Paying taxes on money earned outside your “job”

Terms: income, W-2, self employment income, withholdings, self employment tax, estimated tax payments, independent contractor, personal income tax

So you’ve started making money….

Has a side hustle you started been going well?

Paid for doing some freelance photography?

Contracted to a short term project as an “independent contractor?”

Driving for uber or lyft, delivering for uber eats

Any income you earn outside your normal “W-2” job could be deemed as self-employment income. And guess what!? You need to pay tax on it!

Normally, when you start a job for an employer you fill out a form W-4. This form helps your employer determine how much of your paycheck should be withheld for taxes based on your personal income tax rate as well as your share of social security and medicare tax (7.65%). Your employer then pays these taxes to the government on your behalf (as well as the employer portion of the social security and medicare tax equivalent to another 7.65% of the gross pay). At the end of the year your employer gives you a form W-2 showing how much you made and how much of that you already paid to the government (known as withholdings).

But now you're making your own money! Congratulations! But being your own boss comes with the responsibility to pay your taxes on your own. There’s no more employer to do it for you. This means you must pay the tax on this income every quarter to the government (known as estimated tax payments). This tax is calculated based on your personal income tax rate plus an additional 15.3% for social security and medicare. (Remember as a W-2 employee you only paid half the social security and medicare tax and the employer paid the other half - this 15.3% is commonly referred to as self employment tax)

Don’t get caught off guard come tax time by not setting aside enough to pay your taxes - it's a common pitfall for self employed individuals. Also, if you did not remit the estimated tax payments each quarter, you may be subjected to interest and penalties on the amount owed if you wait until tax time. A common rule is to set aside 30% of net income for taxes.

Be sure to checkout: how to pay estimated tax payments, when are estimated taxes due, how to calculate my personal income tax

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Disclaimer: this article is for informational, educational, and promotional purposes. It does not constituent legal or tax advice, nor creates any attorney client privilege.

Written by Nathan Harding, February 1, 2024. Nathan is a small business owner and attorney practicing in Massachusetts with a wealth of experience in the small business and self employed space. He has over ten years of experience in government, education, military and startups.