How to estimate federal and state taxes likely to be due on my side income?

Question

I'm a software developer living and working in the U.S. I work a regular, full time job, but I do a little bit of work on the side (computer repair, web design, etc.) to help pay down my college loans and start working towards being debt-free.

I don't make enough or work enough at these side projects to qualify as a business as opposed to a "hobby" (as the IRS likes to call it), but it's certaibly enough to make me think about increased tax liability.

What are some tips for estimating what I might owe for this miscellaneous income? My plan was to figure up a rough percentage estimate for last year's taxes, apply it to my side income, and put it in a savings account until April, but I would rather have it out of the way earlier if possible.

Also, I've only been thinking about federal taxes, but do state taxes apply as well (my thinking is "yes")?

Answer 1

Most states that have income tax base their taxes on the income reported on your federal return, with some state-specific adjustments. So answering your last question first: Yes, if it matters for federal, it will matter for state (in most cases).

For estimating the tax liability, I would not use the effective rate but rather use the rate for your highest tax bracket and apply that to your estimated hobby income, assuming that you primary job income won't be wildly higher or lower than last year. As @keshlam noted in a comment, this income is coming on top of whatever else you earn, so it will be taxed at your top rate.

Finally, I'd check again whether this is really "hobby" income or if it is "self-employment" income. Self-employment income will be subject to self-employment tax, which comes on top of the regular income tax.