Yes, estimated taxes are an important aspect of managing your side hustle income, and you may need to pay them depending on your situation. Let’s delve into how estimated taxes work and whether they apply to your side hustle earnings.
What are Estimated Taxes?
Estimated taxes are periodic payments made by individuals who earn income that is not subject to withholding taxes, such as self-employment income, interest, dividends, rent, and other sources. These payments are made to the IRS to cover income taxes, self-employment taxes, and any other taxes that may be due.
How Do Estimated Taxes Work?
Here’s a breakdown of how estimated taxes work:
- Frequency: Estimated taxes are typically paid quarterly, with payment deadlines falling on April 15, June 15, September 15, and January 15 of the following year.
- Calculating Estimated Taxes: To calculate your estimated taxes, you’ll need to estimate your total income for the year, as well as any deductions and credits you expect to claim. This will give you an idea of how much tax you owe.
- Filing Form 1040-ES: To pay estimated taxes, you’ll need to fill out Form 1040-ES and make payments either online, by phone, or through the mail.
- Penalties: Failing to pay enough in estimated taxes throughout the year may result in penalties and interest charges.
Do I Need to Pay Estimated Taxes for My Side Hustle Income?
Whether you need to pay estimated taxes for your side hustle income depends on various factors, such as the amount of income you earn, your tax liability, and whether taxes are being withheld from other sources of income. Here are some scenarios in which you may need to pay estimated taxes for your side hustle:
- Your side hustle income is your primary source of income, and taxes are not being withheld from it.
- You expect to owe $1,000 or more in taxes after subtracting withholding and refundable credits.
- You had a tax liability in the previous year, and you are required to pay estimated taxes to avoid underpayment penalties.
How to Determine if You Need to Pay Estimated Taxes
To determine whether you need to pay estimated taxes for your side hustle income, consider the following:
- Calculate your expected total income for the year, including income from your side hustle.
- Estimate your tax liability by factoring in deductions, credits, and any other sources of income with withholding.
- Use the IRS Form 1040-ES worksheet to calculate your estimated tax liability and determine if you need to make quarterly payments.
Tips for Managing Estimated Taxes for Your Side Hustle
Here are some tips to help you manage estimated taxes for your side hustle effectively:
- Keep detailed records of your income and expenses related to your side hustle to calculate your taxable income accurately.
- Consider setting aside a portion of your side hustle income for tax payments to avoid any cash flow issues.
- Consult with a tax professional to help you navigate the estimated tax payment process and ensure compliance with IRS regulations.