Economy & Jobs
3 Tax Tips for Your Side Hustle
A side hustle helps you bring in extra income and reach your financial goals faster. While you can only cut your expenses by so much, your income potential is unlimited. A side hustle is like turbocharging your path to financial freedom.
The extra income means you’ll pay more in taxes, though. One common mistake people make when they’re working a second job is forgetting to set aside money for taxes throughout the year. Instead, they’re hit with a hefty bill come tax season. Don’t let this happen to you.
To get an accurate estimate of how much you should withhold, consult a tax professional with whom you can discuss your specific situation. This is especially important if your freelance income is more than a few thousand dollars per year. It’s easy to overlook and miss out on valuable tax deductions if you file on your own. In the meantime, here a few helpful tax tips for your side hustle.
Increase Your Withholding
If you work a W-2 job in addition to your freelance work, one of the easiest ways to set aside more money for taxes is to change your withholding. Ask your human resources department for a W-4 so you can decrease your exemption amount. For example, if you claim two exemptions, decreasing to one or zero will result in more taxes being taken out of your pay, making your paychecks smaller throughout the year. This way, you won’t have to worry about sending such a large chunk of your freelance income to the IRS come tax season.
Make Quarterly Estimated Payments
If you expect to owe at least $1,000 in taxes this year and you’re not withholding enough from your W-2 job to cover your freelance work, making estimated quarterly tax payments is the best way to handle your taxes. If you live in a state that charges income tax, make sure to send quarterly tax payments for state taxes in addition to what you owe the federal government.
Use Bookkeeping Software
It’s really important to stay organized. Bookkeeping software, such as Xero or QuickBooks Online, is a great way to manage your income and expenses. Tracking profit and loss throughout the year makes estimating quarterly tax payments that much easier for you and your accountant. If your side hustle becomes your full-time job someday, you’ll be happy you put a bookkeeping system in place at the beginning so your finances are organized when you start to scale.
If you don’t pay enough in taxes throughout the year, you’ll get hit with a big tax bill come April. Thinking about avoiding the filing process altogether? Don’t. The IRS charges harsh fines for not filing on time and for failing to file an extension. Keep in mind that an extension doesn’t change when taxes are due; it just gives you more time to file a return. If you think you might owe, it’s best to send a check to the IRS before April 15 to avoid any penalties.