If you’ve started a side hustle to earn extra income, you might be surprised by unexpected taxes. Many freelancers and small business owners don’t realize how payroll tax vs income tax can affect their bottom line. If you’re not careful, you could end up owing more than expected when tax season arrives.

Curler Accounting & Tax Services, LLC helps individuals and small businesses navigate tax complexities. Whether you’re running a side business in Mequon, Washington County, or anywhere north of Milwaukee, understanding these taxes is key to avoiding surprises.

What Is Payroll Tax?

Payroll taxes are taxes on wages that fund Social Security and Medicare. If you’re employed by a company, these taxes are automatically deducted from your paycheck. However, as a self-employed individual or small business owner, you are responsible for paying both the employee and employer portions of these taxes.

How Payroll Tax Works

– Employers withhold 7.65% for Social Security and Medicare from an employee’s wages.

– Employers also pay an additional 7.65% on behalf of each employee.

– Self-employed individuals must pay the full 15.3%, known as the self-employment tax.

This means if your side hustle brings in significant income, a large portion could go toward payroll taxes. Many new business owners don’t anticipate this and end up with a higher tax bill than expected.

Understanding Self-Employment Tax

Unlike traditional payroll taxes, self-employment tax applies to those who work as independent contractors, freelancers, or small business owners. Self-employed individuals are required to file a Schedule SE with their tax return and calculate their tax obligations accordingly. There are certain deductions available to reduce the burden, such as the ability to deduct the employer-equivalent portion of the self-employment tax.

What Is Income Tax?

Income tax is based on your total earnings and is paid to the IRS and state government. The amount you owe depends on your taxable income and tax bracket.

How Income Tax Is Calculated

– The IRS taxes income at different rates depending on how much you earn.

– Unlike payroll taxes, which have a fixed rate, income tax rates increase as income rises.

– Taxable deductions and credits can lower your income tax liability.

Whether you work a traditional job or run a side hustle, income tax must be accounted for. If your side business generates a significant amount, it could cause you to move into a higher tax bracket, increasing your tax bill.

Types of Income Tax

Income taxes are levied at federal, state, and sometimes even local levels. These taxes are progressive, meaning the more you earn, the higher the rate you will pay. Unlike payroll taxes, which have set percentages, income tax varies based on tax brackets. Freelancers and business owners must also factor in deductions, credits, and taxable thresholds, which help determine their final tax obligation.

Why Your Side Hustle Can Lead to Unexpected Taxes

Many people start a side business expecting extra income without realizing the tax obligations that come with it. If you only account for regular income tax and forget about payroll taxes, you could be hit with a surprise bill.

Self-Employment Tax Responsibilities

– Traditional employees split payroll taxes with their employers, but self-employed individuals pay both portions.

– The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

– If you exceed a certain income threshold, you may owe an additional 0.9% Medicare tax.

Quarterly Estimated Taxes

– Employees have taxes withheld automatically, but self-employed workers must set aside money for taxes.

– The IRS requires self-employed individuals to pay estimated taxes every quarter.

– Failure to pay estimated taxes can result in penalties at the end of the year.

Many side hustlers underestimate how much they need to set aside, leading to financial stress when tax season arrives.

Overlooking Deductions and Credits

Many small business owners and freelancers are unaware of potential deductions that could lower their taxable income. Any expenses directly related to running your side hustle can potentially be deducted, including home office space, internet costs, and software subscriptions. Working with a firm like Curler Accounting ensures you maximize these deductions and avoid overpaying.

How to Reduce Your Tax Burden

While taxes are unavoidable, there are strategies to minimize what you owe. Curler Accounting specializes in tax planning for freelancers, small business owners, and self-employed individuals in Mequon and Washington County, helping them stay compliant while lowering liabilities.

Deducting Business Expenses

– Business-related costs like office supplies, equipment, software, and home office expenses can be deducted.

– Tracking mileage for business travel can reduce taxable income.

– Hiring a tax professional like Curler Accounting ensures you maximize deductions.

Choosing the Right Business Structure

– Sole proprietors pay self-employment taxes, but forming an LLC or S-Corp may offer tax advantages.

– An S-Corp allows you to classify some earnings as distributions instead of wages, reducing payroll taxes.

– Curler Accounting helps businesses determine the best entity structure for tax savings.

Setting Aside Taxes Properly

– A good rule of thumb is to set aside 25-30% of your earnings for taxes.

– Keeping a separate account for tax payments prevents overspending.

– Paying quarterly estimated taxes on time avoids IRS penalties.

Using Retirement Plans to Reduce Taxes

Investing in a retirement plan can help lower tax liability. Contributing to an IRA, SEP IRA, or Solo 401(k) allows self-employed individuals to set aside money for the future while also reducing taxable income. Working with Curler Accounting ensures you choose the right investment strategy based on your financial situation.

Why Work With Curler Accounting?

Handling taxes on your own can be overwhelming, especially when running a side hustle or small business. Matt Curler, CPA, owner of Curler Accounting & Tax Services, LLC, has over 20 years of experience helping individuals and businesses stay compliant while minimizing taxes.

From tax preparation and bookkeeping to payroll solutions and business consulting, Curler Accounting provides personalized financial guidance. Serving clients in Mequon, Washington County, and beyond, Matt Curler’s expertise ensures your side hustle remains profitable without unexpected tax surprises.

Personalized Tax Advice for Small Businesses

Every business is unique, and tax solutions should be customized to meet specific needs. Curler Accounting provides tailored advice to ensure freelancers and business owners take advantage of tax-saving opportunities while complying with regulations.

Comprehensive Accounting and Bookkeeping

Managing finances properly is crucial for business success. In addition to tax planning, Curler Accounting offers bookkeeping services that help business owners track income, expenses, and profitability, ensuring accurate tax reporting and financial growth.

If you’re unsure how payroll tax vs income tax impacts your side income, Curler Accounting is here to help. Avoid tax pitfalls, maximize deductions, and ensure you meet IRS requirements with expert guidance. Contact Curler Accounting today and take control of your taxes!