I am doing some locums work on the side starting this year and trying to educate myself as to how to deal with paying taxes.
My options are estimating and paying taxes quarterly which seems very confusing.
The other option I came across even on irs side gig work is that if you already have a full time job to increase withholding at current full time job via updating W4 form.
Can anyone shed light on what will be the best option for a person with full time job, doing some side gig with regards to tax situation.
I am also planning on investing some of this side gig work income into solo 401k in addition to my full time work 401 k.
If it's more than that, quarterlies are really not a big deal. A CPA can help. Note that you will owe estimates going forward based on the previous tax year. So, if your 1099 income drops you'll overpay and then get a refund (typically).
The biggest mistake 1099 income recipients make is not putting aside enough for taxes. Also, track your Sked C business expenses carefully.
- W-2 withholding by default is treated as withheld equally throughout the year.
- Quarterly estimated tax payments are treated timely of as the quarter (or day if late) they are made. Unless the payments are equal you have to file Form 2210 to account for all income, deductions, credits and taxes for the quarter.
- There are three (3) safe harbors:
- The tax liability due by the tax filing deadline after withholding and estimated payments is < $1,000.
- Your current year (tax withholding + estimated tax payments) is >= 100% (110% if AGI is > $150K) of the prior year's tax liability.
- Your current year (tax withholding + estimated tax payments) is >= 90% of your current year tax liability.
If you can estimate the entire year's business profit from the locums with some degree of accuracy. You should be able to calculate the additional tax liability under the safe harbor. If this is true you can make equal quarterly estimated tax payments. That is likely the easiest path.
If you are unsure if you can accurately estimate the locum work, but can estimate a baseline. You can increase W-2 tax withholding immediately and adust on 4/1, 7/1, 10/1 and later if necessary.
The other option is to use Form 1040-ES and instructions to calculate your estimated tax for each IRS "quarter" and pay on 4/15, 6/15, 9/15 and 1/15. Then you will have to file Form 2210 and use the annualized method.
I would not attempt the last option without a tax professional the first time.