I had a yoga teacher ask a question the other day about taxes. She was wondering how to handle taxes when you earn money as a non-employee. That’s what I would call 1099 income, which is income that has not had any taxes withheld, vs. W-2 income that you earn as an employee, which has taxes withheld. Like when a yoga studio pays you as a contractor, or when you run workshops or classes on your own.
It’s a great question, and I thought others could benefit from the information.
When it comes to taxes, many people bury their head in the sand and choose to worry about it later. This can be a huge mistake! Take it from someone who’s made that mistake. It pays to be proactive.
Before your eyes gloss over and you head over to Instagram, hear me out: it doesn’t have to be complicated! It’s actually very simple.
There are 2 ways to approach this.
Method #1
If you already have a W-2 job (paid as an employee of a company), you can increase the amount being withheld for taxes for both Federal and State. If you’re not sure how, get with someone in the HR department. They’ll have a W-4 form to fill out, which has instructions for adding additional withholdings (or changing your “allowances”).
It can be hard to determine the right amount to withhold if the income you’re making is not consistent, however. If that’s the case for you, method #2 would be better.
Method #2
Set up a new bank account, preferably at a different bank. There are even online banking options, which tend to earn a little bit more interest than traditional brick and mortar banks.
The reason I like using an online bank account is that it’s just slightly further out of reach, so you’re a little less tempted to use it for other things. It can be awfully tempting to see a chunk of money sitting there, and you want to have a buffer to keep your emotions in check.
Once you have the new account, start transferring 15% of your 1099 income (income that’s not from a W-2 wage) once or twice a month and don’t touch it. The account will grow over time, and if you end up owing at tax time, you’ll have the money to cover it. You may even have money left over, and you can buy a new yoga mat or those sweet lulu pants you’ve been wanting!
If you end up having too much left over, you can adjust the % down for the coming year. Or if you didn’t set enough aside, bump it up.
Estimated Quarterly Tax Payments
I won’t go into complicated tax rules here, but I do want to mention this: there’s a threshold you may cross that would require you to pay “Estimated Quarterly Tax Payments.” I don’t know anything about taxes in other countries, so if you’re not in the U.S., this may not apply to you.
Warning: I’m going to get nerdy for a minute.
You’ll need to make estimated quarterly payments to the IRS if you’ll owe at least $1,000 in federal income taxes this year, even after accounting for your withholding and refundable credits (such as the earned income tax credit), AND your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller.
If you’re not sure you’ll fall into that, please talk it over with your tax person. And if you don’t have a tax person, find one! There should be people in your network who could recommend someone in your area.
Someone who knows what they’re doing could look at your tax filing from last year, combined with how much you think you’ll make from your 1099 income this year, and steer you in the right direction. It’s really not complicated or scary when you get help from the right people.
Don’t Ignore Taxes!
Get on top of things now, and tax time will be much less stressful.
I hope this was helpful!
Are there other business related topics that you’d like to learn more about? What other aspects of teaching yoga do you need help with? Shoot us a message! We love talking about this stuff and sharing what we’ve learned over the years.
Nick
P.S. I’m not a tax attorney or a certified public accountant. Please consult with one if you have questions about your specific tax situation.