Hello, @madison_m_barney !
Great question! Ultimately, you will owe taxes on the amount of income you receive during contract work. Because you also work for an employer, you have a few options to pay those taxes:
- make quarterly payments to the IRS and your state (if your state has income tax)
IRS link for quarterly payments: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
OR
- increase the amount of income tax withholding at your current employer (this increase can cover any taxes due from contract work). You can do this by updating your W4 form, and listing a set amount per pay period to withhold for both federal and state taxes.
You can estimate the amount of tax you'll owe on your contract income by multiplying it by 15.63% (self employment tax) and multiplying it by your projected tax bracket (found here for federal income tax: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023).
For example, if you expect your contract income to be $10,000, and your W2 income will be $40,000, you could make a conservative tax estimate (that is, likely to get a refund) by:
- 10,000 * 15.6% = $1,560 self employment tax
- estimated tax bracket for 50,000 total income: 22% * 10,000 = $2,200 income tax on contract work
In this scenario, you would aim to pay $1,560 + $2,200 = $3,760 in either quarterly tax payments or extra withholdings through your employer during the year. If you make quarterly payments, and you have large swings in your income each quarter, aim to estimate the tax due each quarter and make the appropriate payment.
One note here -- the IRS does not charge underpayment penalties for taxes, as long as you pay in as much during the year as your total tax liability last year (https://www.irs.gov/taxtopics/tc306). You can find this on your 2022 return, form 1040, line 24.
