-related expenses from your side gig. For example, if you’re a wedding photographer on the weekends, keep track of travel expenses and equipment costs. You’ll ultimately pay taxes on the profit of your side gig, so you need proof of expenses, like receipts, to reduce your tax burden.

When you need to pay quarterly estimated taxes

Quarterly estimated taxes are due four times a year (once per quarter).

  • Taxes on income earned from January 1 – March 31 are due April 15
  • Taxes on income earned from April 1 – May 31 are due June 15
  • Taxes on income earned from June 1 – August 31 are due on September 15
  • Taxes on income earned from September 1 – December 31 are due on January 15 of the following year

Don’t forget to file both federal and state quarterly estimated tax payments. And, even if you pay quarterly estimated taxes, you still need to file your annual income return. You also need to file self-employment taxes with your tax return.

Save money from each side gig paycheck

A good rule of thumb is to set aside 30 percent of each paycheck into a savings account earmarked for taxes. Personally, I like to save 40 percent because it accounts for state and city tax since I live in New York. That typically leaves some left over for me to put into a retirement account too.

One of the worst feelings as a person with a side gig is to realize you forgot to save enough money to pay taxes. You end up having to raid your savings account, emergency fund, or worse – find you don’t have enough money to pay your tax bill.

Here’s a perk! Tuck some money away in a SEP IRA

Don’t let the additional tax bill and self-employment tax get you down. Earning side gig money is still an excellent way to pad your bank account and reach your financial goals faster.

Plus, you can double-down on your retirement savings.  While you may be contributing to a 401(k) or similar employer-sponsored retirement plan through your full-time job, consider contributing some of your side gig money to a SEP IRA. This type of retirement account is a variation of the IRA and are used by business owners and sole proprietors to provide retirement benefits to themselves or employees.

Since you’re a sole proprietor, you can take advantage of this savings fund along with your regular contributions to your employer-sponsored plan. In 2017, you can contribute the lesser of 25 percent of your compensation or $54,000. It’s one additional way to reduce your tax liability and save for the future.

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