You may have been noticing a theme with some of my articles recently… taxes. It’s just that time of year.
And while we’re all thinking about filing our 2019 taxes, we should also be looking forward and figuring out what to do about our 2020 taxes. This is especially true if you are a side hustler, and that’s because starting to organize and optimize your business income to make it easier for tax time will make the whole process a little less painful.
Seriously, your future self, the one sitting here a year from now, will thank me for telling you how to handle your side hustle taxes.
The issue of side hustle taxes is actually something that I’ve been asked about a lot recently by students in my Facebook Side Hustle Course. I’ll tell you more as you read, but the answer to the biggest question is this… yes, you do need to claim your side hustle income.
Pay attention if you just signed up for my course during the most recent launch!
Not filing taxes for your side hustle, no matter what it is, is a baaaaaadddddd idea, and so is not being honest about what you’re making from it.
Side hustle income is still income in the eyes of the IRS.
I just don’t want any of you locked up for tax evasion or fraud… what would I do without all the GIFs you post on my Facebook page?
So, to ensure that you won’t get locked up and that I’ll keep getting GIFs whenever I want, here’s how to handle taxes for your side hustle:
Keep track of your income
This is really where you need to start preparations for the 2020 tax season. If you’re side hustling online, you might have some advantage in that if you’re invoicing through PayPal with a dedicated business email, for example, you can easily keep track of your payments.
PayPal keeps track of all of your payments, and if you go to the “Activity” tab, you can even see charts and graphs that list what you’ve made each month throughout the year.
While using PayPal does simplify tracking your side hustle income, you might be receiving payments in other ways, like checks, wire transfers, etc. You also might be collecting payments in a variety of ways. This is why I also recommend tracking your side hustle income somewhere else too.
You can go old school with Excel spreadsheets, but you can also get software like Quicken Home and Business to keep track of everything.
Keeping track of your side hustle income isn’t just useful at tax time – it’ll help you see how your business is doing throughout the year, and watching those numbers grow is pretty cool.
M$M tip: If you’re interested in starting a side hustle in 2020, here are 7 completely legit side hustles.
Keep track of your expenses
For a small side hustle, you probably won’t have many expenses… I remember those days fondly.
That being said, your expenses are what will lower your tax burden… okay, maybe they aren’t so bad and I’ll get to lower your tax burden in a minute… which is why you’ll want to keep track of every single expense.
The cost of driving your car to and from meetings with clients or customers, buying a new laptop for work, even the cost of working from home can be labeled as an expense.
It can make tracking your expenses easier if you use a credit card to pay for things or some type of dedicated business account. You can add that card to your financial tracking software, add a business category for transactions that come through related to your side hustle, and then you can run a report that lists just those expenses.
Start paying estimated quarterly taxes
This was one of the things that I kind of overlooked when I started my blog, but not paying estimated quarterly taxes can result in penalties. I think I overlooked it because I honestly didn’t know how much I would be making from my blog at first, but it’s actually really simple to estimate your payments.
But first, what are quarterly taxes and why might you need to pay them?
When you are working for an employer, they are going to be withholding a certain amount of money from every paycheck, which goes to taxes – 12.4% for Social Security and 2.9% for Medicare. Half of that amount is covered by your employer, but running your own side hustle means you are responsible for that full 15.3%. In a side hustle, you are both employer and employee.
As the business owner, you’ll have to manage the payment of these taxes throughout the year, which comes in the form of quarterly estimated taxes, and they are due on the following dates:
- April 15 for payments received January 1 – March 31
- June 15 for payments received April 1 – May 31
- September 15 for payments received June 1 – August 31
- January 15 (the following year) for payments received September 1 – December 31
You will need to pay estimated quarterly taxes if you expect to pay $1,000 or more in side hustle taxes, which will be the case if you’ve made just over $3,300 after any expenses. That’s only around $275 a month in side hustle income.
If 2020 is the first year you’ve side hustled, or if you know your side hustle income has changed from the previous year, there is a really simple formula to determine how much you’ll owe each quarter:
Your income x 30% = your estimated payment
I was talking to my editor the other day about her taxes, and she said that she takes what she’s made at the end of each week and puts 30% of it into a dedicated business savings account before paying herself. She knows the money is there and ready to pay her quarterly taxes when they’re due.
You can handle your quarterly side hustle taxes like that, or you can pull 30% out of each payment, take it out at the end of the month, etc.
Whatever you do, I highly recommend setting that amount aside before you pay yourself – this way you know you’re covered at tax time.
If your side hustle is earning you the same amount as it did the previous year, you can use those estimates to tell you what you’ll owe each quarter.
You’ll use the IRS’s official 1040-ES form to file those taxes, and you can find that along with everything else the IRS has to say about estimated quarterly taxes for your side hustle here.
Reducing the amount you pay in taxes
When you work for yourself, you have a higher tax burden, which is why it’s extremely beneficial to find ways to lower your taxable income. A major way to do this will be claiming your business expenses.
Remember, you’re keeping track of these now, so this shouldn’t be too hard now.
To deduct your expenses, they will need to be both ordinary and necessary.
Here are a couple of examples of what is meant by ordinary and necessary expenses:
- Say you routinely work from a coffee shop, your latte might be an ordinary expense, but it isn’t necessary.
- Say you routinely meet clients at a coffee shop to work and buy them a latte, that ordinary expense becomes a necessary part of doing business.
Other expenses you might be able to claim for your side hustle are:
- The cost of a new laptop
- Tools and equipment needed for your side hustle
- The mileage you put on your car when used for business (especially important if you are side hustling as a rideshare driver with a company like Uber or Lyft)
- The cost of a dedicated home office space
M$M tip: If you are running Facebook ads for small business and have taken my Facebook Side Hustle Course, you can claim the cost of the course as a deduction.
Let’s talk for a second about your home office, which MUST be a dedicated workspace. To determine the amount you can claim as a deduction, figure out the size of your home office in comparison with the overall square footage of your house. Say it’s 10% of your home’s overall square footage, figure out how much you spent on your home (mortgage or rent, utilities, wifi, etc.), then claim 10% of that total as a business expense.
Again, you need to be keeping track of all of these expenses because the IRS is going to want to know, and I shouldn’t need to say this, but BE HONEST.
Once you total up your expenses, you’ll use one of the simplest equations ever to determine your taxable income:
Income – expenses = taxable income
That final number is what you’ll claim as your business income.
Contributing to retirement accounts
Another way to reduce your overall taxable income is to start putting money aside for retirement, and there are special retirement accounts available to those who are self-employed and side hustling, like the SEP IRA and Solo 401k.
These accounts might be good for a side hustle because they allow you to set money aside for retirement, something you might be missing from a traditional employer while getting a business tax break for doing so.
They’re both a little different, but basically you can set aside ~25% of your side hustle income in these accounts. It’s all pre-tax income, but you will pay taxes on it when you withdraw from those accounts.
The Solo 401k is going to offer a little more flexibility for those whose side hustle or self-employment income grows over time, and it also offers more saving options.
Many of the larger brokerages (Vanguard, Schwab, Fidelity, etc.) offer Solo 401k options if you’re interested in learning more about how these can help your side hustle taxes.
Hire a professional when you need one
As your side hustle income gets more complicated, there might be a point when you decide to hire a tax professional to help you. It’s another deductible expense that might make your side hustle easier and more efficient.
Ultimately, that’s what you’re looking for with how to handle taxes for your side hustle, ways to make things more efficient. If you follow what I’ve talked about in this article, then you’ll be making steps towards the type of efficiency that makes tax time a little less stressful.