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Side Hustle Taxes: Tips for Preparation and Moving Forward

Tax Preparation for Side Hustlers and Tips for Tax Preparation

Whether its driving for Uber, selling crafts on Etsy, or doing freelance work, side hustles have become a popular way to earn extra income. But with this extra income comes extra responsibility – taxes.

As a side hustler, you must take responsibility for your own tax preparation. This task may seem daunting, but with some preparation and diligence, you can avoid the stress and expense of hastily preparing your taxes at the last minute.

In this article, we will explore tax preparation for side hustlers and provide tips for preparing your taxes.

Track Income and File Taxes

As a side hustler, you are responsible for taxes on your income. Depending on the nature of your hustle, you may receive a 1099 form from the company you work with.

This form reports your income to the IRS and is similar to a W-2 form used to report income work directly for an employer. You must report all income, even if you do not receive a 1099 form.

When it comes time to file your taxes, you will need to report your income. To ensure that you have the correct information, keep accurate records and track your income throughout the year.

This will make it easier to file your taxes and avoid mistakes that may lead to penalties. You should also keep track of any business expenses you incur, as well discuss in subtopic 1.2.

Deduct Expenses and Collect Receipts

As a side hustler, you can deduct ordinary and necessary expenses related to your business. Ordinary expenses are those that are common and accepted in your industry, while necessary expenses are those that are helpful and appropriate for your business.

Some common deductible expenses for side hustlers include business supplies, travel expenses, and advertising costs. To deduct expenses, youll need to collect receipts and keep accurate records.

These records serve as proof of your expenses and will be necessary in case of an audit. Without accurate records, you may lose out on deductions and incur penalties.

Report All Income and Choose the Right Tax Form

When preparing your taxes, its important to report all income. This includes income you received from your side hustle, as well as any income from other sources.

Depending on the nature of your side hustle, you may need to file additional tax forms. Most side hustlers will file a Form 1040 Schedule C, which is used to report income and expenses related to a business.

You may also need to file a Form 1040 Schedule SE, which is used to calculate self-employment tax. This tax is similar to the Social Security and Medicare taxes that are withheld from your paycheck if you work as an employee.

Set Money Aside and Research State Tax Guidelines

As a side hustler, you will not have income taxes withheld from your checks. This means that you must set aside money throughout the year to cover your tax bill.

If you do not prepare for this expense, you may find yourself with a hefty tax bill that you are not prepared to pay. To avoid this scenario, set aside a portion of your earnings each month for taxes.

You can also make quarterly tax payments to the IRS to spread out your tax payments throughout the year. Additionally, make sure to research state tax laws and guidelines to ensure you are meeting all of your tax obligations.

Conclusion

In conclusion, tax preparation for side hustlers can be a daunting task, but with the right preparation and diligence, it can be manageable. By keeping accurate records and tracking your income and expenses, you can prepare for tax season and avoid mistakes.

Make sure to report all income and choose the right tax form, set money aside, and research state tax guidelines. By following these guidelines, you can ensure that your side hustle remains profitable and compliant with tax laws.

Moving Forward with Side Gigs

Side gigs have become increasingly popular, providing workers with an opportunity to earn extra income outside of their traditional jobs. However, as mentioned in the previous section, with this extra income comes the responsibility of handling taxes.

Without proper record-keeping and tax preparation techniques, side hustles can turn into legal and financial nightmares. But fear not, in this section we will discuss some additional tips for moving forward with your side gigs.

Invest in Good Record-Keeping Software

One of the most challenging parts of managing your side gig finances is keeping track of income and expenses. Keeping track of them manually can be a tedious task, making it more prone to human error.

Not to mention, it takes up a lot of valuable time. To reduce this burden, investing in good record-keeping software is a smart decision.

Automating record-keeping with software such as QuickBooks, Xero, or FreshBooks can significantly reduce the time and effort required to maintain your financial records. These programs offer features such as synchronization with your bank accounts, auto-categorization of transactions, and management of receipts.

Additionally, you can track your income and expenses on the go with their mobile apps.

By utilizing such software, you can ensure that you have accurate and up-to-date financial records, which is crucial during tax season.

Adjust Quarterly Taxes and Consider Establishing an Official Business

As a side hustler, you are required to pay estimated quarterly taxes if you expect to owe more than $1,000 in taxes for the year. Failing to make quarterly payments can result in underpayment penalties and interest charges.

When you initially started your side gig, you may not have thought about the long-term potential of your work. As you scale your side gig and approach earning significant amounts, it’s essential that you reassess your tax liabilities and plan accordingly to avoid any additional charges.

If you expect to earn a significant income from your side gig, you may want to consider establishing a separate business entity, such as an LLC or an S-Corporation. These business entities offer various tax advantages, including lower tax rates and protection of your personal assets.

By establishing a separate entity, you can also file taxes separately and avoid the need to file complicated tax forms as an individual. To further make the most of the potential tax savings, business owners might also consider self-employed individual retirement accounts (SEP IRAs) or one-participant 401(k) plans.

These plans can help maximize retirement savings while reducing the taxable income for the year.

Conclusion

In conclusion, as you continue to grow your side hustle, investing in good record-keeping software and considering business structures can help streamline your business responsibilities while offering various tax benefits. By implementing these strategies, you can ensure that you are meeting your tax obligations and take advantage of the opportunities to maximize your income.

As always, it is essential to consult a qualified tax professional when deciding whats best for your specific tax situation. In this article, we explored the importance of tax preparation and record-keeping for side hustlers.

We discussed the responsibility of tracking income, deducting expenses, and reporting all income while choosing the correct tax form for preparation. Additionally, we shared some important tips for moving ahead with side gigs, including investing in good record-keeping software and considering the potential tax benefits associated with establishing a separate business entity.

Ultimately, to make the most out of your side gig, it’s essential to prioritize tax preparation, as penalties can result from failing to meet obligations. By taking a proactive approach to tax preparation and utilizing the available resources, you can set yourself up for success, both financially and legally.

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