Selling cheesecakes on the side, or DJ’ing friend’s weddings? You’re not alone. Over 15% of Americans work a side hustle, for reasons ranging from building a savings account to paying off debt. The side hustle has become increasingly popular, especially in the gig economy where rideshare and grocery delivery apps have made it easy for people to monetize their spare time.
But even though that income is a side hustle, it’s still taxable. You’ll have to report it to the IRS. If you start accounting for its revenues and expenses like a business now, you’ll be able to take itemized deductions on your return. Plus, if the company ever grows to become your full-time gig, you’ll already have bookkeeping systems in place.
Here are some tips for accounting for your side hustle.
Keep Records of Income
If you’re depositing the check from the wedding DJ gig into your personal checking account, you’re making a mistake. When it’s time to file taxes, it will be harder to track income from your main job, side hustle, and birthday checks from Grandma if it’s all in the same account. Unless you’re keeping records.
While you should eventually open a business checking account, you might not want to go to the trouble until you know that your side hustle will make money. If that’s the case, at least keep accurate records of the income it’s producing. You can try using a free, online software tool, or just use an Excel spreadsheet, but dedicate some time weekly or monthly to updating it.
Tracking your side hustle income can tell you if it’s truly successful, or growing. It can also help you gauge if the time and money you’re putting into it are paying off.
Keep Records of Expenses
You’re making money, but are you producing a profit? It’s not enough to have income coming in; if the expenses associated with that income are higher, you’re actually losing money. In addition to tracking revenues, you need to monitor the costs of running your business.
Don’t buy the flour and eggs for your cheesecake business with your regular groceries - shop separately for supplies. Keep separate receipts and records of expenses that are directly related to your side hustle. As your side hustle grows, you might want to register it as an LLC with the state. You’ll receive a business license and won’t have to pay sales tax on some purchases.
Business owners must track their net income. While you may not have a full-fledged company yet, starting to track net income now will help you later. Knowing if you’re making a net profit could motivate you to keep working on your side hustle, or tell you it’s time to let it go. Learning how large a net profit and if it’s growing could tell you when it’s time to do it full time.
Tracking expenses throughout the year also prepares you to file taxes. Deducting those costs from your business revenues reduces your tax burden. If you’re unsure which expenses you can deduct, talk to an accountant. You can claim business losses for two out of five years before running the risk that the IRS will deem your business a hobby.
Charge Sales Tax
Are you collecting sales tax on your sales? Do you even need to? One of the biggest mistakes small business owners make is failing to collect or not collecting enough sales tax.
Tax laws vary by state, but if you sell goods and services that your state taxes, you’re required to collect it from customers. It’s essentially a pass-through tax - you collect it from the buyer and pass it along to the state.
What happens if you don’t collect it? You’re still required to pay it, so you would have to pay the tax out of your revenues. The same principle applies if you don’t collect enough or fail to set aside the sales tax collected. It’s a good idea to develop the discipline to move sales tax collected from operating accounts into its own savings account. Don’t use it to pay business expenses, or you could struggle to assemble the needed funds when it’s time to remit the tax to the state.
Make Estimated Tax Payments
Once your side hustle begins generating significant income, you may need to make quarterly estimated tax payments. For a while, the taxes set aside from your W-2 employment might cover any business taxes you owe. But after the first year you owe more than $1,000 in taxes due to your side gig, you’ll need to start making estimated payments.
If you file your personal taxes with an accountant, they’ll give you an idea of how much you should send directly to the IRS going forward. This reduces your tax burden the following year and helps you avoid interest fees and penalties. Last year’s revenues will be the basis for estimated payments, but if your business grows, you might have to pay more.
Be aware that your side hustle will impact your personal taxes. You could receive a 1099 from a company if you’re working through an app or as an independent contractor. That income could affect your tax bracket and financial aid if you’re in college or sending a child off to college soon.
If you just started your side hustle to make extra cash, now might be the time to think through all its financial implications.
Side Hustle or Job?
After a while, accounting for your side hustle could feel like another full-time job. Accurately tracking the work involved in running it, the expenses associated with it, and paying taxes on the income could reduce your love of selling knitted hats on Etsy.
A side hustle may represent a lifelong dream, or just a quick way to make some cash. But, either way, you’re responsible for reporting its income and knowing its tax implications. Talk to an accountant before filing taxes if you have any questions or concerns.