We’ve discussed previously the importance of proper estimated tax payments if you have a profitable hobby or so-called “side-gig.” It’s understood and fairly well-known that if your side project brings in more than $1000 per year (via cash, check, bank account transfers, electronic currency or other source), you need to report that income, even if you don’t receive a 1099-MISC, W-2 or other similar tax form. You can also deduct qualified business expenses for a side gig just like you’d be able to with a full-time job.
It’s also pretty common knowledge that side-gigs have become the only gigs for many people, as they’ve been able to quit their full-time jobs just from the income of renting spaces via AirBnB or similar services, driving cars for Uber or Lyft, or selling products from a multilevel marketing company like Amway or LulaRoe.
What you might not understand, however, is the consequences of underpayment of estimated taxes, no matter if the income comes from a standard 9-5 job or a series of side hustles. Simply having more taxes withheld from your paychecks might prevent the need for estimated taxes altogether, even if you have a cash-paying side project. Making corrections to withholding and estimated taxes now, before the end of the year, can help you avoid a major headache come tax time.
Checking in with a tax professional to understand what your withholding should be, and the amount of estimated taxes you should be paying – and doing that now – can not only prevent you from having a big tax bill in April, it will also help you avoid a serious penalty for deliberate underpayment.