• Matching categories:
  • Money

February 7, 2022

Have you ever had a friend or family member ask you to help them by using the skills you’ve learned on the job? Perhaps you’re putting your HVAC experience to use by upgrading their air conditioning or using your years as an auto technician to finally solve that pesky check engine light. Or maybe you’re helping their new business get off the ground by designing a website.

And once you help one person, they tell their friends. And they tell their friends. Suddenly, you’re working many weekends. Wait, did you just start your own side hustle? Side work can be a great way to increase your income, save for a significant expense, or earn more money to put toward debt. But you might forget that your side income is subject to taxation, even if your customers pay you in cash.

Your tax preparer or adviser will help you figure out what taxes you owe and how to account for your business, but it’s your responsibility to keep accurate records so they have the information they need. Here’s what you need to do to get prepared.

Track Your Income

No matter how you get paid, you will need to keep track of how much you’re earning. If you make more than $600 from a person or business, they should send you and the IRS a 1099 form reporting that income. If your clients pay you through a service such as Stripe or PayPal, that company may send you a 1099 instead. You can log into your account and find that form if you have enough transaction volume and earnings to qualify.

Even if you don’t receive any 1099s, you will still need to include all your income when you file your taxes, so it is essential to keep good records. You can use invoicing software, create invoices in a word processing program and keep copies for yourself, or use a paper ledger to track income.

Keep Your Receipts

If you’re in business, you may buy things to help you perform the tasks clients pay you to do. For example, if you do website design, you might pay for a computer, internet access, and design software. An auto technician or HVAC installer may buy parts and consumables to complete their jobs. You can keep a file of receipts or scan and save receipts electronically.

If you travel to offsite locations for meetings or work in your car, track the mileage for those trips. Mileage tracking apps can do that automatically, or you can use a notebook or dedicated mileage tracking book to keep those records.

There may be other expenses that apply to your business. Ask your tax adviser about your specific situation for tips on what to keep and how best to store and share it. For equipment you use for both personal and business use, track how much time you spend doing each task. This tracking applies to your car, computer, internet service, or anything else that you share between your personal pursuits and side hustle. You can use a spreadsheet or a paper tracking system — you will want to provide a percentage of time that you use the equipment for personal and business use, so ensure that whatever method you use is clear and easy to tabulate.

Understand the Taxes

In addition to taxes on the income you earned, you may also have to pay self-employment taxes. When you work for someone else as an employee, you and your employer typically split these taxes. They may cover social security contributions, Medicare taxes, and other payroll taxes. However, you will have to pay the full 15.3% for the income you earn as a self-employed person.

And as you continue with your side business, you’ll want to start paying estimated taxes throughout the year rather than waiting to pay whatever you owe when you file. In fact, if you don’t pay throughout the year, you may end up owing a penalty in addition to your taxes. If you’re working another job, you may be able to account for the extra taxes by having more withheld from your paycheck, but that can be a challenge to manage as your side business grows. It’s more common to pay estimated taxes monthly or quarterly. Again, ask your tax adviser how to handle your estimated tax payments.

Although this can seem like a hassle, keeping accurate records throughout the year will ensure that you’re not scrambling at tax time — and that you’re not surprised with an unexpected tax bill for all your hard work.