How to Pay Taxes on Side Income
In trying economic times, people sometimes take on extra work. This side income is a good way to stay in the black, but unlike income from an employer, taxes are typically not withheld. When tax time comes around, you must still report the income and pay any taxes. If you're supposed to receive a W-2 for your side income, it is simply reported with your total gross income, but if you are an independent contractor, the process is much different.
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Instructions
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Check if the employer has classified you as an employee or independent contractor. If you are the former, you were given a Form W-4 to complete when you began employment and will receive a Form W-2 at year end. If this is the case, you need only add the side income to your primary income and attach both W-2s with your Form 1040. If you are an independent contractor, you will instead receive Form 1099 at year end and report that income separately.
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Gather all self-employment income received from sources other than employers. Income reported on a Form 1099 and income paid in cash typically fall into this category.
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Total all income, including primary and side, and see if your tax will exceed $1,000. You can also look at past tax returns and calculate a rough estimate of what your withholdings and tax liability will be for the current year. If you estimate you will owe more than $1,000 after withholdings, credits, deductions and exemptions, you will need to file quarterly estimated taxes using Form 1040-ES. Failure to do so could result in penalties when you file your final annual tax return.
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Report self-employment income on Schedule C, which you will include with Form 1040 when you file.
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Tips & Warnings
The Internal Revenue Service (IRS) has many rules, regulations and exceptions to consider. If in doubt, contact the IRS or a tax adviser to answer questions specific to your situation. Carefully read and follow the instructions to each IRS form you must file.
Failure to pay quarterly taxes can lead to IRS penalties, but it can also leave you with a very large lump sum of tax liability when you file your. Filing quarterly taxes, whether required or not, can spare you this dilemma.
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