There’s a growing trend in today’s wayward economy. It started before the actual Recession hit, but has certainly gained momentum in the five years since the stock market crashed. The trend is in bringing in side income. Not only are we being told to hold down a good-paying full-time job, but weekends and evenings should be spent bringing in side money, working a part-time job, or building a business.
Of course, people have been doing this for years, both out of necessity and out of the desire to earn more income. However now, the reasons for doing so have changed. Jobs became scarce for some during the Recession, and the amount of time that employees stay at one particular job has dramatically increased. No longer are we able to rely on our employer to keep us on and pay our health insurance and pension needs. Instead, we have to rely on ourselves and our own abilities to bring in money. This means that it is a great idea to have a Plan B. And why not start Plan B while still going with Plan A, your full-time job?
My History of Extra Income
I’ve done this myself. From March 2009 until February 1, 2013, I worked a full-time job as well as worked on the side building up my online blogging and freelance business. Working four ten-hour days at my day job, I then spent Friday-Sunday writing, tweaking my blog, and gaining an audience. It paid off; as of February 1stI quit my day job in order to pursue my writing and blogging full-time. Being able to test the waters and build the business while still earning a full salary was key in how I’ve found myself where I am today. But I’ve also realized that doing the side business on top of a full-time job really lowered my family’s risk in the event of layoffs and other life transitions.
So, what are the tax consequences of taking on side income or part-time jobs?
Do You Pay Taxes on Extra Income?
This one is easy to answer: income is income, no matter if it is through a full-time job, part-time job, or from mowing someone’s lawn (this could include your kids’ side income as well). So long as you meet the minimum criteria for having to file taxes, then you need to include any of your extra income.
You have to pay taxes on extra income.
Are Taxes Typically Withheld from Side Income?
I have worked many jobs to bring in extra income over my life: farm stands, driving Amish to appointments, and side income from my current business. In none of these circumstances was any tax withheld from my pay. That doesn’t mean that all extra income will work this way, as typically a part-time job will automatically withhold taxes. However, be aware that if taxes are not automatically withheld, it does not mean you do not owe them. When you receive your forms at the end of the year or during tax season, then you will need to pay taxes owed.
Because of this, it is a good idea to set aside part of each paycheck in an account earmarked towards tax obligations. Otherwise, you may not have the money required when you file taxes.
Common Tax Forms from Side Income and Part-Time Jobs
You could be classified as an employee, or as an independent contractor by someone. Some may not classify you as anything, such as if you are mowing people’s lawns and they do not want to report anything to the IRS. Depending on how you are classified, you will receive certain forms.
- If you are an “employee”, then you should receive a W-2 form (just like from your full-time job). Income, taxes withheld, and the information on this form was generated by a W-4 you filled out at the start of your employment.
- If you are an independent contractor and have earned over $600 from one company or person, then you will likely receive a 1099-MISC.
- If you were paid in cash, then you will likely not receive any tax form. In this case, you need to keep an accurate record of the money that you earn and report all of this on your tax return.
Consider the Tax Impact of Extra Income
Earning extra income is a smart move in this economy, and with the changes in our employment works. However, you should weigh the extra money gained against time lost for you personally and to spend with family and friends (of course if you need the money, then you don’t have this luxury). The way to do this is to figure out how much you will make after taxes by knowing your estimated tax bracket, and then seeing if you are still making a decent hourly wage. Will this extra income put you into a higher income tax bracket? Even if your answers to these two questions are not positive ones, if you are building a side business, or genuinely enjoy the extra work, then this could still be a good deal for you.
Do you earn extra income outside of a full-time job? What do you do?