Working a side hustle is a great way to earn more money, but that extra job could carry repercussions for your taxes. If you have a side hustle, you may be required to pay income tax and self-employment tax. Here are a few things you need to know about the tax-filing for side jobs.
Budget What You Owe the IRS
At a traditional job, your employer handles income-reporting and tax-withholding for you. The taxes you owe are reduced because they are typically withheld from each paycheck. When you have a side hustle, no one handles tax tasks for you. You’re responsible for making sure you meet all your tax responsibilities. If you’re working as a freelancer, self-employed part-time business owner, or independent contractor, you’ll need to track and report all the money coming in, as well as your expenses. You may also need to pay taxes each quarter, which means estimating how much you need to send (see below).
Keep Track of Your Income and Expenses
Whether you are writing freelance articles or renting out your apartment, you’ll need to verify your income. Keep a log (an Excel spreadsheet is a good choice) and keep track of it daily. Update it whenever money related to your side gig comes in.
For expenses, keep receipts and jot down exactly what each expense is for in your log. To reduce the taxes you owe for your side hustle, track and deduct business expenses. You can only deduct expenses used for your business use. If you have an item like your cell phone that is used for business and personal reasons, you can typically deduct the business portion of the expense. If you’re a freelance artist, for example, some expenses might include: art supplies, mileage to get to art shows, car insurance, a home office or studio space and shipping or postage costs. Make sure to document the business use.
To manage your business financials, consider software programs like Intuit’s QuickBooks or Quicken. Make sure to scan your receipts so you have an electronic record and keep the physical copies after Tax Day. You’ll need to hold onto the records for 3 years from the date you filed your original return, or 2 years from the date you paid the tax, whichever is later.
Make Estimated Tax Payments
If you intend to file as a sole proprietor, a partnership, S corporation shareholder, or a self-employed individual, and you think you’ll owe $1,000 or more for the year, you’ll need to make estimated quarterly tax payments in April, June, September, and January. Businesses that file as a corporation typically need to make estimated tax payments if they owe $500 or more for the year. The good news is that if you project these quarterly payments correctly, you’ll have already paid your taxes by the time tax season rolls around.
Make sure to check your state’s requirements for paying estimated taxes. If you do make quarterly payments, use federal form 1040ES, Estimated Tax for Individuals, and set a calendar reminder for the due dates. Failure to pay or late payments may earn you a penalty from the IRS. Estimated tax payments can be made online through the Electronic Federal Tax Payment System, IRS website or app.
Separate Your Accounts
It’s a good idea to use a separate bank account, credit card, and debit card for all side hustle or side business transactions, to better keep track of your expenses. If you use financial software you can link your credit card and instruct the software to pull in your expense transactions automatically. This will allow you to run an expense report whenever needed.
Hire an Accountant for Help
Having a side hustle can get complicated. If you find it difficult to navigate, consider hiring an accountant. Get a referral or do some research to find a reputable and reliable professional. You want someone who has experience handling tax situations similar to your own. Ask friends, family, co-workers and business associates for a recommendation, and meet with any prospective accountants to discuss your situation. Ask questions and request references. When it comes to your personal business, you want to make sure to hire the right person to assist you.