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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:
Save part of your contract income. Knowing that you'll eventually have to pay taxes on the contract or freelance income you earn, you could set aside a portion of the money in a savings account as you receive it. An added financial benefit of doing this is that you could earn interest on the savings throughout the year.
Make estimated tax payments. If you owe more than $1,000 in taxes when you file your return, you may have to pay an additional penalty for underpaying your taxes