It's estimated that 45% of U.S. workers have some sort of side hustle -- work they do on top of a main job. For many, the motivation to do that additional work stems from a need to build savings -- emergency, retirement, or otherwise. For others, a side hustle is necessary to keep up with bills. But no matter your reason for getting a side hustle, the last thing you want to do is have yours be the source of a tax-related nightmare. With that in mind, here are three tax mistakes you should make every effort to steer clear of.
1. Not paying estimated quarterly taxes
You're supposed to pay the IRS taxes on your income as you earn it. That's why the paycheck you get from work doesn't represent your actual salary, but rather, the portion of your salary you're entitled to with taxes removed. Well, the same holds true when you work a side hustle where you're paid on a freelance basis -- you're supposed to pay the IRS consistently during the year, namely by making estimated quarterly payments. If you don't make those payments and instead wait until you file your annual return, you could wind up with a penalty on your hands for underpaying your taxes.
2. Not reporting all of your income
It may be tempting to keep your side hustle income under wraps, but doing so is a bad idea, as it could get you into serious trouble with the IRS. And if you're wondering how the agency will find out, it's simple. When you work on a self-employed basis, which is what many side hustles entail, you get a 1099 form from each employer that pays you $600 or more in a single year. The IRS gets a copy of those forms as well, which means that if you decide to tear yours up and toss it in the trash, you won't get away with hiding that income.
3. Not accurately tracking your business expenses
If you incur out-of-pocket expenses in the course of working your side hustle, you're eligible to deduct them on your taxes. That's why it's important to keep accurate records of those expenses during the year. Guessing at them could you get into trouble if the IRS decides to audit your tax return, so instead, scan receipts so you don't lose them, and keep a spreadsheet with a running tab.
What expenses might you deduct? Well, if your side hustle is tutoring, you can write off the cost of getting to and from clients. If you design websites on the side, you can write off the cost of a laptop or monitor. And if you cut hair, you can deduct the cost of supplies, including shampoo, scissors, sprays, and gels. In other words, you're allowed to write off any legitimate expense that makes it possible for you to earn that extra money.
Taking on a side hustle can help you improve your finances. Avoid these tax mistakes, and you'll really make the most of that added income.