Starting a Side Hustle in 2022? Make These 3 Tax Moves Now

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  • A side job could change your financial picture -- as well as your tax liability.
  • It's important to keep tabs on your earnings and pay taxes on them once you start doing extra work.

Make a point to tackle these immediately.

If you're thinking of getting a side hustle in 2022, you're in good company. At this point, you may have no choice but to boost your earnings to cover the ever-rising cost of living. Or, you may have a specific goal you want to meet, like paying off your credit card balances or saving to buy a home.

A side gig could change your financial picture for the better -- but it could also change your tax situation. That's why it's important to make these three moves once you take on a second job.

1. Plan for estimated quarterly tax payments

Many side hustles are done on a freelance basis, which means you're paid for your services without having taxes taken out of your wages. If that's the case, you can't just keep all of that money for yourself. Rather, you'll need to give the IRS a portion of your earnings. 

And you can't just wait until you file your next annual tax return to pay the IRS, either. Rather, when you earn money on a self-employed basis, you're supposed to make estimated tax payments on your earnings every quarter. 

You can work with an accountant or use an online calculator to see how much tax to pay the IRS every three months, but it's important to plan for those payments. If you don't make them, the IRS could hit you with penalties.

2. Establish a good record-keeping system

When you earn money from a side hustle, it may be on you to report it to the IRS -- so you'll need to keep solid records of your wages. At the same time, when you work on a freelance basis, you're allowed to deduct the expenses you incur that make it possible to do your job. And that's information you'll need to track as well.

For example, if you work part-time as a tutor, you can deduct the cost of getting to and from your clients' homes. And if you work as a freelance graphic designer, you can deduct the cost of a larger computer monitor or software that makes it easier to do your job.

Take some time to figure out the best way to track all that data. It may boil down to a series of spreadsheets, or you may want to invest in a paid project management tool designed to help freelancers manage their income.

3. Pump more money into your retirement plan

Boosting your income with a side hustle is a great thing, but it could result in you owing the IRS more money than usual. A great way to offset that higher tax bill is to pump more money into your traditional IRA or 401(k) plan. 

The more you contribute, the less of your earnings will be subject to taxes. Plus, putting extra money into an IRA or 401(k) is a great way to set yourself up for a more secure retirement. 

A side hustle could really work wonders for your finances and give you an opportunity to develop helpful new career skills. Just be sure to make these important tax moves as you ramp up.

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