A side hustle can be an effective way to earn extra income. Opportunities are immense for side hustles for those with a variety of skills. Side hustles can be incredibly profitable when you operate yours intelligently, but there are things you need to know to manage your side hustle properly, including how your taxes work.
With many traditional jobs, taxes are automatically deducted from your income. Thus, you do not have to think about them. In addition, when you complete paperwork as you start a new traditional job, you can increase or decrease the tax you pay based on your situation.
With side hustles, taxes are a little bit more complicated. Knowing how taxes apply to your side hustle is essential to ensure you file your taxes correctly and not lose money through mishandling your accounting.
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What exactly is a side hustle?
A side hustle is usually an additional source of income that you earn outside of your full-time employment. Side hustles have become especially popular for many reasons, including the desire to gain new skills, earn additional income, have a new way to save for a goal, or reduce debt.
Some examples of everyday side hustles include:
- Completing freelance work from home in various industries
- Starting an online e-commerce store
- Affiliate marketing
- Working on social media
The benefits of having a side hustle
Side hustles, of course, bring in extra money for your household. This could be extra money or money to keep your finances afloat. Side hustles typically have some flexibility regarding how much you work and when you work, making it easy to plan around your other responsibilities.
Side hustles are also a relatively safe way to dabble in a different industry to see how you might enjoy doing that type of work regularly. You can also learn a new skill or add transferable skills to your resume to advance your career.
Many side hustles revolve around industries that can be easily learned, such as writing, graphic design, social media content creation, etc. You don’t necessarily have to go back to school to learn these skills, as you can learn them online for free or at much more affordable rates through courses or continuing education.
Side hustles can also be very fun. Many side hustles are in creative or innovative industries that allow you to use a different part of your brain than you might in your regular job. So, you can try something new, and if you do not like it, it is not your full-time income, so you can move on quickly.
The potential downsides of a side hustle
There are not too many drawbacks related to side hustles. However, burnout is possible if you cannot effectively manage your time. However, this hurdle is easy to overcome with some diligence and self-discipline.
For many, the hardest part about having a side hustle is handling taxes. Unfortunately, there is a whole new world of taxes that you must learn to conduct your side hustle business legally and properly.
Preparation is key
There is a lot to learn about how taxes work for side hustle income, and the potential instability of that income can make it hard to plan perfectly. However, being prepared is crucial so you don’t risk owing money that you can’t afford to pay.
You can catch up if you’ve already started earning from your side hustle and are scrambling to get things done. While it’s hard to claim expenses when you don’t have receipts saved, you can try to backtrack as much as possible.
Regarding income, depending on where you received it, you can most likely go back into your records. For example, if you work with clients, they usually send you paperwork at the beginning of the year. In addition, Paypal and other payment services will typically keep records of your income.
Saving for taxes is recommended
Even if you do not make much money from your side hustle, saving for your taxes will help you have the necessary funds to pay when your taxes are due. In the worst-case scenario, you will have some extra money saved that can benefit you in other ways.
A general recommendation for how much to save for your taxes is about 30-35% of your income from your hustle. This amount is regardless of how much money you make. This percentage should help you cover the multiple taxes you must pay depending on where you live.
You can play with that percentage once you get a better idea of how much taxes you will typically owe if your income does not change much yearly.
What taxes look like for side hustles
There are usually three categories of taxes you can expect to pay when you earn self-employment income in the United States.
- The first type of tax is your self-employment taxes, including Medicare and Social Security.
- Depending on your hustle, you could be considered an employer and an employee for tax purposes. So, you will have to pay both federal taxes for your income. However, this could account for just over 15% of the 35% tax.
- The next type of tax to account for is your federal tax. Again, you should save for this even if you earn money from a traditional job. But, again, the percentage you will pay will depend on your overall income situation.
- Lastly, you may or may not have to pay an additional state tax. Of course, this depends on where you live. The amount you must pay will also vary depending on which tax bracket you fall into based on your overall income.
Taxes for side hustles vary by location.
Depending on where you live, taxes on what you earn through a side hustle are handled differently. It does not necessarily matter where you earn your income unless your state specifically requires you to declare foreign income differently. The tax you must pay will also vary by state and how much you earn.
The general rule to keep in mind is that if you earn around $400 in income from your side hustle in a year, you will have to start filing taxes for your side hustle.
You need to keep excellent records.
Have a paper trail for your income, expenses, and business conduct. You want to have something tangible to show for each transaction you make so you can prove where your income is coming from.
It would help if you also kept an inventory of any expenses you might have related to your business. Furthermore, it would be best to keep receipts and bills, and it is also wise to make copies of those papers. Your expenses could potentially help you reduce your taxes, but you must be able to justify those expenses.
How you keep records is entirely up to you, but it’s worth making the extra effort to keep these records extremely organized and secure. If you use some online system, ensure that those records are kept safe, as there might be a lot of sensitive or personal information in those records that you don’t want others to see.
Know when to seek out help or services.
If you’re not proficient in accounting, bookkeeping, or financial organization, many affordable and efficient services can be accessed online, so you don’t have to hire someone to do the work for you.
One recommendation to streamline your income and expenses in an organized fashion is to have your business income and expenses conducted in separate bank accounts from your personal accounts.
https://www.morningbrew.com/money-scoop/stories/2021/11/04/how-do-i-deal-with-side-hustle-taxes
For example, have a checking account specifically for income, a savings account for saving for expenses and taxes, and a credit card for purchasing items for your business. A rewards card is an additional bonus, so you get something extra from your expenses.
When it comes time to file taxes, hiring an accountant familiar with self-employment or small business is highly recommended. If you hope to file taxes on your own in the future, pay close attention to what your accountant does and ask questions.
Final Thoughts
Side hustles are fantastic income options, but not if you do not approach them with the right information. Side hustles can turn into endless opportunities for career advancement or enrichment or can be something fun to do for some extra money.
While taxes for side hustles seem complicated at first glance, they are easy to get used to. Do not let taxes deter you from chasing a side hustle; they are one of the most popular income streams and will keep growing.
