Many people nowadays take on contract jobs on the side of their regular employment to supplement their income. However, many need to realize the tax implications of working as a W-2 employee and also hustling to complete contract work.
Familiarizing yourself with the following tax implications of contract work can help you avoid penalties and meet all your tax obligations.
1. Self-employment taxes
Depending on the types of contract jobs and your employment on the side, the Internal Revenue Service may classify you as a self-employed independent contractor for tax purposes. You still are responsible for paying Social Security and Medicare taxes. Since you do not receive a traditional paycheck from which to deduct these taxes, you pay them when you file your return.
2. Estimated tax payments
Along with the self-employed taxes, you must fulfill your requirements to the IRS by making quarterly estimated tax payments throughout the year to cover your income tax and SE tax. Failing to do so may subject you to penalties and interest charges.
3. State and local taxes
In addition to federal taxes, you likely also have to pay state and local taxes on your self-employment income. It’s important to learn the tax laws in your area or work with a professional to ensure you comply with all tax obligations.
4. Deductible expenses
One benefit of working a contract job is that you may deduct certain expenses related to your self-employment income. For example, your office supplies, software, internet and advertising costs. Keep detailed records and only make deductions directly related to your self-employment or freelancing income.
Working a contract job can provide additional income to your traditional W-2 employment and understanding the tax implications involved will help keep it a positive experience.