I have a confession to make. Earning extra income is not all rainbows and roses. It is not all sunny every time you walk outside. Earning extra income has a dark side. One that many don’t speak of that often. Why you ask? It involves a dirty word. One that many don’t like to speak of, and when they do, they cringe. You know the word very well, and so does every working person around. TAXES! That’s right, the good old tax man is calling your name. The tax man is definitely calling my name, and I don’t want to answer. I speak a lot about making more money, from how to earn extra income to how important it is. Earning more can really change your life, but it also takes a lot of work and sacrifice. What I don’t talk about a lot are taxes. There is a reason for this and it basically boils down to my feelings about being overtaxed. I don’t mind taxes, but I do mind getting taxed and then taxed again.
Taxes Are Certain
We have all heard the quote from Benjamin Franklin saying:
In this world nothing can be said to be certain, except death and taxes.
I wish it wasn’t true, but it seems to be. What Benjamin Franklin doesn’t talk about is how we are taxed when we earn extra income. We all expect to be taxed when we have a job. It is part of every official job you have. You will fill out paperwork, which is then sent to the government. Taxes are taken out with each paycheck and we move on. We know they are there and we don’t fight them.
Side Income Taxes
There is a common misconception that if you earn money on the side, you don’t have to report it. This is certainly not true. Whenever you earn money on the side or money at all, you are supposed to report it to the government. My blogging friend, Michelle, wrote a good post about blogging and taxes. While it can be difficult for the government to track what everyone makes, they have some ways. You might see people getting around this by paying cash. That is very hard to track.
I always tell others, both here on Debt Roundup and in my personal life, that earning extra income is a great thing. It opens up possibilities and can give you more financial freedom. It can also help you get out of debt and stabilize yourself financially. It helped me do both of those things. While I do tell people to work hard to find extra income opportunities, I don’t tell them much about the tax ramifications. This has been an oversight on my part. I should be transparent with you and everyone else that I tell with regards to making more money.
You will have to pay taxes on all extra income you earn. Unless you can hide it with cash transactions, which I don’t recommend, you will need to report it. If you freelance on the side, you probably will get a 1099 from the company paying you. If you get a 1099 form from anyone, then you better report that income. One copy of the 1099 goes to you and guess where the other one goes to? Yep, straight to the IRS! Even if you don’t get 1099 forms for your income, you still need to report it on your 1040. It is not hard to do, but it will cause you to either lessen your anticipated refund or will cause you to owe the government.
Some people think that if you don’t earn $600 in the year, then you don’t need to report it. I would just do it and get it over with. No need to make life harder if you do have an audit. You should be tracking all of your extra earnings in some way. I use a very easy spreadsheet with fancy pivot tables for reporting. There are many other great ways to do so, especially with services that link up to your Paypal and checking accounts. One of the easiest ways to keep track is to have a separate bank account. I have a free business checking account to keep myself straight.
The fact is that any income you earn on the side is not taxed when you earn it. You are required to pay those taxes at some point, so when you file your taxes, you will need to pay up then. You don’t get to keep it all, but that depends on what your tax bracket is. I can’t help you there, so look at your last years tax return to get a better picture.
Making Estimated Tax Payments
Here is another dark side of making extra money and they come in the form of estimated tax payments. These little payments are due quarterly and they go straight to the IRS. If you think you will owe more than $1000 in taxes when it is tax time, then you will need to pay estimated taxes. There are a few ways to come up with how much you will owe, but if you don’t pay any, you will probably get a penalty.
Trust me, I made this mistake before. When I had my business, I didn’t pay estimated taxes the first year I made good money. Not only did I have a huge tax bill, but I also had to pay estimated taxes. This past year I didn’t pay estimated taxes because I had more than enough withheld from my regular job. I am changing that this year and I will be making estimated quarterly tax payments to the tax man. There is nothing fun about it, but it should lessen the burden of a big tax bill come April!
If you want to know more about estimated taxes, then check out the information from the IRS. You will probably notice that estimated taxes are usually reserved for small businesses and the self-employed, but don’t let that fool you. If you earn enough from side income that will cause you to owe a good chunk of change, then you should think about estimated tax payments.
One thing that I don’t have an issue with is doing taxes. I understand the process, but I get a little help from a friend. That friend is TurboTax. I have been using that software ever since I have been paying taxes. It is easy to use and makes paying regular and extra income taxes easy. It is also great for small businesses and the like. When you are preparing taxes, you need to use whatever that makes you feel comfortable. Many people love TurboTax, but there is also H&R Block, along with TaxAct, and many others. You can also take your stuff to a CPA or tax attorney. There are also way too many tax preparation offices around these days. I don’t use them because I had a friend work at one that just used software similar to TurboTax and H&R Block. I am not going to pay more for the same effort.
I will advise everyone that if you don’t understand taxes, then you need to seek some assistance. Don’t let you not understanding penalize you when it comes to tax time. If you make extra income, then you will need to make sure you do it right and pay your taxes. I have seen too many get so excited when they earn extra money, but then spend it all. All extra income that I receive goes into my savings account. I then make sure that I keep 40% of it until tax time is over.
Taxes are just a part of life, but they are also a part of earning extra income. As I said, don’t forget to think about taxes when you are earning more money. The more you earn, the more you are taxed, unless you are rich ;), which I am not. Just by understanding that your extra earnings will be taxed can be helpful in planning out how you will deal with the money. There is nothing worse than a big surprise at tax time, and I am not talking about a large refund.
What do you think about taxes on extra income? Do you save a portion of your extra earnings just for taxes?
Image via DonkeyHotey
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