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New Fellow? Pay Your Quarterly Estimated Tax for the First Time This Week!

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Did you start receiving a fellowship this academic year as a graduate student or postdoc? First, congratulations! Second, I must clear up a pernicious misconception about fellowships in the US: you do owe federal income tax (and probably state, too) on your fellowship income. If income tax is not being withheld from your stipend/salary (and the majority of universities do not offer withholding on this type of income), you may be responsible for making quarterly estimated tax payments throughout the year. The next payment is due tomorrow, January 16, 2018! This post will guide you through how to determine whether you owe quarterly estimated tax and how to pay it if so.

Do You Receive Your Gross Income?

The IRS expects to receive income tax payments throughout the year, not just each April. Employees almost always have income tax withheld from their paychecks; instead of receiving their gross (full) income, their employer sends approximately the amount of tax the employee owes from each paycheck to the IRS and the employee receives the rest (net income).

Fellowship recipients (when the term is used conventionally; perhaps not universally) have non-compensatory pay and are not considered employees of their universities. Most universities do not offer income tax withholding on fellowship stipends/salaries. Taxpayers who do not have income tax withheld from their salaries (or who have too little withheld compared to the amount of tax they owe) are sometimes responsible for manually sending money to the IRS. This is called making quarterly estimated tax payments.

If you are a fellowship recipient (e.g., the NSF GRFP), your first step is to confirm that you are in fact not an employee, and your second step is to check whether you are receiving your gross or net income.

Step 1: The easiest way to determine if you are an employee (or rather, confirm that you are not) is to check whether you receive a W-2 for your fellowship income. (If you had an assistantship in this calendar year, you will receive a W-2 for that position, so be sure to check specifically about your fellowship income.) However, if you just started your fellowship in the 2017-2018 academic year, you aren’t due to receive (or not receive) your tax forms until the end of January 2018, and the estimated tax payment is due in mid-January. Your next best option is to inquire into what tax form you will receive for your fellowship stipend/salary. Non-compensatory pay will appear on a 1098-T, 1099-MISC, or courtesy letter or will not be reported in any way. Compensatory pay (indicating that you are an employee) will appear on a W-2. You should try asking your departmental administrative assistant, university fellowship coordinator, Bursar’s Cashier’s office, and/or payroll office. You will most likely be told that they “cannot give tax advice,” but confirming what type of tax form your income generates is not advice.

Step 2: Having confirmed that you are not an employee (if you are, you don’t need this post!), double-check the stipend/salary amount that hits your bank account. If you multiply it by the number of pay periods over which you will receive it, is it equal to the gross fellowship stipend/salary you were told you would receive or is it less? If it is less, did you at any point file a W-4 (e.g., when you had an assistantship)? You may be one of the few students/postdocs who has income tax withheld from a fellowship stipend/salary. As stated earlier, a small minority of universities do offer withholding on fellowship income, and they should use a W-4 to determine the amount of withholding.

If you are not an employee and are not having income tax withheld from your fellowship stipend/salary, you may need to make quarterly estimated tax payments.

Are You Responsible for Paying Quarterly Estimated Tax?

The IRS explains who is responsible for filing quarterly estimated tax on Form 1040-ES p. 1.

Right off the bat, you are not required to pay quarterly estimated tax if in the previous tax year your total income was zero or you did not have to file a tax return (and your return covered all 12 months). For example, if you were a student for all of 2016 and either didn’t have an income or your income was so low that you didn’t have to file a tax return, you aren’t required to make quarterly estimated tax payments.

If that first provision doesn’t apply to you, the IRS has a helpful flow chart on Publication 505 p. 24.

Publication 505 Figure 2-A

At this point, you’re going to have to do a few calculations to determine what amount of additional tax you owe for the year (additional to any withholding you already had). You simply need to fill out the worksheet on Form 1040-ES p. 8 for your household. It looks sort of involved but if you have a simple financial life you won’t actually need to put very many entries into the worksheet. You will need at your fingertips your 2016 tax return (or at least the total amount of tax you paid), your gross income for 2017, the amount of income tax you had withheld in 2017 (if any) and an educated guess as to your 2017 deductions and credits (your 2016 return will be helpful for this).

Once you calculate the amount of tax you owe in total for 2017 (Form 1040-ES line 13c), you can determine whether you are responsible for paying quarterly estimated tax.

First, look up the total amount of tax you paid in 2016. Second, take your total tax due for 2017 and multiply it by 90%. The smaller of these two numbers is the amount of tax you need to pay throughout 2017 to avoid a penalty (Form 1040-ES Line 14c).

Subtract the amount of income tax you had withheld in 2017 (Form 1040-ES Line 15) from the amount you need to pay to avoid a penalty. If the result (Form 1040-ES Line 16) is less than $1,000, you are not required to make a quarterly estimated tax payment. If the result is greater than $1,000, you are required to make a payment.

Please note that just because you are not required to make quarterly estimated tax payments does not mean you will avoid paying tax the whole year, only that the additional tax due does not have to be paid until you file your 2017 tax return this spring. Now that Form 1040-ES has given you some warning, use the next few months to prepare to make that lump sum income tax payment.

How to Pay Quarterly Estimated Tax

If you are required to make a quarterly estimated tax payment, the calculation is pretty simple since this is the last payment due for 2017! You should make a payment for all the additional tax due that you calculated you owe (Form 1040-ES Line 16a). If your calculations were exact, when you file your 2017 tax return in the spring, you won’t receive a refund or owe any additional tax. More likely, filling out your full tax return will bring to light a few adjustments in your calculations, so you may end up receiving a small refund or paying a small amount of additional tax.

The easiest way to make your quarterly estimated tax payment is online at www.IRS.gov/payments (find all your payment options on Form 1040-ES p. 3-4 or Publication 505 p. 32-33).

If you were unaware that you had any income tax liability on your fellowship income and are unprepared to pay what you owe by January 16, 2018, don’t avoid the issue! Give the IRS a call and they may be able to work with you to minimize the penalties you owe (though not the interest).

Calculating your quarterly estimated tax is not very difficult; the most challenging aspect is knowing that you’re supposed to do it! If you are a new fellow and this is your first time making a quarterly estimated tax payment, rest assured that it will be easier going forward. You first quarterly estimated tax payment for 2018 is due on April 17, 2018. You’ll want to freshly fill out the 2018 1040-ES once it’s available, but it should be similar to the form you just worked through.

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How to Put Your New Postdoc Salary in Context

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After a long, arduous journey through graduate school, you’ve successfully defended your PhD and are about to take the next step in your research career: a postdoc. One of the best perks of transitioning from being a graduate student to a postdoc is the pay increase. While postdocs aren’t exactly rolling in dough, they are usually paid significantly better than graduate students, and after 5+ years of zero to tiny raises, it’s gratifying to finally receive a higher salary.

postdoc salary in context

However, before you buy that new car or put an offer on a house, take some time to put your new postdoc salary offer in context. There are a few subtle changes common to the grad student-postdoc transition that will decrease your take-home pay and/or discretionary income.

(This post is specific to the US.)

Employee or Fellow?

The very first question to clarify is what exactly your employment status will be with respect to your university/institute. Just like in graduate school, there are two broad ways you can be paid: compensatory or non-compensatory. In academic-speak: Are you an employee or a fellow?

If you see “fellow” in your title or offer letter, have heard “fellowship” from your advisor when discussing funding, or have won an outside individual fellowship, you are a fellow and not an employee of your university. As a fellow, you may receive no benefits from your university or only a few; you are almost certainly not going to receive all the benefits a full employee would. You should contact your university’s postdoc office or your departmental administrative assistant for a full explanation of your benefits.

If you aren’t labeled a “fellow” you are most likely an employee, but there may be multiple classes of employees at your university so it’s important to determine which one. (Postdocs may not be offered the same benefits as faculty, for example.) Once you know exactly your class of employee, you can read through material provided by Human Resources to determine your benefits, and direct any questions you have to Human Resources or the postdoc office.

When in doubt, ask if you will receive W-2 pay or not. W-2s are used for employee pay, while non-compensatory pay is not reported to the IRS or reported on a 1099-MISC.

Further viewing: Types of Grad Student Pay and Their Implications

Some of the common, though not universal, differences in benefits offered to employees though not fellows are: income tax withholding, 403(b) access, 403(b) match, subsidized health insurance premiums, health insurance premiums paid as a payroll deduction, Health Savings Account/Flexible Spending Account, group disability and/or life insurance access, and official paid time off.

Income and FICA Taxes

If you’re earning more as a postdoc, you’re also going to pay more in federal income tax (given no other changes in your personal life). Your effective tax rate will increase and possibly your marginal tax rate as well. So if your gross pay increases by $1,000 per month, for example, federal income tax may take a $120 or $220 (or somewhere in between) bite out of that increase.

The same broad story would be true for state taxes if you are not moving states, but many postdocs relocate states as well with their new positions. If you don’t want any surprises in your first paycheck, look up how your new state’s tax brackets and rates compare to your old state’s.

One of the biggest tax changes that occurs when going from a grad student to a postdoc is FICA tax (Social Security and Medicaid). As a graduate student, you did not pay FICA tax. Postdoc fellows will also not pay FICA tax (or self-employment tax) on their income as they do not technically receive “wages.” However, postdoc employees will begin to pay FICA tax. On the employee side, the Social Security tax is 6.2% and the Medicare tax is 1.45% on all of your income up to $128,400 (in 2018). If your new postdoc salary is $45,000 per year, for example, you will pay $3,442.50 in FICA tax. That can be a big shock for someone who wasn’t paying any tax in that category previously.

The best way to calculate your new take-home pay after all of these changes is to use a paycheck calculator, of which there are many.

Further reading: Why Is My Take-Home Pay as a Postdoc Nearly the Same as When I Was a Grad Student?

Health Insurance

While your grad school and postdoc universities almost certainly offer you the option of buying group health insurance, who pays the premium and how might change.

As a graduate student, it is typical to have your health insurance premium paid partially or completely from funds that are not part of your stipend pay, so many graduate students don’t have to factor that cost into their take-home pay.

A postdoc employee will likely pay part or all of his insurance premium through a tax-free payroll deduction. A postdoc fellow’s insurance premium may be paid on her behalf, similar to a graduate student, or come completely from her salary.

This is an important benefit to check into prior to starting your postdoc position as you don’t want any lapse in coverage or to be surprised by the additional expense. The premium for a postdoc’s insurance may be much higher than a graduate student’s, depending on the risk pool each position is put in.

Student Loans

Another big change when you transition out of being a student is that your student loans, if you have any, are no longer eligible for in-school deferment. Beginning to pay off student loans can be a large monthly expense on a postdoc salary, depending on the total amount owed.

Contact your lender(s) to find the minimum payment due and the period over which you will repay your loans. Federal student loans have a standard repayment period of 10 years, but private student loans may take a shorter or longer period of time. Factor this minimum payment due into your planning for how to allocate your salary.

If you want to pay off your debt faster than the standard repayment period, which is an excellent idea for debt at a moderate or high interest rate, plan on paying more than the minimum amount due each month.

If you don’t think your postdoc salary can handle even the minimum payment on your student loans, you have two options to immediately consider.

1) With respect to your federal student loans, you may be eligible for one of the many repayment programs that lower your minimum payment due (even, potentially, to $0) by extending the repayment period and overall amount of money you will repay (income-based repayment, pay as you earn, etc.). Your eligibility for these programs depends on your household income. Carefully consider whether it is in your best interest to use one of these programs, even if you are eligible.

2) There are many lenders currently offering student loan refinancing at competitive interest rates. When you refinance, you are paying off your old loans and taking out new private loans, so make sure you would not be losing any benefits unique to student loans, such as the repayment programs for federal student loans. Be forewarned that these lenders only work with borrowers with excellent credit and low debt-to-income ratios. If you can significantly lower your interest rate, refinancing may be a positive step for your personal finances, both lowering your minimum payment due and reducing the total amount of money you will repay.

Cost of Living

With a change in university naturally comes a change in the local cost of living. As you well know, living expenses vary greatly from city to city. At the lower salary levels of a graduate student or postdoc, this can be a major concern.

There are two quick methods to estimate how the cost of living will change between your grad school city and your postdoc city.

CNN offers a cost of living comparison calculator. Plug in the two cities in question (or as close as you can get to them) and put in either your grad student salary or your postdoc salary. Your greater familiarity with the cost of living in your grad school city combined with this calculator will help you estimate how far your new salary will go in your new city.

MIT’s living wage database also provides insight. Look up the living wage for your grad school university’s county and your postdoc university’s county. The living wage will be closer to your grad student salary than your postdoc salary, but the difference between the two will also help you determine how much of an increase or decrease in cost of living you will experience.

A more involved but also more effective step if you have not yet moved to your new city is to sketch a budget. Using your best estimate of your take-home pay based on the above factors, research how much you are likely to spend on housing, food, transportation, etc. if you kept your perceived lifestyle the same from grad school into your postdoc. Ideally, this exercise will help you decide in which areas of your budget you are able and would like to upgrade your lifestyle, such as living without a roommate.

Personal Experience with the Transition to a Postdoc Position

My husband stayed in his PhD advisor’s lab for an extra year as a postdoc to finish up a few papers before applying for a “real” multi-year postdoc at another institution. My husband received one postdoc offer that he seriously considered before ultimately choosing a position in industry. We performed the calculations above regarding increased taxes and insurance costs to compare the take-home pay of his new postdoc offer directly to the take-home pay from his short-term postdoc and graduate student positions. The take-home pay from the postdoc offer was slightly less than that of his short-term postdoc position and much higher than his pay as a graduate student.

However, when we compared the cost of living in our grad school city, Durham, NC, to the cost of living in Boston, MA, where the new offer was from, we were shocked by the results. In terms of the effective purchasing power from my husband’s take-home pay, the pay for the postdoc position in Boston was “less” than even his grad student pay in Durham. We would not have expected to experience an effective pay decrease moving from a grad student position to a postdoc position, but that is how the numbers worked out. I’m very glad that we took the time to do those estimates before he made a final decision about the offer.

Further reading: An Agonizing Decision

While the gross pay from your new postdoc position may seem great in comparison with your grad student pay, don’t be fooled! You must account for several important changes in taxes, benefits, and cost of living to compare apples to apples.

Why It Matters How You Are Paid

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If you look across a sample of graduate students receiving stipends within any given field, you will find that they have quite similar day-to-day activities: taking or teaching classes, researching, writing articles or chapters, applying for funding, etc. However, behind the stipends that allow these students to engage in their studies are two very different types of sources, which the student’s tax forms reveal. (This distinction and the tax-related details herein are for graduate students in the US.) Whether a student has one type of funding or another has implications for his taxes, access to retirement accounts, and possibly university benefits.

A version of this article first appeared on GradHacker.

The two types of pay that provide stipends to graduate students are ‘compensatory’ and ‘non-compensatory.’ Compensatory pay is given in exchange for work. Typically, this work is in the form of an assistantship – research, teaching, or graduate. Non-compensatory pay is given as an award, and there is (according to the IRS) no work requirement for receiving it. Typically, this award is in the form of a fellowship or participating in a training grant. (Scholarships that go toward paying tuition, fees, and/or health insurance premiums are another form of non-compensatory pay.)

why it matter how you are paid

The type of pay that is behind a graduate student’s stipend potentially affects several aspects of her finances, depending on the university’s policies.

1) The tax forms generated by each type of pay differ. Students with compensatory pay will receive a W-2 in January. Students with non-compensatory pay will see their pay listed on, depending on the university’s policies, a 1099-MISC in box 3, a 1098-T in box 5 (probably summed with the scholarships received), or an unofficial courtesy letter. It is also possible that students with non-compensatory pay will receive no additional notification at tax time. Despite these different reporting mechanisms, a graduate student will report both types of pay in line 7 of his 1040 (with “SCH” denoted next to the line to indicate non-compensatory pay).

2) Graduate students receiving compensatory pay will have the opportunity to have income tax withheld from their stipends, while graduate students receiving non-compensatory pay may or may not, depending on the university’s policy. If students receiving non-compensatory pay do not have the option to have income tax withheld, they may have the responsibility of paying quarterly estimated tax.

3) With rare exceptions, graduate students cannot elect to contribute to retirement accounts at their universities. Therefore, graduate students who wish to save for retirement inside a tax-advantaged account typically opt to contribute to an Individual Retirement Arrangement (IRA). However, only compensatory pay (aka ‘taxable compensation’ or ‘earned income’) is eligible to be contributed to an IRA. Graduate students who receive only non-compensatory pay in the course of a calendar year (and are not married to a person with compensatory pay) are not eligible to contribute to an IRA in that year (though they can still save for retirement).

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4) Full-time graduate students typically do not pay FICA tax on their stipends, but the reason for this is different between the two types of pay. Graduate students with compensatory pay enjoy a student exemption to FICA tax, whereas non-compensatory pay is not subject to FICA tax in the first place. This distinction is important if graduate students ever become predominantly viewed as employees rather than students, which sometimes occurs in the summer when they are not enrolled in classes. In that situation, they might lose their FICA exemptions temporarily and have to pay additional tax.

5) The benefits that universities extend to students may differ based on their status. Graduate students receiving non-compensatory pay are unambiguously students in the eyes of the university. Graduate students receiving compensatory pay are both students and employees, and universities have varying views on which half of that balance is dominant. In some cases, when graduate students are considered employees, different or additional benefits may be extended to them that graduate students who are only students do not receive, such as union membership, childcare subsidies, and pensions.

While graduate students receiving compensatory and non-compensatory pay likely have very similar roles within the university, you can see that the IRS and the universities draw a number of distinctions between the groups that become important at some points in a graduate student’s career. If you are unsure which type of pay you are currently receiving or received earlier in the calendar year, you can either wait to see which kind of tax form you receive (W-2 for compensatory, anything else or none for non-compensatory) or inquire within your university’s payroll or financial aid office.

Have you received compensatory, non-compensatory, or both types of pay during graduate school? Was there a time that you realized that your type of pay affected your life materially? Do compensatory and non-compensatory students receive any different benefits at your university?

How to Improve Your Finances this School Year

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A new school year brings the sense of a fresh start, even for those of us who are largely unmoored from the academic calendar. Even with a PhD trainee’s limited income, we can harness our renewed optimism for our finances each September. If you are willing, there are steps you can take this week, this month, and this year to improve your relationship with money, your money management skills, and your net worth.

A version of this post was first published on GradHacker.

improve your finances

Improve Your Finances This Week

Identify your life values

There is no single right way that everyone should use their money; your own individual best practices will be based on your life values. Your values are the concepts that you hold most dear; examples include freedom, fun, family, health, excellence, and so on. Identifying what is most important to you will bring great clarity to your financial decisions. You can choose to spend more resources fulfilling your values and dispense with things and activities that do not.

Further reading: Determining Your Values and Financial Goals in Graduate School [A Personal Finance for PhDs Guide]

For example, when my husband and I identified ‘community’ as one of our top values, we knew we wanted to allocate more money for traveling to visit our families and attend weddings. To enable that, we cancelled our cable TV and stopped eating out for convenience, as those areas of spending did not correspond to any of our values.

Create a balance sheet

A balance sheet is a snapshot of your entire financial life – every asset and every debt listed by type, financial institution, balance, etc. If you have any confusion or disorganization in your finances – or the tendency to bury your head in the sand – a balance sheet will help you see your whole situation at a glance. If you have debts, you can also include the minimum payments and interest rates so that you can easily decide which payoff to tackle first. Your balance sheet may reveal vestigial accounts or other duplications that you can clear up this week.

Start tracking your spending

My top financial ‘tip’ for grad students newly interested in their finances is to implement a tracking system for all their financial transactions. The simple act of tracking is often enough to start optimizing behavior. You can do this manually with anything from a notebook and pen to an app such as Wally or automatically with software that links to your accounts such as Mint or Mvelopes.

Create a prioritized goal list

Taking your values and balance sheet into consideration, list the current financial goals you would like to reach. You may be able to work on some of those goals simultaneously. For the goals that should be tackled sequentially, choose the order in which you will focus on them so that you can make quick progress. For example, if you have multiple debts you want to pay off, use the debt snowball or debt avalanche method to create your prioritized list.

Improve Your Finances This Month

Implement a frugal strategy

Trying out a new frugal strategy is a great way to unblock what can feel like an impossibly tight financial situation. You don’t have to commit to it forever – just give it a test run so that you can evaluate how much money you save and how it affects your life. (Bonus points if the frugal strategy you choose reduces a fixed expense!) You can find tons of suggestions online (example: 66 Ways to Save Money in New York City) or among your peers.

Further viewing/reading: A Month of Frugal Tip for PhDs-in-Training by PhDs(-in-Training)

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Optimize your food spending

Food spending is a prime target when you are trying to free up more money, as it’s among the largest variable expenses in a grad student’s budget. Check out these articles on how to get the most for your money:

Add to your emergency fund

Even a small amount of available cash can save your bacon in the case of an emergency. If you have nothing put aside for emergencies right now (46% of Americans surveyed couldn’t even cover a $400 emergency), set a goal of saving $1,000 for that purpose. If you already have $1,000, consider setting a larger goal based on your current monthly expenses or your insurance policy deductibles. You can add to your emergency fund with a monthly savings goal or in dribs and drabs as you free up cash.

Improve Your Finances This Year

Right-size your housing and transportation

As housing and transportation eat up a huge fraction of a grad student’s income, it’s important to pay only what you can afford or – in some high cost-of-living areas – as little as is feasible. If you realize that you are overspending on rent or your car, it will take some time and doing but you can correct the situation by moving, getting a roommate, selling your car, switching to cycling for your commute, etc.

Develop a side income

There are two ways to free up more money each month: spend less or earn more. Grad students tend to focus on the “spend less” side of that equation, forgetting that “earn more” is sometimes also an option, depending on the source of your funding and your department’s culture. A judiciously chosen side job can advance your career as well as generate income, providing you with opportunities far beyond what your program can.

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Regularly invest and/or pay off debt

In some situations, the best a grad student can do is keep his head above water financially in grad school, but in others it is possible for a grad student to increase her wealth. The best way to increase your net worth is to make saving, investing, and/or paying down debt regular and automatic (pay yourself first). Don’t only use frugality or a side income to free up cash flow that is then lost to the ether. Commit that cash flow to working for you through automatic monthly transfers to your savings account, investments, or loans.

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What are you doing this week, month, or year to improve your finances?

How to Pay Tax on Your PhD Side Hustle

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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.

tax PhD side hustle

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.

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 Sometimes Contribute 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?

Best Financial Practices for Your PhD Side Hustle

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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

PhD side hustle

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!

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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?