Are you bringing in some extra cash with some type of income-producing side venture? If so, you may rightly wonder how this new influx of income will affect your income taxes. To help you keep as much as possible of your side earnings, here's how each of these four income sources could affect your taxes.
1. Getting a Second Job
A second job — being paid as an employee of another company — is treated just like a first job when it comes to taxes and income earnings. Your increased income may naturally result in higher taxes, but the hope is that the additional money withheld would cover the bill. You should consult with a tax preparer to determine how much you need to be withheld from your second job, as this is often wrong if not managed.
2. Providing Side Services
Providing some kind of side service is a good second gig. But you'll be responsible for your own taxes as an independent contractor. The biggest change independent contractors face is usually the self-employment tax. This tax — representing Social Security and Medicare contributions — is higher than when you had an employer to cover their half. Your tax preparer can help you determine if you should make quarterly estimated tax payments to cover the higher income and the additional self-employment taxes due.
3. Selling a Personal Asset
Many people access extra cash by selling an unused asset. Technically, selling a large asset — such as a boat, car, or record collection — should be reported as a capital asset sale. Only the profit would be taxable, though, and at a lower rate than your paycheck. Reduce the tax consequences significantly by deducting the cost of buying the asset, taxes paid on it, and any substantial improvements or repairs you made over the years.
4. Selling Homemade Goods
Selling items you've made is a popular way to earn a side income. But unlike a single asset sale, selling something on a regular basis means you're treated as a small business. Depending on how you set up your enterprise, you may report the income and expenses on your personal Form 1040 or you may need to file a business tax return. Keep track of all income and any potential related expenses to help reduce taxable profit.
Although all four of these income-producing methods bring in new money, they each have different effects on your income taxes. The best way to understand the impact of your particular plans is to work with an experienced tax preparation service or accountant in your state before you embark on your new plan. Make an appointment with a tax preparation service today to learn more.Share