For several years I worked a full-time job as a Personnel Assistant for our local county government, and ran my photography business as a side hustle. Despite it being a lot of work, I enjoyed all the extra income that came with it! I mean, who doesn’t like extra cash? I didn’t realize the effect having two jobs would have on my taxes (I was a bit naive!). Navigating your side hustle and taxes can be a little confusing at first, but today I’ll be breaking down how to best prepare yourself come tax time!
If you, too, have a side hustle, listen up! If you’re not careful, that side hustle income could cause you some serious headaches once tax time hits. All it takes is a few new clients or a big job to mess up your tax bill in a not-so-good way. How can your side hustle mess up your taxes, you ask? Here are a few ways:
- Not having proof of receipts if the IRS comes knocking. That $2,000 new computer you just purchased? Make sure you keep any receipts related to your business spending.
- You could potentially see your tax bill increase depending on how much you worked + made in your side hustle.
- If your side hustle is successful enough (and you pay the IRS over $1,000 for two consecutive years), you should begin paying quarterly taxes. You could potentially be hit with a penalty if these aren’t paid on time.
So, what can you do to make sure you are properly prepared? Here are a few ways to keep your side hustle from screwing up your taxes:
Navigating Your Side Hustle and Taxes | Kelly Grace Photography
Open a Business Checking
It’s pertinent to open a separate business checking account if you are being paid any sum of money in your side hustle. It’s time to start treating your business like a business! This account is dedicated solely to any payments received or expenses paid in relation to your side hustle. It’ll make it much easier for you to find business expenses and add up how much you spent on your side hustle throughout the year!
Pro tip: You don’t need an Employer Identification Number (EIN) or an LLC to open a business checking account. A business checking account can be listed under your name and Social Security Number. For example, the account could be name: Kelly Mathis, DBA (Doing Business As) Kelly Grace Photography.
Save Early For Taxes
Don’t wait to save for taxes until it’s too late. Start stocking away a portion of your revenue throughout the year to save for tax time. I personally follow the Profit First Method and stock away 15% every two weeks. I have a checking account named, “Income,” and whenever I receive a payment the money goes into that account. On the 10th and 25th of each month I take 15% of the amount in that account and transfer it to my tax savings account.
If I owe taxes that particular year, I simply take the money from that account to pay the IRS. Whatever is left over in the account after the taxes are paid can be used to purchase for something in the business or as a personal bonus.
It’s also important to find out if you need to pay quarterly taxes going forward. The IRS generally wants people to pay throughout the year, rather than one lump sum. If you only make a few hundred dollars per year, you shouldn’t have to worry about this! Generally, if you owe the IRS more than $1,000 then you’ll need to start paying quarterly taxes.
If you need to start paying quarterly taxes, there are a few options on how you can proceed:
- Complete a new W-4 form at your full-time job to adjust your tax withholding. There is a great tax withholding estimator on the IRS website that will help you complete the form.
- When you get the total amount due to the IRS, divide that number by four and pay that estimated amount every quarter (i.e March, June, September, and December).
If you need help with your quarterly taxes, get with your accountant to help you! It can be confusing so it’s best to have someone in your corner!
Utilize a Record Keeping System
I used to spend hours printing off receipts, filling in a spreadsheet, and adding up mileage the weeks leading up to our tax appointment. I would have to search high and low through my inbox and file folder to find what I was looking for. It was honestly such a mess and a huge headache!
I finally invested in Quickbooks and began to organize my receipts once a week. It’s been so much easier organizing everything in small increments rather than waiting until the last minute and doing it all at once!
If you don’t currently have a record-keeping system I would highly suggest getting one! But, if you aren’t able to afford it at this time there are a few simple things you can do to keep your records in order:
- Have all your receipts from your side hustle in one easily accessible place. For example, you could utilize Google Drive, Dropbox or a simple manila folder.
- Keep items such as bank statements, business records (contracts, invoices), tax forms, 1099s, and receipts. Many of these items you’ll be able to utilize as deductions so be sure to hold onto to everything!
- Utilize a mileage tracker app, like Mile IQ, to keep track of all your mileage. It automatically syncs to your maps, and you can organize each trip by classifying it as business or personal.
You’ll be well prepared by keeping hold of the above documents if the IRS ever comes for an audit!
Get Your Taxes Done Right
Navigating your side hustle and taxes can be a bit confusing! Having a side hustle will make your taxes a little more complicated, and trying to handle it all on your own can be a bit overwhelming. Be sure to open a separate business account, start saving for taxes ahead of time, and utilize a record keeping system. Lastly, be sure you have an accountant in your corner to help you with any questions you may have and make sure your taxes are getting done right!
Are you needing help with your finances? Check out everything that I offer over on my education page!