Did you make extra money using your skills and experience on the side in 2020? Tax season is here. Did you remember to make estimated tax payments? Are you aware of all the tax deductions for your side hustle?
According to the IRS, gig-workers, freelancers, or people with a side hustle are self-employed. Extra income earned may require additional tax payments throughout the year, otherwise known as estimated tax payments.
This Pot of Gold post will show you how to put more money in your pocket by paying your taxes on time and making the most out of often-overlooked business expenses.
What are estimated taxes for side hustlers?
Think of estimated taxes for the self-employed as the equivalent of withholdings for employees. Withholding tax from your paycheck happens as you earn income. Similarly, the IRS likes gig workers, freelancers, and the self-employed to pay quarterly in equal installments.
What’s the penalty for not paying estimated taxes in 2020?
The penalty for underpayment of your taxes is determined as follows:
“We calculate the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.”
Put another way, the longer it takes to pay your quarterly taxes, the higher your penalty fee. To figure out your regular, quarterly estimated payments, use Form 1040-ES.
I didn’t pay estimated taxes in 2020. Should I relocate to Argentina?
There’s no need to move to Argentina, thought of as the most business-friendly country in the world. According to DollarSprout’s 2020 Side Hustle Report, 20% of self-employed people were surprised by what they owed in taxes at the end of the year.
If you did not pay as you earned income from a side hustle, you might not owe a penalty fee.
To figure out whether you’ll owe a penalty, use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Consult with a tax professional before wasting hours of your life.
How do I avoid a penalty fee for failing to pay estimated taxes?
The best way to avoid paying a fee for failing to make estimated tax payments is to calendar these payments. It’s okay with the IRS to make unequal payments throughout the year. Say you can’t pay the full balance owed by April 15, 2021; you can apply for an installment agreement.
The IRS has the following to say about avoiding penalties for underpayment of estimated taxes:
“Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.”
Put more money in your pocket with smart business deductions from your side hustle
Side hustlers have business expenses like internet, telecommunications, licenses, supplies, computer software, a desk, chair, utility bills to keep the lights on, and more. These business expenses can be deducted to reduce your tax liability and your estimated tax payments. That’s more money in your pocket to spend or reinvest in things needed to reach your goals. Consult a tax expert on which expenses your side hustle can deduct or can’t deduct.
Who knows? Someday, your gig work could become full-time self-employment. That’s the goal of 18% of side hustlers surveyed by DollarSprout. Regardless, take a look at these five small business deductions that may surprise you, but you can use to your advantage as you work hard to make your business successful.
Download your copy of the side hustle deductions here!
Side hustles become full-time, self-employment with the right financial foundation. Get accounting help that scales with your growing business. Schedule a call with inDinero.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.