Have a Side Hustle? This Small Oversight Can Balloon Your Tax Bill
Your occasional gig driving for a rideshare, pet-sitting or designing logos for local businesses has become a bona fide side hustle. Congratulations. Still, as you pop the champagne on your success — or maybe sparkling juice — you may be wondering what paying taxes will look like this year. It’s a fair question, because one small but significant oversight can make your tax bill balloon.
What’s the oversight? Failing to plan. It’s rarely intentional, but if you’re used to navigating tax season as a traditional employee, it’s easy to overlook tax planning as a freelancer or consultant. The good news: Fixing that oversight isn’t as hard as you might think.
Read More: The Side Hustler’s Guide to Paying Taxes Without Crying (Much)
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Not Planning Creates a Ripple Effect
For Gene Bott, a CPA, tax adviser and partner at Kevin O’Leary’s Tax Hive, when side hustlers don’t plan for taxes, they open a Pandora’s box of complications. Simply put: If you’re not thinking about your taxes, you’re probably not tracking expenses — which can put you in a tough spot with Uncle Sam.
“Many don’t track their side hustle income, and then they’re hit with a nasty surprise when the IRS asks about it,” he said. “Suddenly, they have a large tax bill for a side hustle that didn’t even make money because they failed to track and deduct expenses. Or they have a bill for legitimate profits, but they forgot no taxes were withheld on that income.”
To stay on the IRS’s good side and avoid a large tax bill — not to mention a major headache — build taxes into your regular business planning.
Not Planning for Taxes Leads to Underestimating Your Tax Bill
If you’ve been a W-2 employee, you’re likely used to a straightforward system in which taxes are withheld from each paycheck. Side hustle income has no withholding, which means you’re responsible for both income tax and self-employment tax.
Kevin Golden, a CPA and partner at James Moore & Co., said failing to prepare can lead you to underestimate what you owe.
“Many individuals spend the gross income they receive without accounting for the tax portion that was never withheld,” he said.
Meeting with a professional advisor — or doing your own research on what taxes may look like as a freelancer — can help you plan ahead. Golden is particularly concerned about side hustlers who focus only on income tax and overlook self-employment tax.
“Self-employment tax covers Social Security and Medicare and is currently 15.3% of net earnings,” he said. “When you add federal and possibly state income tax, total liability can easily reach 25% to 35% of profits. That surprises many first-time side business owners.”
It won’t surprise you if you’ve planned for it. If this is your first year filing as a side hustler, hiring a certified public accountant to help you prepare may be worth the investment.
Not Planning Can Lead to Sloppy Recordkeeping
Golden has also observed that freelancers who don’t plan ahead are more prone to sloppy recordkeeping, which can inflate taxable income or raise red flags with the IRS.
Many side hustlers, he said, fail to track net income properly, focusing on total deposits instead of subtracting legitimate business expenses.
“If expenses aren’t documented and deducted, they end up paying tax on more income than necessary,” he said. “Poor recordkeeping can significantly inflate taxable income.”
You don’t need to rely on notebooks or outdated spreadsheets. Apps and digital tools can help you track expenses throughout the year.
Not Planning Can Mean Missing Your Quarterly Estimated Taxes
Still unsure whether you need outside help? Bott urges side hustlers to consider how the IRS assesses penalties for failing to pay quarterly estimated taxes. If you expect to owe $1,000 or more, you generally must make payments four times a year — not just by April 15.
“That means they charge interest and penalties on one quarter of your overdue tax bill from the due date of each quarterly payment,” he said. “If you wait until April 15, you are charged penalties from the previous April for some of those late payments. It adds up incredibly fast, and the penalties alone can reach 25% to 35% of your actual tax bill.”
How do you avoid those penalties? Work with a tax professional who can guide you through quarterly payments — and set aside money for taxes as you earn it.
The Bottom Line
Failing to plan for taxes is a common mistake among freelancers. When you’re busy walking dogs, designing logos or driving passengers to their destinations, taxes may be the last thing on your mind. But this small oversight can carry big consequences if you’re not prepared.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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