The main reason gig workers often end up with an unexpected tax bill is that taxes aren't automatically deducted from their earnings. As an independent contractor, you're responsible for covering not only your federal and state income taxes but also the self-employment tax, which includes Social Security and Medicare contributions. This tax is 15.3% of your net earnings and can be higher than expected, especially if you don't plan accordingly.
Life events like taking on more gig work, reducing hours at your primary job, or moving to a new state can further impact your tax situation. These changes can leave you underpaying your taxes if you don't adjust your estimated payments or withholding to keep up with these changes.
One of the best ways to avoid a big tax bill in April is to make quarterly estimated tax payments throughout the year. These payments break up your tax liability into four more manageable amounts. If you've been making estimated payments based on last year's income but started earning more through your side hustle, now's the time to reevaluate and adjust your payments to stay caught up.
The next quarterly payment is due in January, covering your income from September through December. If you missed payments earlier in the year, don't wait until the final deadline to catch up. By making payments now, you can minimize the risk of penalties for underpayment.
If you have a regular W-2 job in addition to gig work, you can adjust your withholding on that job to cover taxes on your freelance income. By submitting a new W-4 form to your employer, you can have more tax withheld from each paycheck to offset what you owe on your side hustle. This strategy can help you avoid having to scramble for funds when tax season rolls around.
November is the perfect time to schedule a tax check-in with a CPA. Six months ahead of the April 15 tax filing deadline is ideal for reviewing your income, making necessary adjustments to estimated payments or withholding, and discussing any deductions you might qualify for. A CPA can help you take advantage of gig worker-specific deductions for business expenses, home offices, and health insurance premiums. Taking proactive steps now will ensure you're adequately prepared and able to avoid any unpleasant surprises next tax season.
Are you ready to get a jump on your taxes for next year and head off any problems before they arise? Contact Myrick CPA to schedule a consultation and make sure you're on track with payments and deductions for your freelance gigs.