Paying For Self Employment Income Tax Year Round 43 Comments
Since 2005 I’ve been earning side income online. I’ve gotta say, it’s pretty nice to be getting that extra income each month. At times I’ve even relied on that money as my primary source of income.
While the additional money is satisfying, there is one part that you’re bound to dislike…paying taxes on that income.
When many people start making money online, they figure they can get away with not claiming taxes on that income. In my case I probably could get away with it since I’m Canadian and the majority of the companies paying me are in the US. It’s simply not connected to my tax id number.
Really though, I just wouldn’t want to take that risk and always be worried about having to suddenly pay a huge tax bill all at once. Plus there would likely be penalties for not paying the tax in the first place.
Also, I’ve always had dreams of turning my online business into a full time gig. If that were to happen, would I really want to commit to something like that knowing how susceptible it all would be to an audit? If the income would increase to that point, it would be a realistic scenario.
So like an honest tax payer, I dutifully claim all of my income and deal with a big tax bill each year. At tax time I really miss the days of actually getting a tax refund.
The solution to this big annual tax bill? Pay your taxes on that income throughout the year just like regular income tax.
I know with my taxes, I’d get apprehensive as tax time rolls around. I’d be unsure how much I’d owe and would be focused on a worst case scenario. Some years I’ve even had to resort to taking out money from my line of credit to cover a big tax bill. My big problem was that I never properly planned for taxes throughout the year.
At one point the government wanted me to start making installment tax payments throughout the year. While I didn’t like the idea since my income fluctuated too much each year, I realize it was actually in my best interests.
First of all, if the government asks you to start making tax installments throughout the year, you will have to pay a penalty if you fail to make those payments. They dinged me with that a couple years back and I had to pay an extra few hundred dollars.
Making those regular tax payments also reduces that tax time stress. When you’ve already made payments through the year, you can sleep easy knowing that if you do have to pay more tax, it will be a small amount. You might even get a refund. A lot of financial experts say you don’t want to be in a position where you get a refund, but speaking from experience I’d rather be in that position and miss out some interest I could’ve made on that money.
When you’re paying that tax through the year, you are forced to keep your accounting more organized too. That limits some of the last minute accounting that some people resort to. Those people may be natural procrastinators, but why create that extra stress?
Have any of you had to claim online income on your taxes? Did you handle the paperwork yourself or did you pay someone to help?