
Moonlighting can cause headaches with income taxes because a second income directly affects your annual tax return. To avoid withholding too much in taxes during the year or not withholding enough, pay attention to the W-4 form you fill out with your employers. Acting as an independent contractor can expose you even more to this risk because you are required to track your own withholding. You may also be liable for self-employment taxes. Check with your tax adviser for guidance on self employment taxes and mandatory tax withholding.
W-4 Tax Withholding
Pay close attention to the W-4 tax withholding with each of your employers to see if enough taxes are being withheld. Increasing the withholding on your W-4 forms can help you avoid underpayment of taxes during the year. The taxes will be withheld from your regular paychecks and credited to you on your tax return when you file at the end of the year. The IRS has a withholding calculator available to help you calculate the amount to withhold. The information is based on your filing status, income and any deductions you plan to claim.
Self-Employment Tax
If you are an independent contractor, you will need to track and withhold taxes separately. A part-time independent contractor could be someone who is a freelance writer for a magazine. If the writer makes more than $400 in any year, she would receive a 1099 MISC form from the publisher. In addition to income tax, the writer would be responsible for paying self-employment taxes for Social Security and Medicare. An employer normally pays half of these taxes, but as an independent contractor you are responsible for the entire amount. Currently the total self-employment tax is 13.3 percent for the 2011 tax year.
Independent Contractors With More Than One Job
If you work as an independent contractor for two different companies and neither withholds taxes, you may be required to pay quarterly estimated taxes on IRS Form 1040 ES. The IRS states that a taxpayer must pay current year quarterly estimated tax if he expects to owe at least $1,000 in tax for the current year or if he expects his withholding and credits to be less than his projected tax owed. Check with your tax adviser to see if you are required to complete Form 1040 ES.
Freelancers With a Full-Time Job
If you have a full-time job and an independent contractor position as a part-time job, you have an advantage, because you already withhold taxes from a paycheck. If as a freelancer you expect to pay less than $1,000 in self-employment taxes for the year, the IRS states that you can adjust for this by increasing your W-4 withholding from your full-time employer.
References
- IRS Publication 505: Tax Withholding and Estimated Tax
- Find Law: Self-Employment Taxes Q&A
- Internal Revenue Service. "Historical Highlights of the IRS." Accessed Jan. 7, 2020.
- Library of Congress. “1862 Revenue Act,” Pages 472-473. Accessed Jan. 7, 2020.
- Library of Congress. “1862 Revenue Act,” Pages 446-453. Accessed Jan. 7, 2020.
- U.S. Constitution. "The Constitution of the United States of America," Page 37. Accessed Jan. 7, 2020.
- U.S. Congress. "A Bill To Amend the Internal Revenue Code of 1986 to Repeal the Withholding of Income and Social Security Taxes, H.R. 1919, 111th Congress," Page 2. Accessed Jan. 7, 2020.
- Internal Revenue Service. "IRS History Timeline," Page 17. Accessed Jan. 7, 2020.
- U.S. Congress. "A Bill To Amend the Internal Revenue Code of 1986 to Repeal the Withholding of Income and Social Security Taxes, H.R. 1919, 111th Congress," Page 3. Accessed Jan. 7, 2020.
- Randolph Bourne. "The State,” Page 21. See Sharp Press, 1998.
- Reason. "Best of Both Worlds: An Interview with Milton Friedman." Accessed Jan. 7, 2020.
- U.S. Government Printing Office. "Legislative History of the Current Tax Payment Act of 1943," Page 11. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Publication 505: Tax Withholding and Estimated Tax," Pages 1-2. Accessed Jan. 7, 2020.
- Internal Revenue Service. "About Form W-4: Employee's Withholding Certificate." Accessed Jan. 7, 2020.
- Internal Revenue Service. "Form W-4: Employee's Withholding Certificate," Pages 3-4. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Publication 505: Tax Withholding and Estimated Tax," Pages 21-22, 47. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Publication 17: Your Federal Income Tax," Pages 13-14. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Topic No. 751: Social Security and Medicare Withholding Rates." Accessed Jan. 7, 2020.
- Internal Revenue Service. "Publication 505: Tax Withholding and Estimated Tax," Pages 13-14, 21-22. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Publication 505: Tax Withholding and Estimated Tax," Pages 13-14. Accessed Jan. 7, 2020.
- Tax Foundation. "State Individual Income Tax Rates and Brackets for 2019," Page 4. Accessed Jan. 7, 2020.
- State of California, Employment Development Department. "Employee's Withholding Allowance Certificate," Pages 1-4. Accessed Jan. 7, 2020.
- Colorado Department of Revenue. "Colorado Income Tax Withholding Tables for Employers," Page 4. Accessed Jan. 7, 2020.
- Internal Revenue Service. "Tax Withholding Estimator." Accessed Jan. 7, 2020.
Writer Bio
Tim Burris has over seven years experience writing and editing formal sales proposals and marketing materials. Tim has also worked as a freelance journalist for two news organizations. His cover story in "NUVO Newsweekly," Financial Disclosure, May 5, 2004, won an award from the Indiana Society of Professional Journalists. Tim has a Bachelor of Science degree in business, finance from Indiana University.