For starters, you'll owe income tax and self-employment tax since those levies are not being withheld by an employer. However, half of that self-employment tax expense is deductible. Those making over $200,000 a year also have to pay a Medicare surcharge.
In reality, the average income of self-employed business owners is about $25,000 according to TurboTax. Of those with a side gig, nearly half make $2,000 or less a year, just over one-third make between $2,000 and $10,000 and about 14 percent report earnings between $10,000 and $50,000, according to a report by accounting software form Xero.
Even if you earned less than $600 from a side job, you may not receive a 1099 form, but you still have to report the earnings, according to Lisa Greene-Lewis, a CPA at TurboTax .
If you expect to owe over $1,000, you will need to make quarterly tax payments, Greene-Lewis said. If you haven't done that already, you could be hit with penalties and interest. And keep in mind that for 2017, the first quarterly payment is due this April.
If you have the income to spare, consider setting up a Simplified Employee Pension, or SEP, to save tax dollars, said Lester Law, managing director of planning at Abbot Downing, a boutique business of Wells Fargo. "It's another way to defer your income," he said.
You can contribute up to 25 percent of your net earnings to a SEP, for a maximum contribution of $53,000 for 2016, or $54,000 for 2017 – although that max also includes any contributions made to a 401(k), if you have more than one type of plan. And, the contribution to a retirement account qualifies you for a tax deduction (more on a host of other deductions below).
Deduct your business expenses
As a freelancer or an independent contractor, you should be tracking your income throughout the year in order to estimate your tax liability well ahead of the deadline. Burridge recommends keeping separate bank accounts and credit cards for business related activities to have a record of what you are earning and spending.
Any income made over the course of the year can – and should – be offset with work-related expenses. Those expenses you incurred as a result of your side job are deductible, if they are necessary for the business, according to Gil Charney, director at The Tax Institute at H&R Block.
However, 73 percent of freelancers don't deduct any expenses at all, according to Xero. "That means they are paying too much tax," Burridge said.