Side hustle finances 101
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If you’re making money from a gig, congrats—you’re an entrepreneur! Now make sure you know how to manage business finances to avoid costly mistakes.
More and more people are turning to side hustles to earn money. Whether you’re using gigs as a way to cover living expenses, boost savings or increase disposable income, keeping your business finances in order will help you keep more of your hard-earned dollars.
Prepare for taxes upfront
There’s no way to avoid taxes but you can minimize the hassle of tax season by keeping good records.
To streamline your accounting, open a separate business checking account. While it’s not necessary to have business credit card for a side hustle, it’s helpful to designate a personal credit card for business expenses only.
With separate accounts used only for business, all your expenses and income data will be together at tax time, saving you hours of prep. Also, read up on IRS guidelines on business expenses to make sure you’re taking all the deductions you’re eligible for.
Pay estimated taxes quarterly
Contractors and gig workers who don’t pay quarterly taxes can face a big bill come tax time. The hit is even worse if the IRS assesses penalties and interest. Avoid tax bill surprises by paying estimated taxes each quarter.
A general rule of thumb is to set aside 25% to 30% of income for income tax and self-employment tax.
The government expects you to pay estimated taxes quarterly. Mark these dates on your calendar: April 15, June 15, September 15 and January 15. Total estimated taxes for 2021 are due by January 15, 2022.
Stay on top of billing and collections
Unless customers pay you on the spot, you’ll have to invoice them in order to get paid. Invoice all work as quickly as possible. The longer you wait to bill, the longer it will take get paid.
Most companies are used to receiving invoices that are due in 30 days. However, some have a policy of paying in 45 or even 90 days. Discuss payment terms up front.
Use a spreadsheet or invoicing app to keep track of bills that have gone out, money that’s come in, and accounts that are past due.
As soon as an account is overdue, contact the customer. Sometimes an invoice is simply overlooked and you can get paid quickly. Other times, customers may be slow to pay or facing financial problems of their own. If a customer is behind on their bill, you may decide to suspend work until their account is current to limit your risk.
Treat your side hustle like the business it is by keeping your finances in order as you go—your future self will thank you!
And as always, it’s best to consult with a knowledgeable tax advisor about your individual situation.
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