Business Best Practices
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The short answer is yes you have to pay taxes. The IRS isn’t going to miss out on an opportunity to collect money from you. The longer answer, what you owe, how you calculate it, how you pay it, how often you pay, is here.
The short answer...everything. If you make money providing a product or service you have to pay taxes on your profits. Note, that you’re paying on your profit (revenue minus expenses) not just your revenue. This means that you must track your expenses, every single one. If you’re not tracking your expenses you’re missing out on valuable tax deductions and you’re overpaying the IRS. And nobody wants to be doing that.
The money you earn in your side gig is considered self employment income (note it’s considered self employment income if it’s your only source of income as well). Self employment income is reported on the Schedule C of the 1040 tax form. The 1040 is the standard personal income tax form you file every year. You’ll report your revenue and expenses on the Schedule C and it will calculate the taxes you owe. As a self employed person you’re responsible for both sides of the Social Security and Medicare tax (if you’re employed by someone else they’re paying half and you’re paying half).
It’s also important to note that the IRS will likely be informed of some of your income by people who have paid you throughout the year. Anyone who has paid you more than $600 during the year will need to file a 1099 NEC form (new in 2020) for you. So it’s in your best interest to make sure you’re reporting all your income to the IRS. If they receive more 1099s than you’ve claimed in your tax return you can bet there will be an audit.
The IRS doesn’t want to wait until April to collect all their money so they require you to make quarterly estimated tax payments. The due dates are Q1 April 15th, Q2 June 15th, Q3 Sep 15th, and Q4 Jan 15th. Note due dates are adjusted if they fall on a weekend or holiday. The IRS will fine you if you don’t pay in 90% of your current tax bill during the year (or 100% of last years amount).
So how do you get the IRS their money? You’ve got a few options. If you’re still employed by someone else you can increase the amount that is withheld from your paychecks. The IRS wants their money but they’re not too worried about whether you paid in personally or through your job. If this isn’t an option for you or if you want to make payments yourself you can do this through the eftps website. You’ll need your SSN or EIN. (Please get an EIN, seriously please, you do not want to be handing out your SSN to clients). You can use this IRS form to calculate what you should pay each quarter.
The IRS wants their money, and they want it throughout the year. Make sure to stay on their good side by reporting all your income and getting your payments in on time.
Want to make sure you won’t forget those federal tax deadlines? Get your bookkeeping checklist to make things simple and get a handy checklist to keep up with your bookkeeping as well as email reminders so you don’t miss any federal tax deadlines.
You know bookkeeping is vital to the success of your business. Stop procrastinating and start getting it done with this simple checklist. You’ll get:
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