One of the biggest challenges associated with a side hustle is paying the right amount of tax on your PhD side hustle at the right time. Understanding your tax due and tax benefits can be even more complicated for PhD side hustles because of the unusual pay structure and benefits that some grad students and postdocs receive.

If you haven’t yet, read last week’s post on the best financial practices for PhD side hustles, and pay particular attention to how to categorize your side hustle (employment, self-employment, neither) because that designation plays a very important role in taxation. The assumption that your side hustle income is much less than your stipend/salary holds here as well. This post is also US-specific.

What Kinds and How Much Tax You Will Owe

The two types of tax on your PhD side hustle that you should be prepared to pay are income tax and FICA tax.

Income Tax

The income tax on your PhD side hustle income will be equal to your side hustle pay for the year multiplied by the marginal tax bracket your primary job tops out in (e.g., 10%, 15%, 25%). The exception is if your side income bumps you into the next higher tax bracket, in which case part of the income will be taxed at your previous marginal tax rate and part at the higher marginal tax rate.

FICA Tax/Self-Employment Tax

The FICA tax rate for each person is 15.3% (12.4% for social security and 1.9% for Medicare; in 2017, social security is not taxed on the portion of your income that exceeds $127,200). If you are an employee, you pay half of that rate (7.65%) and your employer pays half. If you are self-employed, you pay both halves, which is called self-employment tax.

(Graduate students do not pay FICA tax on their stipends because they either fall under the student exemption or their income is not considered wages and is therefore not subject to FICA tax. Postdoc fellows and other fellows also may not pay FICA tax because their income is not considered wages.)

How to Pay Your Tax throughout the Year

If you have tax withholding set up accurately at your primary job, it will only cover the tax due on your primary income. You will additionally need to send the IRS regular payments for the tax on your PhD side hustle income.

Withholding

If you are an employee in your PhD side hustle, you will file a W-4 with your side employer to have income and FICA tax withheld from that paycheck. The simplest thing to do is claim “0” allowances on your side hustle W-4 and the appropriate amount of allowances on your primary job W-4 (if you have one). For a more detailed calculation, complete the Two-Earners/Multiple Jobs Worksheet on the second page of the W-4.

Further reading: 3 Tax Considerations for Those with Multiple Jobs

If you are self-employed in your side hustle and have tax withheld at your primary job, you can increase your withholding at your primary job to cover the additional tax on your PhD side hustle by filing a new W-4 with fewer allowances and/or an additional dollar amount to be withheld from each paycheck. This is a good strategy if your side hustle income is very regular.

Quarterly Estimated Tax

If you are self-employed with an irregular side income and/or you do not have tax withholding on your primary income, you will probably be required to file quarterly estimated tax.

Quarterly estimated tax payments should be familiar to most PhDs who at some point received non-compensatory income such as from a fellowship or training grant. If you currently receive non-compensatory pay and are making quarterly estimated tax payments, simply adjust your calculations on Form 1040-ES to account for your PhD side hustle income.

For those not currently making quarterly estimated tax payments, the process is relatively straightforward. You use Form 1040-ES (page 8) to estimate your income, tax due, and existing tax withholding for the year. If you will owe more than $1,000 in additional tax and don’t fall into an exception category, you are required to pay that additional tax over four payments taking place in April, June, September, and January. A quick way to take care of this if your tax withholding at your primary job is accurate (you didn’t receive a large refund or owe a lot of additional tax on your return last year) is to calculate your additional income and self-employment tax due for each quarter when the quarter ends. Multiply your income for the quarter by 15.3% plus your marginal tax rate and use that amount as your estimated tax payment.

Further reading: Paying Income Tax throughout the Year

How to Prepare for Your Tax Bill

Whenever you receive side hustle income into your personal bank account (whether that is directly from your client/customer or via your business checking account), you should set aside the appropriate fraction of that income to go toward your tax payments. The best practice for doing this is to set up a separate, dedicated savings account that you solely use for future tax payments. From each bolus of income (or once per month), transfer into your dedicated savings account the fraction of your income that will go toward your income (and self-employment) tax, as calculated above.

Tax Benefits to Having a PhD Side Hustle

One of the best perks of having a PhD side hustle is that it might qualify you for tax benefits not conferred by your primary job, especially if you are a grad student or fellow.

A PhD Side Hustle Is Virtually Always Taxable Compensation/Earned Income

If your primary job gives you non-compensatory pay (i.e., your stipend or salary is not reported on a W-2), you may be ineligible for certain tax benefits that are reserved for people with “taxable compensation” or “earned income.” Examples are Individual Retirement Arrangements (IRAs) and the Earned Income Tax Credit. Therefore, receiving compensation/earned income from a PhD side hustle qualifies you for these tax benefits to some degree.

Further reading: Taxable Compensation or Earned Income

One of the few drawbacks to receiving a fellowship is that fellowship income is not eligible to be contributed to an IRA, which is a tax-advantaged retirement savings vehicle. For fellows, earning just a small side income from a PhD side hustle during calendar years in which you would only have fellowship income can completely reverse this problem. In that case, you can contribute to an IRA up to the amount of your taxable compensation or $5,500 (in 2017), whichever is lower.

Further reading: Why the Roth IRA Is the Ideal Long-Term Savings Vehicle for a Grad Student

Self-Employed People Can Take Business Deductions

If your PhD side hustle is self-employment, even more tax benefits become available to you, such as business deductions. Keeping your personal and business account separate, as discussed in last week’s post, is also extremely helpful for keeping track of business deductions. You should pay for expenses that have solely a business purpose directly from your business checking account.

Of course, not all business expense deductions apply for every type of business, but some of the common ones that freelancers and contractors can take are:
• travel
• mileage and gas
• home office
• computer
• phone
• internet
• domain fees and hosting
• meals

One step to take when you become self-employed is to diligently track your usage of anything that has both personal and business purposes. You might decide to take a business deduction on the fractional use of those resources.

For example, you should track the mileage in your car, noting the miles used for business. Your internet usage is another deductible expense, again for the fraction of the total time it was in use. If you buy a new computer in a year that you are self-employed, you can deduct part of the cost, but you’ll need to track the fraction of the time that you actually use it for your self-employment work vs. other purposes.

Self-Employed People Can Contribute Even More to Retirement Accounts

Self-employed people are eligible to create retirement accounts for themselves that take the place of a workplace-based retirement account and greatly increase their contribution room above that provided by an IRA.

The additional retirement contribution eligibility is especially beneficial for grad students and postdoc fellows who don’t have access to a workplace-based retirement account (e.g., their university’s 403(b)), and in some cases the self-employment retirement account is a superior alternative to the workplace-based retirement accounts available to PhDs with Real Jobs.

Self-employment retirement accounts come in a few versions, and the best choice is dependent on the number of employees you have, your income, and your desired savings rate. The most common self-employment retirement plans are the individual 401(k), Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE IRA).

Further reading: Avoiding an Expensive 401(k) Plan through Self-Employment; Retirement Plans for Self-Employed People

How do you pay tax on your PhD side hustle? Has your side hustle conferred any tax benefits that you didn’t already receive through your primary job?

Whether you started your PhD side hustle to fund your basic monthly budget, pay for lifestyle upgrades, or further your career, you must put in place a few foundational financial practices to ensure that you use your money effectively and stay on the IRS’s good side. These steps are simple, easy and take only a short time once the habits are in place.

Further reading: Side Income

This post assumes that your PhD side hustle income is much less than your stipend from your grad student position or your salary from your postdoc/Real Job. If your side hustle income becomes quite regular and compares with your primary income, you should extend your financial and business planning beyond the steps outlined in this post. Regardless, this is a great place to start!

Today’s post is about general financial best practices, and next week’s post is all about taxes: how much tax you’ll pay, how to pay tax, and the extra tax benefits such as retirement account contributions. The next section of this post is US-specific, but the rest of the sections are widely applicable.

Determine Your PhD Side Hustle Categorization

Your PhD side hustle will fall into one of three categories: employment, self-employment, or neither. The category will affect your tax rate and eligibility for certain tax benefits.

If you are an employee, that relationship should be made quite clear by your employer. Foremost, you’ll receive a W-2 at tax time, so when you start your position you can simply ask, “Will my income be reported on a W-2?” At this type of side hustle you would probably have regular hours, even if they are only part-time. Examples include a retail job, nannying, or an on-campus work-study job.

More likely, your PhD side hustle will qualify as self-employment. Performing similar services for multiple clients, determining when and how you work for a single client, or selling a product directly to customers are all indications of self-employment. Examples include freelance work, babysitting, and tutoring.

Further reading: Am I Considered Self-Employed?

Finally, you might on occasion receive income that is neither employee nor self-employment income, such as from a one-off activity like participating in a clinical trial. In this case, the activity wouldn’t really rise to the level of being considered a PhD side hustle and it’s not necessary to put the following practices in place (aside from paying income tax).

Further reading: Self-Employment or Other Income?

Track Your Time

It may be hard to believe if you’re in the training stage of your career, but your time is valuable. It may not be valued monetarily by your university, but you should value it. While it may be a bit depressing to calculate the hourly rate you are paid for your work as a grad student or postdoc, it’s still a useful baseline. You should look for a PhD side hustle that pays you a much better hourly rate than what you receive at your primary job. But be sure to include all the travel and administrative time it takes to perform your side hustle, not just your “billable hours.”

One of the best reasons to keep track of the time you devote to your primary job vs. your PhD side hustle is to make sure that your side hustle does not encroach upon your primary work time. The benefits of pursuing a PhD side hustle dramatically diminish if it prolongs the time you spend in training.

Further reading: Can a Graduate Student Have a Side Income?

When you track your time and know definitively what you are earning per hour, it makes decisions about how to use your time that much easier, whether it’s on your research, PhD side hustle, or personal pursuits.

Give Your PhD Side Hustle Earnings a Job

If you mix your PhD side hustle earnings (net of taxes) in with the rest of your money, it very well might disappear into the ether like unbudgeted money tends to do. A better practice is to link a financial goal directly to your side income. That way, every time you work on your PhD side hustle, you know exactly what the money you earn will do for you.

For example, if your side hustle money is going toward lifestyle upgrades, you could funnel it into a savings account dedicated to travel, entertainment, or shopping. You could withdraw it as cash and make it your “blow” money for the month to be spend on anything. Assigning it to a necessary budget category like food would also work well if you have a good degree of control over how much you earn and are just trying to motivate yourself to work more/faster. Another common issue that a PhD side hustle can help with is un-/under-funded summers; the more you earn during the academic year and summer, the less stress you’ll experience when you’re drawing down your savings. Finally, assigning your PhD side hustle money to debt repayment is a great way to accelerate your debt payoff.

Maintain Separate Business and Personal Accounts

Creating a separate business checking account is just about the first step you should take when you become self-employed. If you are a sole proprietor, your PhD side hustle earnings will be reported on your personal tax return on a Schedule C, so at the end of the day it’s all really your money. However, keeping a separate business checking account that you use for only business transactions helps tremendously with bookkeeping and tax records. It’s also advantageous when you want to save up your income for a business investment, such as a piece of equipment or professional development.

Maintaining separate personal and business accounts is also a reasonable step for anyone with an irregular income to take, even if it’s not self-employment income. Instead of receiving variable amounts of income directly to your personal checking account, you can create a degree of separation with a business checking account. If you let a balance build up for a couple months, you can set up an auto-transfer of a regular amount of money from your business account to your personal account that is less than your average income – just like a paycheck – which is easier to incorporate into your budget than a variable income.

What financial best practices have you put in place for your PhD side hustle?