If you’ve started side-hustling as a way to bring in more money, good for you. More money is always a good thing — so long as you’re taking care of the behind the scenes stuff that comes with your gig.
Side hustles, by nature, serve your budget. Whether paying bills, getting rid of debt or bulking up an emergency fund, you’ve probably got a plan for your extra earnings. Here’s what you might not have planned for: Uncle Sam is going to want to know about that income. And, if you’re bringing in a bunch of money, your side hustle could upend how you do your taxes.
So, side-hustlers, you’ve got some homework to do. Here are three things to do to stay on top of your tax responsibilities.
1. Track your income
If you’ve got a side gig (or two), you need to know how much money you’re making in total from each and every one of your clients. That way, you accurately report your income at tax-time. Each company you earn more than $600 from should send a 1099 form by Jan. 31 each tax year.
You’ll want all your 1099s to file your taxes, so make sure each company you worked for has your Social Security number or business Employer Identification Number and current address.
Big note: If you earned less than $600 from a gig and don’t receive a 1099, you still need to report that money to the Internal Revenue Service. That’s why it’s important to track your income no matter how much you’re earning.
You also need to track income now matter how you’re earning. You don’t have to be a full-fledged freelancer — maybe you rent a room in your house all-year-round or frequently Airbnb it. Most rental income has to be reported on your taxes.
You can track your extra income via a simple spreadsheet, but there are also freelancing apps that can help with that.
2. Set aside Uncle Sam’s cut
Freelancers and contractors are not full-time employees of a company, so your side gig facilitator won’t withhold income tax for you. It also won’t shoulder part of your tax burden related to Social Security and Medicare. The checks you receive are effectively gross income — you pay taxes later.
To stay on top of what you owe throughout the year — and thus avoid an unpleasant surprise in April — set aside at least 25% of each side gig paycheck you make. Tuck that away in a separate savings account so you don’t spend it.
If your side hustle is turning into more of a full-time gig, you might have to pay quarterly taxes. If you have a full-time job on top of that side hustle, you could mitigate quarterly payments by adjusting your withholding. What exactly you owe depends on the city and state you live in, your filing status and how much you make across jobs.
That’s why it’s a good idea to consult an accountant if you have a lucrative side gig. They can help you properly estimate (and pay) your taxes. Plus, they can help minimize your tax burden via deductions or credits for self-employed individuals.
Full-time freelancer? We’ve got a guide to filing taxes here.
3. Consider your side hustle structure
More likely than not, you’re operating as a sole proprietor in your side hustle. It’s the default designation for someone who starts earning money as a contractor. A sole proprietor (or a sole prop, the common slang term) is someone who earns money without a specific business designation.
When you’re a sole proprietor, your business and personal income are mixed. You are responsible for any and all debts you incur in the name of your business, and someone could sue you personally for business-related incidents.
If you’re making consistent money and plan to continue with your side hustle for the foreseeable future, consider changing your legal designation. An LLC (Limited Liability Company) is a popular choice, as they are relatively inexpensive to set up in most states, and offer some legal protection in case of a lawsuit.
The recently pass tax bill has changed some of the tax laws affecting sole proprietors and LLCs. They decrease their taxes for the next 10 years and then increase them. They also change how deductions work. Again, consult an accountant and an attorney if you’re interested in registering an LLC. They can walk you through the pros and cons and flag what business structure is best for you.
Confused about what’s going on with Uncle Sam this year in general? Here’s how to file your taxes in 2018.
Image: Steve Debenport