If You Have a Side Hustle, Watch Out -- These Mistakes Could Cost You Thousands

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Self-employment mistakes can be costly in the short and long term.

Rideshare driver? Grocery deliverer? Reseller? Picking up a side hustle is a great idea if you can make extra money. It's not so great, however, if your side hustle ends up costing you big bucks. Here are a few costly errors to avoid.

Forgetting to set aside money for taxes

If you earn more than $400 a year from self-employment, you have to file a tax return. Besides income taxes, you'll also pay a self-employment tax, which covers Social Security and Medicare. You might pay state taxes, too. Be careful not to underestimate how much you'll owe. A good rule of thumb is to set aside 30% of your income.

You may or may not receive 1099 forms for all of the non-employee (side-hustle) income you earn. For some side hustles, your income will be reported via a 1099 form even though no taxes are withheld. Other times, income reporting is on the honor system.

Don't forget to report all of your income. The IRS cross-checks income reporting in a number of ways. Failing to report income could lead to back taxes and penalties. Plus you might get on the IRS's radar for a few years.

The good news is that as a self-employed person, there are many ways you can reduce your tax bill. For instance, anytime you work a self-employment job, you can take a deduction for your mileage. If you're a swap meet seller, the fee you pay for your space is a deductible business expense. You'll have to research your own expenses to find out if they are deductible.

Forgetting to file a quarterly tax return

The IRS wants to be paid, and wants to be paid on time. Many individuals would have a hard time paying a year's worth of taxes all at once, so the IRS "helps" us budget. If your tax bill for the year is more than $1,000, the IRS will insist that you file quarterly tax returns the following year. This is true whether your income is from side hustles, investments, or any other source.

Once you're on the quarterly tax return schedule, you'll remain on it until the IRS says you don't have to pay quarterly any more. Most business owners, including self-employed side hustlers, need to pay quarterly. If you miss a quarterly tax return, penalties and interest will start to accrue on the day your quarterly return was due.

Violating an employment contract

If you have a full-time job, make sure your employment contract does not prohibit moonlighting. In some states, your employer has the right to fire you for taking on a second job of any kind. Some employers only want to prevent you from working for competitors. But others want to make sure that you have the ability to do a good job while you're at work, and they believe productivity might suffer if you are working another job in your off hours. Don't risk your main source of income by unknowingly violating your employment contract.

Failing to contribute to a retirement account

It's nice when you have an employer who sets up a 401(k) for you and helps you set up automatic contributions. When you are self-employed, you need to do this for yourself. If you don't, you lose out on growth during all the years between now and when you retire.

Even if you can't dedicate 100% of your side hustle income to those golden years, make a commitment to set aside a portion. It's easy to set up an IRA (contributions can lower your tax liability) or Roth IRA (contributions are after-tax now and tax free in retirement) at Fidelity or Vanguard or another reputable brokerage.

Failing to buy health insurance

You don't have to be a risk-taker to sustain a costly injury. For example, according to Healthcare.gov, a broken leg can cost $7,500. That price tag does not discriminate between the person who falls off the kitchen step ladder and the one who jumps stairs on a skateboard.

And let's not even start to talk about the cost to treat cancer or other illnesses.

Health insurance premiums are all over the map, so you should research the options where you live. Don't forget to consider catastrophic coverage, which comes at a lower premium cost and can cover you for expensive emergencies even though routine care has to be paid for out of pocket.

No one plans to get sick or hurt, but living without health insurance is a huge financial risk.

Failing to keep good records

Once you start working for yourself, you're the CEO, the accountant, the file clerk, and everything else.

If you freelance, be sure a signed contract is in place for each client, spelling out expectations and payment terms. If you have to invoice clients, use a system that is easy to track so that money you're owed doesn't fall through the cracks. Keep track of the money you spend for your business so that you can reduce your tax liability and find opportunities to reduce costs.

The more successful you are in your side hustles, the harder it will be to keep everything straight in your head.

Make that side hustle worth your time

Side hustles can be fun, but they can also be more work than you expect. Mistakes are to be expected, but hopefully you can avoid some of the more financially painful ones. Make a plan, consider the details, and build your side hustle into something that provides value for the time you put into it.

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