One of the biggest mistakes I made when I started my business was not understanding the tax implications. I knew I paid taxes out of my paychecks from my full-time government job. Yet somehow, I didn’t consider the fact that I would have to pay taxes on my side hustle.
And eventually, that ignorance came back to bite me. After a couple of years, I had started to make real money and ended up with a large tax bill when I filed my taxes. I definitely learned my lesson then.
Now over the past few years, I’ve seen more and more people starting their own side hustles, which is amazing. But whether it’s a blog, an Etsy shop, a gig side hustle, or anything else, it’s important to know what it means for your taxes.
In retrospect, I wish I had all of the knowledge and the bookkeeping and tax system that I have today in those early years. So today, I’m sharing all of the advice I have with you to ensure you don’t make the same mistakes I do.
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Set up a separate bank account
First things first, if you’ve decided to start making money from any side hustle or small business, set up a separate bank account ASAP.
When you are making money from your side hustle, you have to track every single dollar of income you get. And since you report and pay taxes on your income, you’ll also get to deduct your expenses (meaning you need to track those too).
The best way to do this is by keeping your side hustle income separate. If you have your side hustle income going to your personal bank account, you’re sifting through far more transactions to figure out which were and were not business-related.
Aside from making it easier to track, it also helps with budgeting. I like investing in myself and my business with tools and education. However, I want to make sure the amount I’m investing in the business isn’t excessive compared to the amount I’m bringing in. Having a bank account with just my business income, especially early on, showed me exactly how much I’ve made from my business so I can get a look at the big-picture of my business finances.
It also helps when it comes to paying quarterly taxes. QuickBooks (the tool I use to manage my business finances) keeps track of how much I’m likely to be paying in estimated quarterly taxes. I keep an eye on that number and make sure I always have enough set aside to cover that number.
Then, when I have money left after the amount I need for quarterly taxes and the amount I plan to reinvest in the business, I can transfer that money into my personal bank account.
Track all income and expenses
Track every dollar you make from or spend on your side hustle. That way, when it comes time to file taxes, you’re ready to go. As I mentioned above, setting up a separate bank account makes it way easier to do this. So does using an accounting tool like QuickBooks.
As you’re tracking your expenses, make sure you save all of your receipts so you can deduct them on your taxes. Without receipts to prove your expenses, you might run into trouble with the IRS down the road.
I recommend doing your bookkeeping at least monthly. My QuickBooks is connected to my business checking account and credit card, meaning it automatically pulls all income and expenses. I simply sit down once per month and go through them to ensure everything is accurate.
Then, at the end of the year, it’s easy to pull all of that information for my business tax return. And since I’ve been diligently checking it each month, I know it’s all accurate.
Report all of your income
The bottom line is that you need to report every dollar you make from your side hustle. I read articles or Facebook posts occasionally where someone says you don’t have to pay income unless you make a certain amount of money or you only have to report income you have a 1099 form for. That’s simply not the case.
The IRS wants to know about and tax every dollar that you’re bringing in. Yes, you may get 1099 forms from some companies you work for. But that is not the only income you have to report.
The pain of having to pay taxes on your side hustle income is a lot less than the pain of the fine you could be facing down the road if you don’t report your income.
Know what you can deduct
Having to report and pay income on your side hustle income is a bummer, but the good news is that your side hustle expenses are tax-deductible! The general rule is that you can deduct any expenses that are considered reasonable and necessary for your profession.
The expenses you deduct will depend on the type of side hustle you have. Deductions that I deduct for my own business include the cost of my website, writing tools, bookkeeping software, marketing expenses, education, my accountant, and more.
NerdWallet has a really good list of common tax deductions for small businesses you can use to see which of your expenses qualify.
Learn about quarterly taxes
Do you know how at your full-time job, there is money taken out of every paycheck for taxes? Yeah, that’s because the IRS wants you to be paying taxes on your money as you’re earning it. Meaning if you’re making money from your side hustle, they don’t want you to wait until the following April to be making good on that tax bill.
That is where quarterly taxes come in. Every quarter (on April 15, June 15, September 15, and January 15), you will pay your quarterly taxes. I can’t stress enough how important it is to have an accounting tool or professional for your business because this resource can estimate your quarterly taxes for you and coordinate the payment (my go-to accounting tools are QuickBooks and my CPA).
Don’t start freaking out now – this rule probably doesn’t apply to you if you’re a beginner. Generally, you won’t have to do this if you didn’t have a tax liability the following year OR if you don’t owe more than $1,000 in taxes for your side hustle. If you’re concerned about it, though, I would definitely talk to an accountant.
Find the right tools to help you
Finances and taxes can be complicated. There’s a reason we pay accountants so much money to do this for us. And if you’re new to the whole side hustle thing, this probably all seems pretty overwhelming to you. The best advice I can offer you is to find tools that help you to implement these tax and finance tips. Here are my favorites:
- QuickBooks: This is the tool I use to do my business accounting. I’ve tried a couple of other tools, and this one is hands down my favorite so far. It connects to my business bank account, credit card, and PayPal account to track all of my income and expenses. It also tracks my estimated quarterly income. Finally, it connects with TurboTax (the tool I used to use to file my taxes) so I can just import all of my business income and expenses for the year.
- TurboTax: As I mentioned, this is the tool I previously used to file my taxes. I now work with a CPA who files my taxes, but when your business finances are fairly simple, software like TurboTax can do the trick.
Hire a CPA
I’m going to share a secret with you: It took me more than five years of being a business owner before I finally hired an accountant. While many people will recommend this as a first step when you start a business or side hustle, I really think you can DIY your finances at first – if you understand what you’re doing.
But eventually, you may hit a point where your financial situation has become too complicated to handle your own taxes. I should also mention that while I went the DIY approach for several years, I was a personal finance blogger, meaning I had a deeper understanding of taxes.
If you’re feeling overwhelmed by the tax part of running a side hustle or don’t feel that you understand what’s expected of you, then I recommend hiring a CPA sooner. The cost you’ll pay is well worth avoiding any problems with the IRS.
Learning to deal with taxes and finances is definitely one of the most daunting parts of having a side hustle. For years after earning income from my business, I was nervous that I would make a mistake. Do your research, and when in doubt, talk to an accountant. if you already have an accountant you work with for your taxes, they should be able to talk you through all of this.