You know how you have a normal 9-5 job and you get your paycheck and it’s not the WHOLE amount it started with? That’s because a good chunk of it (roughly 30%) is going to the federal, state and sometimes local taxes, social security, medicare, and FICA. And sometimes a few fun other things depending on where you live. This, however, is all done for you thanks to your human resources people! That way come tax time, you don’t usually have to pay anything as it’s already been taken out throughout the year based on your estimated income.
When you start a side business, and you begin to generate revenue, you will have to set aside this money in order to pay it come tax time. Why is this? Well if you make money, the government wants a piece of it. That’s taxes, folks.
Please contact your tax accountant for professional advice.
Why You Need To Set Aside 30% For Taxes
As a blogger or any type of freelancer when you’re 1099 (that means you’re a contracted employee) you are responsible for paying the government their share of income Since brands are not taking out taxes when they pay you, it is your responsibility to do so. Typically, you will usually pay about 30% of your NET income to the government. Your NET income is calculated as Total revenue, minus total expenses. This gives you your NET. You’ll pay 30% of your net to taxes. But to be on the safe side, we always recommend putting aside 25-30% of your checks or payments received from brand partnerships, affiliates and the like, into a separate saving account for taxes.
When Do You Need To Start Paying Taxes
The next question we get often is when do you need to start paying taxes and set this money aside. As long as you’re generating revenue, you should be recording it and paying taxes on it come tax time. The IRS says if you make more than $400 in freelance work in a year, you will need to claim this and file it for taxes.
Why do people pay quarterly estimated taxes?
Paying quarterly estimated taxes is done for a few reasons. One, it makes it less painful come April 15th when you have to write that check to the IRS. But also, it’s required by the IRS to do so if you plan on paying a minimum of $1,000 in taxes for the year. You may be penalized a small fee for not paying enough throughout the year so it’s important to be mindful of this. Payments are made quarterly and you can learn more about how to estimate these and when to make them from the IRS here.
P.S. If you have a day job, you may want to ask your human resources manager if you can update your number of dependents. More taxes are taken out when you claim 0 versus 1. Sure this may suck on your paycheck every 2 weeks, but it’ll help compensate for when you have to pay taxes on that side hustle of yours. It may also mean you can set aside a little less without stressing.
Always contact a tax accountant professional to discuss your options.