When starting a side hustle, taxes are likely the furthest thing from your mind. You’re focused on attracting customers and clients, delivering excellent work, and keeping your business afloat. As your side hustle starts generating income, taxes need to be addressed. Without proper documentation and filing, you could face penalties, interest charges, or even audits down the road. The rule is to keep detailed records of all your earnings from your side hustle. It includes income from every client, customer, or source of revenue generation. You’ll report this income on your tax return. Having clear, accurate documentation makes filing your taxes smoother. If you ever get audited, thorough income records will be your saving grace.
Document your expenses
You’ll also want to track any business-related expenses you incur. Examples include equipment, software, advertising costs, freelancer help, professional development costs, mileage for driving to client meetings, dedicated home office space, and more. Tracking expenses not only provides data for tax deductions but also helps monitor your business profitability. Strive to keep receipts, invoices, bank statements, and credit card statements organized for documentation purposes.
Calculate estimated quarterly taxes
how to start your side hustle? As a side hustler, you are self-employed and do not have taxes automatically withheld from your income like a W-2 employee. The IRS expects you to make quarterly estimated tax payments on your income. Use IRS Form 1040-ES to calculate what you owe. You pay online or mail checks to the IRS each quarter. It prevents you from getting hit with a penalty at tax time for underpayment. Calculate your estimated taxes carefully as income fluctuates to avoid penalties.
Decide your business structure
Then decide whether to operate your side hustle as a sole proprietorship or a corporation. Each structure has different tax implications. A common starting point is a sole proprietorship because it’s the easiest, but it offers no liability protection. LLCs shield your assets and allow you to choose how you’re taxed – as a sole proprietor or corporation. Talk to an accountant or attorney to decide what business structure best aligns with your goals.
The major tax benefit for side hustlers is writing off valid business expenses. As mentioned before, track every business expense meticulously. Deductions reduce your taxable income, so you pay less in taxes. Allowable tax deductions for side hustlers include supplies, advertising, training, phone/internet, travel, insurance, fees, contracted help, rent, and potentially even home office deductions. Just be sure to deduct only legitimate business expenses.
Maintain good recordkeeping
Developing excellent recordkeeping habits early on will benefit you tremendously as a side hustler. Store receipts, bank statements, mileage logs, invoices, and other tax-related documents in organized digital or physical systems. When tax time comes around, you’ll be prepared with all the data you need to calculate your tax liability. Proper documentation also helps if you ever get audited. Investing in accounting software also facilitates good financial practices. Programs help you organize income and expenses, generate invoices, track mileage, create financial reports, and run profit statements. It gives you visibility into the financial health of your side hustle. Self-Employed even estimates quarterly taxes for you and helps compile documentation for filing your return.