Pursuing a side hustle is a great idea as it brings some extra dollars for your pocket along with an opportunity to do something you love. Surely, it feels good to spend or save up that extra cash that comes over and above your regular paycheck. However, the same money can land you in big trouble if you don’t manage taxes properly. After all, you are making money and you are accountable for it.
In fact, you may take your tax bill higher by hundreds, or even thousands, of dollars if you seriously hustle up during a year. Just imagine the kind of tax problem it can create! You may have to pay a huge bill or even face a penalty if you don’t account for them or pay up on time. And there is a need to have proper documentation of expenses you made for your side hustle. If you are bad at sums or simply do not have the time to do tax planning, fret not as there are many local tax professionals out there who are well versed in tax laws. You can be rest assured that your taxes are being filed accurately and in a timely manner. Here are some guidelines you can follow to ensure that your side hustle does not mess up with your taxes.
Set aside a part of side hustle income for taxes
Anyone who brings in a regular paycheck knows that the employer holds back a part of the salary to pay for income taxes. This means you are holding a part of your income for taxes even before it comes into your bank account. However, things are different in the case of a side hustle. You get the entire money in your pocket and spend or save it happily, often forgetting about tax. Rather, you should plan right from the day you start making money. Regardless of the amount you make, you need to stash 25-30% of the side hustle money for taxes. This way, you will have enough to pay up the self-employment taxes at the end of the year.
Check if you need to pay estimated taxes
Since the tax system is pay-as-you-go in nature, the IRS expects taxpayers to pay estimated taxes as quarterly payments rather than in one lump sum. And this may apply to your income from a side hustle as well, depending on the amount you earn. If the side gig gets you a few hundred dollars a year, you need not worry about estimated taxes and can clear it up as a single payment. A larger tax burden, however, needs to be paid on a quarterly basis. Discuss the matter with tax attorneys with detailed knowledge in tax law if you have doubts. A side gig makes the situation tricky and it is best to consult an expert rather than leaving things to chance.
Have a separate bank account for side hustle expenses
Ideally, you should treat your side hustle as a business from the tax perspective. Just as you are expected to pay tax on your income from the gig, you are entitled to claim deductions as well. This means that you can actually write off certain legitimate expenses as legitimate deductions while calculating the taxable income. At this stage, it becomes important to identify the expenses specifically, distinct from your personal expenses. The best way to do this is by having a separate checking account which is solely dedicated to the expenses for the side hustle.
Maintain a record-keeping system
A side hustle can be a major complication from the tax calculation perspective. Unless you want to spend a lot of time and be stressed out about the calculations, it is advisable to keep your records sorted out. You can invest in a software solution or maintain them in an old-fashioned way depending on your comfort level. The smartest thing to do is to keep all the receipts from your side hustle expenses in one place because it will enable you to claim the relevant deductions. Plus, you will have a paper trail if you have the IRS asking for proof later. Besides receipts, bank statements, business records and tax forms are some of the documents that you must maintain.
Collaborate with a tax professional
If you are making a considerable income from a side hustle, collaborating with a tax professional is mandatory. Though you may have to spend on their services, the expense is totally worthwhile. It reduces your stress and workload because professional services have you covered from start to end. Further, these professionals know the tax laws and norms well enough for your complex situation, where you have money coming in from your regular job and side gig.
Following these useful tips can make your tax situation simple and ensure that you are completely sorted out with the IRS. No tax issues mean you can concentrate on making money, which is something you would absolutely want to do!