The 1 Side Hustle Trap You Must Avoid at All Costs

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Getting a second gig? Steer clear of this blunder.

These days, a lot of people are pursuing gig work outside of their main jobs. And there are plenty of good reasons to go the side-hustle route.

For one thing, earning more money could help you grow your savings. Many people don't have enough money to cover emergency expenses, so building savings could be the ticket to avoiding debt.

Furthermore, working a side job could help people who already have debt pay it off more quickly. The result? Less money lost to interest charges.

Finally, earning more money can result in more financial flexibility. Want to take an extra vacation? Your side hustle could pay for it, the same way it might pay for an upgraded cell phone or a new TV.

But if you're going to sign up for a side hustle, there's one big trap you must be careful to avoid. If you don't, it could seriously hurt your personal finances.

Don't forget the IRS

You've probably noticed that you don't take home all of your earnings from your main job. Rather, you get a portion of your earnings taken out of each paycheck for tax purposes.

Just as you're required to pay taxes on your income from your main job, so too are side-hustle earnings taxable. Many people who work on the side as an independent contractor forget this and spend all of their earnings rather than set aside a portion for the IRS. And then those same people get stuck in a jam as a result.

The tricky thing is that when you earn a salary at work, your employer withholds the right amount of tax from each paycheck based on the information you provide on your W-4 tax form. (Employees are required to fill one of these out when they start a job, and some companies require W-4s to be updated yearly). When you earn money from a side hustle, you need to figure out how much to withhold for taxes.

The good news is that there are online calculators that can help you estimate your taxes on your side income. Or you could look up your tax rate and apply that percentage to your side hustle earnings.

For example, if you're single and earn between $40,525-$86,375, your marginal tax rate is 22%. So if you earn $100 a week at your side hustle, you could just set aside $22.

Another thing you should know is that if you have income, and you don't pay taxes on up front, you're supposed to make estimated tax payments to the IRS every quarter. Doing so (as opposed to waiting until your tax return is due) could help you avoid penalties, so it's best to pay taxes on your side hustle income every three months. Those tax payments are due on preset dates:

  • April 15
  • June 15
  • Sept. 15
  • Jan. 15

If the usual due date falls on a weekend or federal holiday, sometimes it will be moved slightly.

Be careful with your side-hustle earnings

Just as it's important to not blow your side-hustle earnings when you have bills you're behind on or your savings account needs work, it's just as important to not forget about taxes on that income. Setting aside a portion of your earnings and paying the IRS on schedule could help you avoid a major headache down the line.

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