Welcome to the final post in our series about earning extra income with a smart side hustle! (If you missed the first two posts, you can learn how to choose the perfect side hustle for you and get tips for launching your side gig to get up to speed.) Knowing how to deal with your side hustle finances will keep you in the money for the long term.
Once you’ve started your side business and are earning some extra money, it’s crucial to track that income. It’s good information to have for yourself, of course, but the IRS is also going to be interested in taxing you. You need to be prepared.
How to Track Your Income
If you work for an entity like Uber or another online gig company, tracking your income is easy. The site you’re working with should have an ongoing list of your payments that you can check any time.
If you work for yourself, you’ll need to do a little more legwork. I recommend keeping a simple spreadsheet where you log important information like the customer, payment date, and the amount you earned. You can add to it every time you get paid, or you can snap a photo of your checks and enter the data at the end of each month.
If you work a combination of side gigs, it’s best to log all of your payments yourself (even the ones from a big company) so you have all your info in one place.
How to Save for Taxes
Unfortunately, all the money you earn from side jobs is taxable. Unlike working for a traditional employer, however, no one is taking the taxes directly out of your check. You have to do that yourself.
First, figure out what percentage of your income you’ll owe to the federal government by seeing which tax bracket you fall into. Then do the same for your state taxes. Add your percentages together for the total percentage of your earnings that you can expect to pay in taxes.
The trick is to make sure you never get fooled into thinking you get to keep all of your side gig money. Instead, add up your earnings at the end of each month, figure out the percentage that will be taxed, and shuttle that amount directly into a savings accountso you don’t accidentally spend it and end up in trouble at tax time.
This might feel depressing, but it’s much better to be safe than sorry when you get your tax bill. If you end up not owing as much as you thought, then you can use any extra money in your tax savings account to pay down debt or put toward something special. Essentially, you’re giving yourself a tax refund, but you also get to earn interest on it while it sits in your savings account. Ca-ching!
How to Pay Your Taxes
If you are paid by a company, you should receive a 1099-MISC form sometime in January. This form will detail how much money you earned as a contractor (i.e., not an employee). If a company pays you through PayPal or another third-party service, you may receive a 1099-K instead. Either way, all 1099s get entered into your tax software almost just like a W-2, so this is easy. Your tax will be calculated automatically.
If you work on your own, this is where you’ll be glad you kept that spreadsheet of your income. When you file, you’ll need to add a business to your personal tax return—this is done on Schedule C. You’re a sole proprietor, so your side gig income just gets added to your regular income via this form. If you don’t have 1099s, just list your income under the section about “gross receipts.”
If you earn a LOT of money from your side gig, you may have to pay a penalty for not having paid enough in taxes throughout the year. This is very hard to predict ahead of time, but once you file, you’ll be asked if you’d like to pay estimated quarterly taxes for the next year. Say yes!
If you use an online tax service, you’ll be prompted to calculate your income and come up with an amount you pay ahead of time in April, June, September and January. Now that you’re in the practice of saving your tax dollars in a special savings account, the easiest thing to do is set up an automatic withdrawal from that account to pay the IRS. This will keep you from missing a payment.
The Bottom Line
If all this tax talk has you discouraged, don’t be! Your side gig is still a great way to get the extra income you need to take control of your finances. If you’re not sure you can do your taxes yourself, it’s worth it to ask a professional for help to set up your business taxes and estimated payments. Once you’ve done it once, you’re ready to get out there and kick some butt at your side hustle!