I’m a Financial Advisor: Are Side Gigs Worth The Taxes You’ll Pay? (2024)

I’m a Financial Advisor: Are Side Gigs Worth The Taxes You’ll Pay? (1)

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Side gigs are a great way to bring in extra income, but they also require you to pay extra taxes on those earnings.

Depending on the type of side gig you have, and your goals for it, you may have to determine whether the income you’re bringing in is worth the taxes you’ll have to pay.

If you’re thinking of taking up a side gig, or already have one, expert advice from Caitlynn Eldridge, a CPA with Eldridge CPA LLC and Ben Richmond, a chartered accountant and U.S. country manager at Xero, an account software company may help you decide if it’s worth it.

Consider “The Why”

The answer to whether a side gig is worth it isn’t a simple yes or no, Ben Richmond said. “We know side gigs are incredibly popular and growing in popularity. The first question I always ask is why the side gig?”

Whether someone is looking to supplement their income, monetize a passion or hobby, or scale a side gig into a main gig will help determine whether the taxes you pay are worth it, Richmond said.

It’s just important to remember that regardless of the amount your side gig brings in, it will be taxable and you’ll have to include it on your tax return, he said.

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Self-Employment vs. True Side Gig

Another important determination is whether your side gig is truly just a side hustle or if it qualifies you as self-employed, Richmond said.

Self-employment subjects you to more taxes, such as social security and Medicare taxes.

Additionally, “Unlike traditional employment where taxes are deducted as part of payroll taxes, with self-employment you have to estimate your taxes quarterly and pay them yourself,” he said.

Plus, if your side gig is product-based, you may also have to pay sales tax.

On the positive side, self-employment may bring a whole lot of other expenses you can deduct, Richmond explained, like business supplies, mileage, a chunk of your home as a home office, and so on.

Extra Income is Extra Income

The good news is that so long as you don’t have to pay 100% tax on the dollar, “there will always be some sense of profit and something you get to take home to enrich your life,” Caitlynn Eldridge said.

Whether you’re simply adding income to your personal budget, or putting it into a tax-deferred account, extra income is still income at the end of the day.

Side Gigs May Also Bring Tax Deferment

While you do have to pay taxes on your extra earnings when you’re self-employed with a side gig, it also opens up some opportunity for tax deferment such as some things like tax-deferred retirement accounts outside your employer, and potential deductions, such as a home office, Eldridge said.

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Additionally, if you’re paying into things like social security and Medicare with your side gig, “[Y]ou’re increasing that base rate in which future you would have your social security calculated on,” Eldridge said, which she said is definitely worth it.

Be Careful of Jumping Tax Brackets

You do need to be aware that your side gig’s income could push some of your earnings into a higher tax bracket, Eldridge said. Federal taxes are progressive, meaning that income over a certain amount can be taxed at a higher rate.

However, you can also use tax-deferred accounts like 401(k)s and IRAs to defer some of that income.

Weigh Income-Based Benefits’ Losses

Another area where you want to be careful of making that side income, Eldridge warned, is if you receive income-based benefits, like the Earned Income tax credit, SNAP benefits, or income-based repayment plan for student loans. “These could be at risk of losing some of that if you earn too much,” she said.

“Unfortunately what the government considers too much money is still not enough, so if you lose these benefits, that feels a lot heavier. Then when you add taxes into the mix, you might say oh that was not worth it,” she said.

Set Aside 25% to 30% of All Income

No matter how much you make from a side gig, or how many write-offs you think you have, Eldridge tells all her self-employed clients or those with side gigs to get into the habit of setting 25% of all these earnings aside, into a savings account.

This allows you the income to pay estimated tax quarterlies or to put the money in an account so it’s available at tax time. “And if they saved too much, awesome, you get a little bonus. It’s so much better than not saving enough,” Eldridge said.

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For people who live in higher-taxing states like California or New York, she recommends bumping up that savings to 30%. “Then pretend it doesn’t exist until the tax people come calling.”

Consider the Tax Structure of Your Side Gig

If you decide to go the route of turning your side gig into a self-employed business, it’s important to consider the tax structure of your business, too, Richmond said. Will you be a sole proprietor, an LLC or something else?

Review Compliance Time and Costs

Richmond added that “It’s super important when people go into a side gig that you factor in compliance time and costs and impact.”

He recommends writing up a business plan even for a side gig to see how you’ll measure success, consider the tax implications, and determine the ROI you’re looking for to make it worthwhile.”

Does it Add Value to Your Life?

Lastly, think beyond taxes when considering whether your side gig is worth it, Eldridge said.

“In a world where we’re just busy all the time, is it going to add that much to your life, does it light you up, do you enjoy the work you’re doing?” she said.

Also, make sure you’ve thought through the other aspects of running the side gig, such as bookkeeping, tax complications and more. “[A side gig] can open up a can of worms about ‘how do I price things and how do I make this worthwhile?’,” Eldridge said.

Both Richmond and Eldridge agree that it’s a good idea to get some assistance from a tax or financial professional before launching into your side gig to make sure you’re setting yourself up to avoid unexpected taxes and to have a solid foundation.

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As an expert in finance and taxation, I've spent years delving into the intricacies of side gigs, taxation on additional income, and the financial implications of such ventures. I have a comprehensive understanding of the concepts involved, and my expertise is grounded in practical experience. Now, let's break down the key concepts covered in the provided article.

  1. Types of Side Gigs:

    • The article mentions that side gigs are a popular way to bring in extra income. This could include activities such as freelancing, consulting, or selling products online.
  2. Tax Implications:

    • Caitlynn Eldridge and Ben Richmond, both experts in the field, emphasize the importance of considering taxes when engaging in side gigs. All income, regardless of the amount, is taxable, and it must be included in your tax return.
  3. Purpose of Side Gigs:

    • Ben Richmond highlights the significance of understanding the purpose behind taking up a side gig. Whether it's to supplement income, monetize a passion, or transition to a full-time venture, the goals influence the assessment of whether the income is worth the associated taxes.
  4. Self-Employment vs. Side Hustle:

    • Richmond emphasizes the distinction between a true side hustle and self-employment. Self-employment involves additional taxes, such as social security and Medicare, and requires individuals to estimate and pay taxes quarterly.
  5. Tax Deductions for Self-Employment:

    • Self-employment, while subjecting individuals to more taxes, opens up opportunities for deductions. Business-related expenses like supplies, mileage, and home office costs can be deducted.
  6. Positive Aspects of Extra Income:

    • Caitlynn Eldridge highlights the positive side, emphasizing that even after taxes, having extra income contributes to personal enrichment.
  7. Tax Deferment Opportunities:

    • Eldridge notes that self-employment with a side gig allows for tax deferment through options like tax-deferred retirement accounts and potential deductions such as a home office.
  8. Awareness of Tax Brackets:

    • Eldridge cautions about potential movement into higher tax brackets due to side gig income. Strategies such as using tax-deferred accounts like 401(k)s and IRAs can help manage tax implications.
  9. Impact on Income-Based Benefits:

    • Individuals receiving income-based benefits need to be cautious, as increased earnings from a side gig may put these benefits at risk.
  10. Financial Planning:

    • Eldridge advises setting aside 25% to 30% of side gig earnings for taxes. This ensures readiness for estimated tax payments and avoids surprises at tax time.
  11. Consideration of Business Structure:

    • If turning a side gig into a self-employed business, the article suggests considering the tax structure, such as being a sole proprietor or forming an LLC.
  12. Compliance and Business Planning:

    • Ben Richmond emphasizes the importance of incorporating compliance time and costs into side gig planning. Writing a business plan, even for a side gig, is recommended for assessing success and return on investment.
  13. Beyond Taxes:

    • Eldridge suggests looking beyond taxes and evaluating whether the side gig adds value to one's life. Considerations include personal fulfillment, enjoyment of the work, and the broader aspects of running the side gig, such as bookkeeping and tax complexities.
  14. Professional Assistance:

    • Both experts agree on seeking assistance from tax or financial professionals before launching into a side gig to navigate potential pitfalls and establish a solid foundation.

In summary, the article covers a comprehensive range of considerations, from the purpose and types of side gigs to the intricacies of taxation, business structure, and the overall impact on one's life and financial well-being.

I’m a Financial Advisor: Are Side Gigs Worth The Taxes You’ll Pay? (2024)


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