Tax time can be stressful and confusing, especially if you made money last year from a side hustle or gig work. Self-employment taxes are something that individuals need to pay on wages outside of a W-2. When you’re an employee, your employer covers a portion of these taxes on your behalf, but for nonemployee compensation, you’ll need to foot the bill yourself. This most commonly applies to earnings shown on certain 1099 forms like the 1099-MISC and 1099-NEC.
Even if you don’t have your own business, the IRS will treat nonemployee compensation as self-employment income and tax you as a sole proprietor. If you haven’t been putting enough money aside for taxes from your contractor earnings, the balance due on your taxes can come as a shock and spoil your side hustle mojo. It’s important to understand what can be deducted as expenses to help lower your tax liability.
According to Logan Allec, a certified public accountant and founder of Choice Tax Relief, certain expenses you incurred to make money can be deducted as long as you’ve documented them. This includes equipment purchases, marketing expenses, mileage or car maintenance costs, and even a home office deduction if applicable. By knowing what can be deducted, you’ll be better able to navigate the year as someone who has different sources of income.
Self-employment tax is a federal tax applied to income generated while self-employed. It consists of two types of taxes: Social Security tax and Medicare tax. The Social Security tax rate is 12.4%, and Medicare tax is 2.9%, leading to a total rate of 15.3% for tax year 2022. When you’re self-employed, you are responsible for both halves of the FICA tax, unlike when you’re an employee where your employer covers half.
To calculate your self-employment taxes, you need to take your net self-employment income (income minus deductible expenses) and multiply it by 0.9235 (92.35%). Then multiply this number by the FICA tax rate of 15.3% to arrive at your estimated self-employed tax. Deducting expenses is crucial in lowering your tax burden, so it’s important to keep track of all relevant expenses throughout the year.
It’s essential to claim expenses within reason and not try to push the limits by claiming personal expenses as business expenses. The IRS will classify your earnings as business income even if you don’t have a registered business, but this also means you can deduct certain qualified business expenses to lower the amount of income that gets taxed.
In conclusion, understanding self-employment taxes, knowing what expenses can be deducted, and keeping accurate records throughout the year are key to navigating tax time successfully as someone with a side hustle or gig work. By following these tips and staying informed, you can ensure that you’re prepared and can maximize your tax savings.
