August 8, 2018
This article and the recommendations included within it are provided for informational and educational purposes only and should not be relied upon for tax, legal, regulatory or other advice. Recommendations should be independently evaluated by a tax professional in light of your specific needs and any applicable laws and regulations. Neither Visa nor Mr. Norton is responsible for your use of the recommendations or other information, including errors of any kind, contained in this document.
Whether they’re renting out a spare room, driving others, delivering food or products, selling crafts or offering services online, many people are trying to find new and interesting ways to make money outside of their nine-to-five jobs. Some turn to online platforms that connect contractors with work and others are creating their own small businesses. Either way, a side gig can help you make ends meet or provide you with extra spending money.
The idea of joining the “gig economy” may be even more enticing for some after the passage of the Tax Cuts and Job Act (the new tax bill), which offers some contractors and business owners a tax break if they meet certain outlined criteria. Even if you’re eligible for the new deduction, you should still plan ahead to avoid a surprise next tax season.
What does the new tax bill offer freelancers and contractors? In short, you may be able to deduct 20 percent of the net income (your income after expenses) you earn as a sole proprietor or contractor. Owners of a pass-through entity, such as an S-corporation or limited liability company (LLC), could also be eligible.
The deduction doesn’t apply to income you earn as an employee of a temp company, even if you’ve moved from one short-term gig to another. And there are exceptions for high-income earners. But many people who work a regular job and have a side gig, or even a few side gigs, could be eligible.
Freelancers and contractors still have to pay taxes. The new deduction could help limit how much you’ll owe when you file a tax return next year. However, even if you are eligible for the deductions, your net income will likely still be subject to income taxes – you should consult a tax professional for further information. You could also have to pay Social Security, Medicare and self-employment taxes on all your earnings (including the deductible portion).
Unlike income earned as an employee, when you work as an independent contractor, taxes generally aren’t taken out of your paychecks. As a result, contractors could face a hefty tax bill because they’ll owe the full amount at filing time.
If you don’t want to be caught off guard at filing time, consider one of the following ways to prepare:
To determine the correct withholdings, you can use the worksheet attached to the W-4 or try the free IRS tool online. Once you figure out the correct withholdings amount, fill out a new Form W-4 and give it to your company’s HR department (or whoever manages your payroll). You can update your W-4 as many times as you want throughout the year.
Bottom line: There are many ways to get a side gig and earn extra money, and the new tax bill means many contract workers may be able to keep more of the money they earn. However, freelancers and contractors should still take steps throughout the year to avoid being caught off guard when they file a tax return next year.
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