Do You Have A Job AND Side Income? How To Avoid A Rude Surprise At Tax Time

UPDATED FOR 2022

I can still remember it from my Corporate days — the shocked looks on many of my client’s faces when I gave them the bad news. You see, many of them came to me for tax help with both a job and a side income, and were excited about generating money from somewhere other than their W2s (and who could blame them, right?).

Then I had to give them the bad news, and the bad news was this…

Their tax bills were WAY higher than they expected. And the unpleasant surprise of that bottom-line dollar figure was written all over their faces. The panicked looks on their faces still haunt me. 

But the shock of how much they owed at the end of the tax year could’ve been avoided. If my clients had met with their CPAs about midway through the year to look at their potential tax situation, they could have been more informed. And could have made a plan. 

So why did this kind of tax “sticker shock” happen in the first place, and where did the planning go wrong? 

This kind of tax surprise was often because many of my clients had both a job and a side income, usually from a business venture of some kind. That side income (on which no taxes were withheld) often railroaded them into a higher tax bracket before they knew what happened. 

But here’s the thing. If you’ve always been an employee, you probably don’t think much about tax withholding, as your employer does it for you. 

Then again, like many of my clients, you might be an employee and an entrepreneur at the same time. You might have a W2 from a job and a side income as well.

Now, here’s the part that SO many people miss: whether you know it or not, you are responsible for paying taxes on that side income yourself. 

What constitutes “side income” according to the IRS?

If you have any other sources of income like a business (including MLMs), affiliate income, tips, interest income, or cashed-out stocks, that counts as “side income.” 

When it comes to paying taxes on that side income, though, it’s easy to overlook. Paying taxes for both a job AND a side income might not have even occurred to you. But if you ignore that side income on your tax return, you’re playing the game with only half of the rules. This ignorance could wind up costing you a lot more than you bargained for when April rolls around. 

So if you have a “real” job and a side income (or two), how do you keep track of it all so that it doesn’t turn into a tax time disaster next April? 

Maybe the mid-year check-in with your CPA didn’t happen this year, but it’s not too late to eliminate some of the potential shocks.

All you need is to take a look at ALL your sources of income NOW and make a plan. And all it takes to start preparing is a simple conversation like the one we’re about to have! 

I’ve got a strategy and a handy tool that will help you determine if you’re withholding enough taxes. But before we start, let’s have a quick check-in about your tax withholding situation.

Even if you think you have been withholding enough up until now, consider two things: 

1) First, there were new tax brackets implemented in 2018. You can see the 2022 tax bracket updates HERE, so take a look and see where you stand.

2) Second, if there has been any change in your family dynamic (such as marriage, divorce, or a new child), your tax withholding situation might not be the same as it was last year.

So take into consideration whether either of these changes applies to you for the upcoming tax year. For the first situation, check out the current tax bracket breakdown HERE and see where you fit in.

And I’m guessing that when it comes to the second question we talked about, you can answer that on your own. 😉 

Now, let’s soften the tax bill shock as much as we can, and get started estimated your year-end tax bill NOW. 

Here’s what you’ll need: 

• A record of all your W9 income (such as business income, commission income, affiliate income). Then subtract the qualified expenses. (If you track your bookkeeping, this would be your Profit and Loss Statement.)
• Your most recent pay stub
• The year to date numbers from your W2 (that is, the total amount of taxes withheld from Jan-July)
• A record of any other income sources (such as retirement, interest income, or unemployment)

Pro tip: If you aren’t tracking your bookkeeping just yet, you can find your income on your bank statements under ‘deposits.’

Now, check out the tool available on irs.gov. Click HERE to access that tool, and start filling out the form (you can also access that form at the link below): 

As you fill out this online form, remember to include any additional taxable income you’ve received (or expect to receive) this past year. Include this extra income under “non-wage income.” 

When you’re done, the IRS will tell you if you can expect a refund or a tax bill (and how much in either case). You can make a plan from there! 

If it looks like you might owe money come this April, and you don’t want to be in that same situation a year from now, check out these steps on how to pay estimated taxes. (After all, it’s never too early to start planning for the next tax year either, right?) 

Here’s a quick caveat: you might be considering not counting some of your side income to side-step a tax bill. It might seem tempting, but I don’t recommend this. Not only is it illegal, it’s also risky. It could even hurt your chances of getting a mortgage or a loan in the future. 

I had this kind of situation come up a few years ago. 

My client had a business but never claimed income or filed taxes. She made $60,000 in her business. But she and her husband didn’t qualify for a mortgage on her husband’s income alone. She ended up reporting her income after all, and she ended up having to file two years of taxes with huge penalties and interest so that they could qualify for their home.

The good news is that you can be 100% proactive in your tax situation. So make a plan, use tools like this one I shared, and stay on top of things.

Bottom line? Know yourself, know your money. Stay on top of all your income sources throughout the year. Even if you missed the mid-year check in this year, start preparing TODAY. There’s still time to make a plan, even if your tax is looking crazy! 

Got any further questions on getting your tax withholding situation in order? Leave me a comment, and I’ll answer them as best as I can for you!

Until next time,

Love, Light, and MONEY, Honey…

Kaylee