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Do I Have to Pay Taxes on My Side Gig?

Do I Have to Pay Taxes on My Side Gig?

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Everyone has a side hustle these days. But the taxes on that income can be very different from what you're used to seeing with salary and wage income from traditional employment.

In this video from the Motley Fool Live Financial Planning series, longtime contributor and Director of Investment Planning Dan Caplinger discusses the tax implications of side gigs. As Dan notes, when you have a side gig, you're treated as running your own business, and you have to pay taxes accordingly. Dan runs through some of the implications and what you'll need to watch out for.

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Dan Caplinger: So Max, it's a long topic, but let me give you just a general overview. When you have a side gig, you were treated as though you've started your own business. In general, the side gig is not going to hire you on as an employee. If they do, then it's a pretty simple situation. You just have to treat it the same way that you treat your employment. You'll get a W-2 from those folks. You'll have to report the income the same way.

But most side gigs aren't set up where you're an employee. Instead you're an independent contractor. If you get any reports of income at all, they're going to come on a different tax form. It's called the 1099. Usually, it's 1099-MISC for miscellaneous income.

You're going to have to report that as self-employed income. What that means is not only do you have to pay income taxes on that, you also have to cover the money that usually your employer withholds from your paycheck to go for social security payroll taxes and for Medicare payroll taxes as well. Those amounts in general are 15.3 percent of your self-employment income.

It's a huge amount. If you're used to being employed, you're used to your employer doing that for you. You don't have with a side gig, anybody doing that for you. You have to handle it yourself.

That usually means filing estimated tax payments on a quarterly basis to make sure the IRS is happy, doesn't charge any interest or penalties. But yeah, it's a big deal because it's essentially you running your own business.

Now there's some advantages to that as well. You can write-off some things as a contractor that you're not able to write-off as an employee because you are treated as running your own business. But yeah, it's a big question and you're right to say, "Hey, there are some tax implications here, both beneficial and not-so beneficial." Take a look and see whether it makes sense to do it that way or whether it makes more sense just to focus on your regular full-time job.

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It’s safe to say that this year has been a wild ride and there’s a good chance that your finances have taken a hit as a result of the coronavirus pandemic and all that’s followed. With the holidays just around the corner, this can be an extra stressful time financially with the added pressure of gift giving and various other holiday-related expenses. Brittney Castro, a CFP at Mint, suggests taking some time to evaluate your current financial life and how you’re going to navigate the holidays.

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