§ MONEY · 2 MIN READ
The Side Money Has Tax Rules
Braiding hair, driving, selling plates, cutting grass. Side income is real income, the tax works differently from a paycheck, and the deductions people never claim are worth more than the surprise bill.
By Culture
THE SHORT VERSION
Self-employment income has no tax withheld, so both income tax and self-employment tax of roughly 15.3 percent covering Social Security and Medicare are owed at filing. Anybody expecting to owe about 1,000 dollars or more generally needs to make quarterly estimated payments, and ordinary business expenses including mileage, supplies and a portion of a phone bill reduce the taxable amount substantially.
Somebody in your house is earning money outside a paycheck. Braiding, driving, plates on the weekend, lawns, nails, photography, a booth. That is a business, whether or not anybody calls it one, and the tax rules are genuinely different from a job.
On a paycheck, tax is withheld before the money reaches you. On side income, nothing is withheld. All of it lands in your account and feels like yours, and the bill arrives later.
You owe two things:
Income tax, at your ordinary rate.
Self-employment tax, roughly 15.3 percent. On a job, your employer pays half of Social Security and Medicare and you pay half. Working for yourself, you pay both halves. This is the part that surprises people.
So set aside roughly 25 to 30 percent of what you bring in, in a separate account, as you earn it. Not at the end.
If you expect to owe about 1,000 dollars or more for the year, you are generally expected to make estimated quarterly payments rather than settling it all in April. Skipping them can add a penalty even if you pay in full later.
The due dates fall roughly in April, June, September and January. Pay online directly through the IRS; it takes minutes.
This is the part that turns the article from bad news into money.
Mileage. Usually the biggest one. Driving for the business is deductible at a set rate per mile, and it adds up faster than anybody expects. It requires a log: date, purpose, miles. A phone app or a notebook in the car both work, but the log has to exist.
Supplies and materials. Hair, product, ingredients, packaging, tools.
The phone. The business-use portion of the bill.
Home office, if a space is used regularly and exclusively for the work. The exclusively part is strict.
Fees. Payment processing, booth rent, licences, insurance, software.
Mileage to buy supplies, which people forget is also business mileage.
Keep receipts and keep the business money in a separate account. Opening one is step four of making it official, and it converts tax time from reconstruction into printing a statement.
“The tax is not the punishment. Not tracking the deductions is.”
There is a temptation not to report cash income. Three reasons to anyway.
Social Security credits. Benefits are calculated from reported earnings. Unreported years are zeros in that calculation, and it is your own retirement and disability coverage being reduced.
Lenders count documented income. A mortgage or a car loan generally needs two years of reported self-employment income. Unreported income cannot buy a house, which matters if the goal is the down payment.
Grants and contracts require it. County grant programs ask for a tax return.
Many VITA sites handle self-employment returns at no cost. The whole free filing route is here, and it is a far better option than paying a preparer a percentage of a refund.
- How much tax do I owe on side income?
- Income tax at your ordinary rate plus self-employment tax of roughly 15.3 percent, because you pay both the employer and employee halves of Social Security and Medicare. Setting aside around 25 to 30 percent as you earn is the usual guidance.
- Do I need to make quarterly tax payments?
- Generally yes if you expect to owe about 1,000 dollars or more for the year. Due dates fall roughly in April, June, September and January, and skipping them can incur a penalty even if you pay the full amount later.
- What can I deduct from self-employment income?
- Mileage driven for the business, which is usually the largest and most commonly missed deduction and requires a log, plus supplies and materials, the business portion of your phone bill, a home office used regularly and exclusively for work, and fees for payment processing, booth rent, licences and insurance.
- Why should I report cash side income?
- Because reported earnings build Social Security credits toward your own retirement and disability benefits, lenders require two years of documented self-employment income for a mortgage or car loan, and grant programs ask for tax returns.
