Running a side hustle can be exciting and help pay for funding an emergency fund, travel, unexpected expenses and lots more. It’s the chance to grow something small into a real business.According to a Bankrate study, 44 million Americans are running side hustles. Sarah Berger of the Cashlorette blog (part of Bankrate) says, “It isn’t spare change from a lemonade stand.”
From the study, 86% of respondents are earning money from a side hustle, and of that group, 36% are earning more than $500.While earning money on the side is a great financial benefit, it’s important to also efficiently manage your hustle’s taxes as well.Otherwise, the IRS might decide to crash the party and impose a number of penalties and fines.In this article, we’ll see how to avoid that scenario and make tax planning for your side hustle very manageable.
Most side hustles that are generating only a few hundred dollars per month probably aren’t going to have many expenses. Even so, it’s best to start early in forming efficient record-keeping habits.While some people still keep paper receipts in a box and have to sort through them manually, there’s a much better way to keep track of expenses.One of the easiest ways to keep track of your expenses is to use a credit card to pay for business expenses. Then in your financial software, link the credit card and let the software pull in transactions automatically. From there, you can run an expense report quarterly or even annually for your accountant or self if you are doing your tax return.When expenses come through in your financial software, simply add a business expense category. This way, all of your business expenses are easily identifiable and can be grouped in a report.Quickbooks is common for managing business financials. But probably overkill for a side hustle. Quicken can do the job just fine and it’s a one-time fee rather than monthly like Quickbooks.Quicken Home & Business will let you create a business in the software for your side hustle. This helps to separate it from your personal finances.For the credit card, it isn’t necessary to get a dedicated business credit card. By coding your credit card transactions to specific business expenses, they are separated from personal expenses.As your side hustle grows into a larger business, you’ll probably want to consider getting it a dedicated business credit card.Some of your expenses might be mixed with personal expenses. In this case, you’ll need to prorate them.An example of such an expense is the use of your car for business. Or the use of a room in the house as a dedicated office for business. The car still gets used for personal reasons, and of course, the room is attached to your house. In those cases, you’ll want to keep a mileage log for your car. This way, you can take a mileage deduction for business use. There are many mobile phone apps that can help you track this type of deduction.For the office, take the total square footage of your home and the office. Determine the percentage occupied by the room.For example, if the house is 1500 square feet and the room is 300 square feet, that’s 20%. This means you can deduct 20% of your rent and utilities for business use. It’s best to speak with an accountant to be sure though.Business owners must handle payment of all their taxes. This is unlike an employee, where the employer pays for half of the 12.4% Social Security and 2.9% Medicare taxes. For your side hustle, you’ll have to pay the full 15.3%, which increases the overall tax burden compared to employees.While employees have taxes withheld for each paycheck, business owners need to manually handle their withholdings through out the year.This is done through estimated tax payments, which are made each quarter on the following dates:
A simple rule of thumb for determining your quarterly tax payments is to take your projected annual income and multiply it by 30%. For example, if you are going to make $5000 for the year, your taxes amount to $1500. Divide that number by four to get $375 for each quarterly payment. That is just a simple guideline.An accountant can help you determine the exact figure since credits and deductions will impact the estimate.Of course, if you have a side hustle income from the previous year, you can just use that amount. This assumes there isn’t a change in the amount from one year to the next. Instead of making quarterly payments, some people increase their employee withholdings and have the money come out of their paycheck.In that case, instead of dividing your taxes ($1500 in our example) by four, divide by 12. This brings the number to $125 per month.When you’re a side hustler, you can potentially take advantage of some new retirement plan options – which allow you to save some of your side hustle earnings AND save on taxes.When you side hustle, the primary options for retirement accounts are the SEP IRA or Solo 401k. Both of these plans allow you to save roughly 25% of your net income into the account. This money is saved pre-tax, meaning that you don’t pay taxes on it until you withdraw it!If you’re working a day job, a SEP IRA is usually easier to manage. If you have a work 401k, you have to ensure that you don’t exceed the 401k contribution limits between your 401k and Solo 401k. In some cases, this could limit how much you save. That isn’t the case with a SEP IRA.Which ever plan you choose, these can be great ways to save as a side hustler!Running a side hustle, no matter how small, means paying taxes. You can’t outsmart the tax man.But you can make your life easier by optimizing how you manage your side hustle taxes using the above tips.