You don’t want to know how many times I’ve heard a side hustler say, “Oh no, I don’t have the cash to pay my income tax!” Remember, even though no taxes come out of your side hustle paycheck, you still need to pay income tax every year.
Here’s how to handle this new responsibility. Open a new interest-bearing savings account and immediately transfer 30 percent of your side-hustle pay into there. Every quarter, send whatever money is in that account to the IRS as a quarterly payment for estimated income tax.
Yes, 30 percent sounds like a lot, but as a self-employed person, you now have the joyof paying self-employment tax, which is about 15 percent of your taxable income. Add to that your standard income tax, and you’ll likely be around 30 percent. Of course, you can take the guesswork out of it and just use IRS form 1040ES to figure out how much you should send in and when to mail it.
At this rate, you’ll may even see a small refund each year — a rarity for a side hustler. If you have kids, that refund could be even bigger.