Self Employed
Essential Tools for Navigating Side Hustle Income and Taxes
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In today's economy, side hustles have become a common means of boosting income and pursuing passions outside of the traditional 9-to-5 job. Whether you're freelancing, selling handmade crafts, driving for a rideshare service, or engaging in any other form of side work, the income you earn from these activities can be a valuable addition to your financial portfolio.
However, it's important to understand that with increased income comes increased responsibility, especially when it comes to managing taxes. To navigate the world of side hustle income and taxes effectively, you'll need the right tools at your disposal. You'll find that by utilizing these tools, you'll also save more time, money, and stress in the long run.
In the following paragraphs, we will explore essential tools and strategies to help you optimize your earnings and stay on top of your tax obligations.
1. A dedicated bank account
One of the first steps in managing your side hustle income is to open a dedicated bank account for your business activities. This separation of personal and business finances is crucial for keeping track of your earnings and expenses. It also simplifies the process of calculating your business income for tax purposes.
Many banks offer business checking or savings accounts specifically tailored to small businesses and freelancers. These accounts often come with online banking features, making it convenient to manage your finances.
2. Accounting software
Keeping accurate records of your side hustle income and expenses is essential for tax compliance and financial clarity. Accounting software can be a game-changer in this regard. Tools like QuickBooks, FreshBooks, or Wave allow you to track income, categorize expenses, and generate financial reports with ease.
They can also help you monitor cash flow, create invoices, and simplify the bookkeeping process. Many of these applications offer mobile versions, enabling you to manage your finances on the go.
3. Mileage tracking apps
If your side hustle involves driving, such as ridesharing or making deliveries, mileage tracking apps can be invaluable. These apps automatically record your mileage and travel expenses, which can be used as a deduction when filing your taxes. MileIQ ranks among the most popular options for providing accurate mileage records, categorization of trips, and exportable reports.
By using a mileage tracking app, you can maximize your mileage deductions and reduce your taxable income. And since tax matters tend to be more complex for freelancers, an automated app can significantly simplify the process and provide peace of mind.
4. Tax preparation software
As a side hustler, you may need to file additional tax forms, such as Schedule C (Profit or Loss from Business), along with your regular income tax return. Tax preparation software like TurboTax, H&R Block, or TaxAct can simplify the process.
These tools guide you through the tax-filing process, help you identify eligible deductions, and ensure accurate calculations. They also allow for electronic filing, which can speed up your refund or reduce the time it takes to pay any taxes owed. Keep in mind that you can only deduct expenses for which you have documented records.
5. Receipt tracking apps
Staying organized with receipts is crucial for verifying business expenses and ensuring tax deductions. Receipt tracking apps like Receipts by Wave, Expensify, or Shoeboxed allow you to snap pictures of your receipts, categorize them, and store them digitally.
This not only reduces paper clutter but also makes it easy to retrieve receipts when needed for tax purposes or audits. The digitization of receipts also minimizes the risk of losing important financial records, providing an extra layer of security for your financial documentation.
6. Estimated tax calculators
When you have side hustle income, you may be required to make quarterly estimated tax payments to the IRS. To determine how much you owe, estimated tax calculators can be immensely helpful.
These calculators take into account your expected side hustle income, deductions, and tax liability. The IRS provides an online Estimated Tax Worksheet, or you can use third-party calculators to simplify this process.
7. Retirement savings accounts
It's essential to plan for your financial future, and contributing to retirement savings accounts can be a tax-efficient way to do so while reducing your taxable income. If you have self-employment income from your side hustle, consider opening a Simplified Employee Pension (SEP) IRA, a Solo 401(k), or a Traditional or Roth IRA.
These accounts offer various tax advantages and allow you to save for retirement while potentially reducing your current tax liability. In addition, they enable you to set aside pre-tax or post-tax income, depending on the type of account, which can result in reduced taxable income for the year in which you contribute.
8. Hire a tax professional
Navigating the complexities of side hustle income and taxes can be challenging, especially if you have a full-time job and limited tax expertise. In such cases, hiring a tax professional or accountant can be a wise investment.
They can help you optimize your tax strategy, ensure compliance with tax laws, and identify deductions you might have overlooked. While there is a cost associated with professional services, the potential savings and peace of mind they offer often outweigh the expense.
