Moonlighting, Side Jobs, and Self-Employment
We’ll give you the basics
This page is designed to educate and warn you about the basic tax concepts (and pitfalls!) regarding any income you may have from a 2nd job, or income which is in addition to your main salaried job.
First steps, W-2 vs 1099-MISC?
Most of you are “typical” employees in your main job. Which means that at the end of the year your income is reported via a W-2 (which is how all employers are required to report your income to you and the IRS). But now, you have ANOTHER job, presumably part time or “here and there” whether you call this “moonlighting” a “side hustle” or something else.
The first step is to determine what “kind” of employee you are in this second job. Are you are regular/typical employee? If so, your extra income will be reported on a W-2. But first, you’ll be required to fill out a W-4, which tells your employer how much you want them to withhold from your pay and send to the IRS on your behalf. They will take care of both income tax withholding (again based on the amounts you instructed) but they’ll also withhold Social Security and Medicare taxes, just as in your main job.
KEY POINT!! You do not fill out your W-4 for a second job the same way you filled it out for your first!! We see this mistake all the time, and it can result in substantial underwithholding! See the section on “common mistakes” in our W-4 tutorial/walkthrough.
But what would you be if you are not a regular employee? The commonly used term is “independent contractor”. This essentially means you are self-employed, and are selling your services to someone else. It doesn’t matter whether you are taking extra shifts at the hospital across town from your main job, or whether you start a dog-walking service. In both cases you have a skill/service that someone is paying you for, but you are not considered an employee of any company/hospital/person who pays you. The first thing you should ask in any moonlighting position is “will I be considered an employee or an independent contractor?” Sometimes the person you ask will not know those terms. What you really want to know is “will my income be reported on a W-2 or a 1099-MISC?”. People who pay you are required to 1) appropriately classify what kind of a worker you are and 2) report your income on the correct form. If your income will be reported on a 1099-MISC, that means you are being classified as an independent contractor. Keep reading to learn how that’s different from being a regular (W-2) employee.
1st “1099” issue? No withholding.
If you are independent contractor, your moonlighting employer has no obligation to withhold taxes for you. Your pay will have no deductions or withholding. Yet, you obviously owe taxes on that income. What do most people (mistakenly) do? They just wait until the end of the year when doing their taxes to find out how much extra they owe. What does this occasionally lead to? TAX SHOCK, and sometimes penalties and interest due to underpaying. See, our income tax system is a “pay as you go” system. You are supposed to pay taxes AS YOU EARN the money, at least quarterly. In a W-2 job, withholding is every paycheck. But in a 1099-paid job, it is up to you to make quarterly “estimated payments” to the IRS (and state if applicable), for at least the minimum required quarterly amount in order to avoid penalties and interest on unpaid tax, and/or prevent having a huge unexpected tax bill when you file.
2nd “1099” issue? Double SS and Medicare Tax!
If you get paid via 1099 you are self-employed and thus are running your own business. And that means you are an employer, who employs yourself. EmployEES must pay Social Security and Medicare taxes, as you can see from your last W-2. But employERS must ALSO pay these taxes. And now, you are an employer! How much is the tax? The employEE amount of SS tax is 6.2%, and Medicare tax is 1.45%. The employER amounts are the same. Which means that, your 1099-based moonlighting income will be assessed a total of (6.2% x 2) + (1.45% x 2) = 15.3% for those taxes. In contrast, in your regular W2 job, you only pay half (7.65%) while your employer pays the other half.
But! There are extra nuances to SS and Medicare taxes…
1) For 2019, SS taxes only apply to the first $132,900 in total income, across all jobs. So at the end of the year, any income (from any source) which pushes you above that number will not be assessed SS taxes. If you have only one W-2 job, your employer stops taking out SS tax when you reach the limit. But if you have multiple W2 jobs and/or self-employment income, the amount of SS tax your pay may be more than what you actually owe. Any extra is squared up and refunded to you when you file your taxes.
2) Medicare tax applies to ALL job income, without limit.
3) Wages/income (self-employed or otherwise) which are above $200,000 (or $250,000 if married filing jointly) is assessed an ADDITIONAL 0.9% medicare tax.
3rd issue? Not understanding “marginal income tax rate” on side income.
Question: You take an extra weekend call and make $2000. Will the income tax rate on this income be more or less than your main job? Answer: Trick question. Why? Because the question is not worded properly. All wage income from all sources are treated the same for income tax purposes. Income is income. At the end of the year it all gets added up together, and the IRS does not care which was “side” income or “main” income. However, with your regular or typical salary, you can predict what tax bracket you will be in because your annual compensation is already known. It’s as if you know your taxes in advance. But now, suppose you ADD extra income. The “extra” income tax you will owe and have to account for is based on all the other income “below” it. For example, a medical resident with $50,000 in salary will pay $4370 in Federal taxes (about 9%). They are in the 22% federal tax bracket. Thus, earning another $2000 will increase taxes by $440. It’s this $440 you have to be prepared to pay when you file (and potentially account for it with estimated taxes as below). Note that if the base salary was $52000, the total income tax is exactly the same as the $50,000 + $2000 example. The point is (contrary to popular belief!) moonlighting income, side income, bonuses, etc are not “taxed more” than regular income.
So how do I pay these taxes on moonlighting income?
It can be tricky to figure out exactly how much extra tax (above your current main-job-withholding) your side income will cost you. We’re not going to address this here. But you have to have some way to estimate your tax and pay it “on time”. How do you pay it? Two ways: 1) you can increase your withholding in your MAIN job to cover the extra tax from your SIDE job. The IRS doesn’t care which jobs the money comes from, as long as they get paid what they are due overall. 2) You can make quarterly estimated payments. Actually, there is a third way: a combination of #1 and #2.
If you look at a copy of the W4 forms you give your employer, can can see that line 6 allows you to add an “additional amount” per pay period. You can simply give your employer a new form and have them take out extra tax to cover any additional tax you think you may owe from another job.
Don’t forget that if you get paid via 1099-MISC you are by definition “self-employed” and that means you run a business, and must report the income/costs of that business on “Schedule C” of your taxes. Might you have any costs you can deduct from your moonlighting or side job? That’s a topic for another day (we can only do so much, our fingers hurt from typing all this quality info, and maybe you should do a websearch, ok?).
Do I always have to increase my withholding or make estimated payments?
Even though the US tax system is a “pay as you go” system, there are several situations where you are indeed allowed to wait until you file your taxes and pay extra tax at that time without owing interest or penalties on the underpaid amounts.
This is referred to as the “Safe Harbor” rules.
Basically, you have to get “close enough”, via withholding, to the total tax you owe at the end of the year. Alternately, you can pay a certain minimum amount which is based on your taxes from the PRIOR year, without taking into account what you actually made THIS year.
Moonlighting and PSLF
Finally, a caution. If you are on an income driven federal student loan repayment plan, as is required for Public Service Loan Forgiveness, you can think of all of your income being subject to an additional “tax” of 10% if on PAYE or REPAYE or “New” IBR (or 15% if on the “original” IBR). This is because any income you have eventually flows through to your taxes and raises your “adjusted gross income” (line 7 of the new 1040 forms). And your payments are based 10%/15% of your AGI. Assuming you one day get PSLF, anything you pay extra is “wasted” and thus can be thought of as a tax. Therefore, when thinking about extra pay (whether raises, bonuses, side income, etc) don’t forget to include the effects of the “PSLF tax”. For example, suppose your total Federal + State + Social Security + Medicare taxes on an extra $1000 of income is $400. Your “take home” might be considered $600. But if you are also on REPAYE/PAYE, that $1000 in income will lead to an extra $100 in loan payments next year (which will reduce your forgiveness by $100). So in reality, your eventual overall “take home” is really $500 (not $600), due to the PSLF “tax”. This amount needs to be considered when creating budgets and evaluating the net benefit to you of any extra income (or any job/salary in general).
Too many words
We’ll stop at this point, because if you’ve made it this far you hopefully have enough info not to later say “why didn’t anyone TELL me this stuff?!?”