Set Aside Money To Pay Taxes

Riverbank News - - PERSPECTIVE - Hugh Nor­ton

Whether they’re rent­ing out a spare room, driv­ing oth­ers, de­liv­er­ing food or prod­ucts, sell­ing crafts or of­fer­ing ser­vices on­line, many people are try­ing to find new and in­ter­est­ing ways to make money out­side of their nineto-five jobs. Some turn to on­line plat­forms that con­nect con­trac­tors with work and oth­ers are cre­at­ing their own small busi­nesses. Ei­ther way, a side gig can help you make ends meet or pro­vide you with ex­tra spend­ing money.

The idea of join­ing the “gig econ­omy” may be even more en­tic­ing for some af­ter the pas­sage of the Tax Cuts and Job Act (the new tax bill), which of­fers some con­trac­tors and busi­ness own­ers a tax break if they meet cer­tain out­lined cri­te­ria. Even if you’re el­i­gi­ble for the new de­duc­tion, you should still plan ahead to avoid a sur­prise next tax sea­son.

What does the new tax bill of­fer free­lancers and con­trac­tors? In short, you may be able to deduct 20 per­cent of the net in­come (your in­come af­ter ex­penses) you earn as a sole pro­pri­etor or con­trac­tor. Own­ers of a pass-through en­tity, such as an S-cor­po­ra­tion or lim­ited li­a­bil­ity com­pany (LLC), could also be el­i­gi­ble.

The de­duc­tion doesn’t ap­ply to in­come you earn as an em- ployee of a temp com­pany, even if you’ve moved from one short­term gig to an­other. And there are ex­cep­tions for high-in­come earn­ers. But many people who work a reg­u­lar job and have a side gig, or even a few side gigs, could be el­i­gi­ble.

Free­lancers and con­trac­tors still have to pay taxes. The new de­duc­tion could help limit how much you’ll owe when you file a tax re­turn next year. How­ever, even if you are el­i­gi­ble for the de­duc­tions, your net in­come will likely still be sub­ject to in­come taxes – you should con­sult a tax pro­fes­sional for fur­ther in­for­ma­tion. You could also have to pay So­cial Se­cu­rity, Medi­care and self-em­ploy­ment taxes on all your earn­ings (in­clud­ing the de­ductible por­tion).

Un­like in­come earned as an em­ployee, when you work as an in­de­pen­dent con­trac­tor, taxes gen­er­ally aren’t taken out of your pay­checks. As a re­sult, con­trac­tors could face a hefty tax bill be­cause they’ll owe the full amount at fil­ing time.

If you don’t want to be caught off guard at fil­ing time, con­sider one of the fol­low­ing ways to pre­pare:

Save part of your con­tract in­come. Know­ing that you’ll even­tu­ally have to pay taxes on the con­tract or free­lance in­come you earn, you could set aside a por­tion of the money in a sav­ings ac­count as you re­ceive it. An added fi­nan­cial ben­e­fit of do­ing this is that you could earn in­ter­est on the sav­ings through­out the year.

Make es­ti­mated tax pay­ments. If you owe more than $1,000 in taxes when you file your re­turn, you may have to pay an ad­di­tional penalty for un­der­pay­ing your taxes through­out the year. To avoid this, you can make es­ti­mated tax pay­ments on­line, by phone or by mail each quar­ter.

In­crease your W-4(s) with­hold­ings. If you’re an em­ployee (as op­posed to a con­trac­tor), the Form W-4 you fill out helps the com­pany de­ter­mine how much money it should with­hold and send to the IRS from each of your pay­checks. When you start a new side gig, you can update your Form W-4 and change your with­hold­ings based on your new to­tal in­come.

To de­ter­mine the cor­rect with­hold­ings, you can use the work­sheet at­tached to the W-4 or try the free IRS tool on­line. Once you fig­ure out the cor­rect with­hold­ings amount, fill out a new Form W-4 and give it to your com­pany’s HR depart­ment (or who­ever man­ages your pay­roll). You can update your W-4 as many times as you want through­out the year.

Bot­tom line: There are many ways to get a side gig and earn ex­tra money, and the new tax bill means many con­tract work­ers may be able to keep more of the money they earn. How­ever, free­lancers and con­trac­tors should still take steps through­out the year to avoid be­ing caught off guard when they file a tax re­turn next year.

Hugh Nor­ton di­rects Visa’s fi­nan­cial ed­u­ca­tion pro­grams. To fol­low Prac­ti­cal Money Skills on Twit­ter: www.twit­ter.com/Prac­ti­calMoney.

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