Working for yourself can be rewarding in more ways than one (the flexible schedule, being your own boss, the cash!). But for the self-employed, tax time rolls around four times a year — and things can get a little tricky.
And if you're one of the 44 million people who bring in extra income through a side hustle or freelance gig, you may be doing your taxes all wrong.
In fact, 10 million people were hit with penalties in 2015 for underpaying their estimated taxes, according to the IRS — up from 7.2 million in 2010, or an increase of almost 40%!
"The data suggests that millions of people don't understand they need to pay quarterly taxes, or at least increase their withholding to avoid penalties," Eric Smith, an IRS spokesman, told The Wall Street Journal.
Unlike full-time employees whose taxes are automatically withheld from each paycheck, freelancers — as well as retirees, business owners and investors — are on their own to put money aside to pay Uncle Sam. And these estimated payments are due quarterly, rather than in one lump sum in April.
Failure to pay these quarterly taxes, or paying too little, results in a penalty from the IRS. And no one wants that.
So whether you're new to freelancing or didn't realize your side gig profits can actually be taxed, make sure you're staying on top of your tax paperwork and keeping track of your income and expenses.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.