Financial Tips for Your Side Hustle
In need of some extra cash? Consider starting a side hustle. Creating a side hustle is one of the most popular ways to bring in extra cash flow. A side hustle is defined as activities undertaken outside of one’s main job to earn additional income. Common side hustles include food delivery services, ridesharing, or tutoring. Once your side hustle is up and running, you will need to know how this extra cash flow will affect your finances. Keeping track of your side hustle finances can be a large task. Here are some helpful tips to make the most sense out of your side hustle cash flow.
Open a Separate Bank Account
Opening a separate bank account allows you to keep your side hustle income and expenses separate from your personal income and spending. You don’t want your side hustle to cost you more money than you make, having a separate bank account will allow for easy tracking.
Stay Up to Date on Bookkeeping
Now that you have a separate bank account, you can use the bank statements to create a financial picture of your side hustle. Using software such as QuickBooks or Excel to categorize your income and expenses, you can see where your money is coming from, and to what expenses you are allocating that money. It is recommended to do this monthly to have a clear picture of how your business is doing on a month-to-month basis.
Keep in mind that along with extra cash flow, comes the need to pay some of that to Uncle Sam. That’s right, you will need to pay taxes on the net income you make. The net income is calculated by starting with the income and deducting the expenses incurred for the side hustle during the year against this income. It is recommended that you save 20-30% of your net income for taxes due when you file your tax return or to pay your estimated tax payments throughout the year.
Estimated Tax Payments
Since your side hustle income doesn’t have withholding deducted from it when you receive it like your paycheck does from your employer, you may be required to pay estimated tax payments. To avoid penalties, you are generally required to make estimated tax payments if (1) you expect to owe at least $1,000 in tax for the current year after withholdings and refundable credits are subtracted and (2) you expect your withholding and refundable credits to be less than the smaller of 90% of the tax shown on your current year tax return or 100% tax shown on your prior year return. There are some special exceptions to these rules in some cases.
Now that you are keeping track of your side hustle finances and allocating some for taxes, what should you do with the remaining cash?! Allocate the remaining amount so you don’t find yourself spending it on items you don’t need. Saving for retirement, paying down debt, creating an emergency fund, or planning a vacation are all great ways to allocate your additional cash flow from your side hustle.
Creating a successful side hustle takes hard work and keeping track of your finances can be overwhelming and timing consuming. Do not be afraid to reach out to your local CPA for help. Your trusted friends at Ketel Thorstenson are here to assist you in reaching your financial goals!