As tax season gets into full swing and Americans everywhere gear up for that ever looming April 15th deadline, there is no shortage of information for business owners—or for traditional nine-to-fivers—about how best to handle their tax situations.
But what about for those individuals who fall somewhere in between—who have a traditional 9 to 5 job while also running a small business that generates income on the side?
Being a side-hustler comes with its own set of tax requirements and special considerations that may not be relevant for those who solely run their own business or those who solely work a traditional 9 to 5.
If you’re busy burning the candle at both ends as a side hustler, these eight must-know tax tips are for you:
1. Understand your business tax obligations
Whether you’re a freelancer or have a formally structured business such as an LLC or C-Corp, any person who brings in self-employment income not covered by a traditional employee W-2 is expected by the IRS to make regular estimated tax payments. These payments cover not only your standard income taxes but also self-employment and alternative minimum tax obligations.
To determine your estimated tax obligations for the current year, the IRS recommends using the estimated tax calculation worksheet within Form 1040-ES as a guide. This document will help you configure your expected gross income, deductions, and credits for the year to determine your tax liability.
From there—provided you expect to owe more than $1,000 in annual taxes on your self-employment income—you’ll need to make quarterly payments either online, by phone, or by mail to avoid a penalty for late payment.
2. Use a separate business bank account and credit card
You’ve likely heard it before, but the importance of using a separate business bank account and credit card for your business expenses can’t be overstated—especially when you have a side hustle.
When you’re working from home or on-the-go alongside your regular job, it is all too easy for the lines to become muddled between what is business and what is personal. And when you look back on your finances at the end of the year to prepare for tax season, it can be almost impossible to tell which is which.
To avoid any confusion, keep a separate business bank account and credit card under the name of your business and vow to use those accounts for business-related expenses. Any overlap will only create additional confusion—and it could make you more susceptible to a tax audit.
3. Maintain your bookkeeping monthly to avoid tax-time stress
When you have a side hustle in addition to regular income, tax time is already stressful enough. But if you haven’t been maintaining accurate books for your business throughout the year, that tax season stress can quickly escalate.
Ideally, you should be maintaining your business accounting through an online tool. But even if all you’re using is a simple spreadsheet, you should still take the time to reconcile your business revenue and expenses each and every month.
4. Automate putting aside your estimated tax payments
One of the hardest things about managing business cash flow as a side hustler is having to hold money in your account that is earned and freely available to you—but that needs to be set aside for paying estimated taxes. It can be hard to keep track of how much you owe to the government in the first place, and it takes discipline to continually keep that money set aside for taxes as opposed to taking a share of the profit or reinvesting in your business.
Avoid this unnecessary battle of wills and constant number crunching by creating a second business bank account into which you automatically transfer savings for estimated taxes.
As a starting point, most accountants will recommend saving around 25 percent of your gross profit for federal taxes, plus another 5 percent for state and local taxes if that applies in your location.
By automatically saving towards your tax payment either with every transaction you take in or on a weekly or monthly basis, you can keep track of exactly how much you need to save for estimated taxes and have a clear-cut policy to follow when opportunities arise that tempt you to dip into that extra cash on hand.
5. Consider increasing your employee tax withholdings
Does it take every ounce of your self-control to see estimated tax savings sit in your bank account when you could be reinvesting in your business? If you have traditional W-2 income in addition to your side hustle—or if you’re married and filing jointly with a spouse who files a W-2—there may be a better way.
By refiling your statement W-4 with your employer, you can actually choose to have additional taxes withheld (state and federal) from your regular employee paychecks. This additional withholding can cover the estimated taxes for your side hustle, eliminating the need to save for and pay quarterly estimated taxes within your business accounts.
6. Remember these often overlooked business deductions
With all of the time and energy that you put into your side hustle on top of a full-time job, even the most motivated and optimistic of entrepreneurs can easily be discouraged by the idea of setting aside a full 25 percent of the money you make for Uncle Sam.
But before you panic remember this: Your tax liability is calculated by using 25 percent of the gross profit of your business—not your business’s revenue. This means that any expense considered “ordinary and necessary” to the operation of your business can be deducted from the total amount that you’ll be taxed upon.
If you’re unsure what qualifies as “ordinary and necessary,” here are some common examples of deductible expenses that side hustlers often overlook:
● Website Hosting, including domain registration, hosting services, and email
● Professional Services, including graphic designers, consultants, accountants, business coaches, virtual assistants, and more
● Apps and Software, including accounting software, project management apps, social media tools, and any other one-time or ongoing subscription costs
● Equipment used for business, including technology, office supplies, or any tools required to make your product or perform your service
● Supplies and Inventory, including costs of inventory you sell or raw materials used to create your product
Every business is different, so there’s a good chance you’ll have additional deductible expenses that aren’t listed here. Consult with a knowledgeable bookkeeper or accountant to ask about deductible expenses that may be specific to your business.
7. Deduct shared personal and business expenses by percentage used
In addition to these basic business expenses, most side-hustlers also incur expenses that live in a gray area between business and personal.
For example, have you purchased a personal computer that you also use for your business? Do you use your cell phone for business calls? What about your home internet, or even your car?
Applying the full cost of these expenses as a deduction for your side hustle would likely raise some red flags with the IRS. However, you can deduct a portion of the expenses according to the amount or frequency of their use for your business. For example, if a third of your time spent on the internet is doing work for your side hustle, you can qualify a third of your monthly internet bill as a deductible expense. As long as you’re willing and able to show justification for these calculations in the event of a tax audit, you can apply the same percentage calculation to any mixed-use expense.
8. When in doubt, work with a professional
Between keeping track of the correct IRS forms for each of your income streams, saving for and paying estimated taxes, and doing the math on percentages for your business and mixed-use expenses, navigating the tax code as a side hustler is downright complicated. If you’re at all in doubt about how to proceed, your best bet is to work with a professional accountant or tax lawyer.
Remember, the cost of hiring an accountant qualifies as a deductible business expense—and in most cases, a capable CPA can save you enough money on taxes to more than make up for their fee.
There’s no denying that dealing with taxes is one of the most stressful aspects of owning a small business. But with these tax tips in hand, you have everything you need to cross this year’s tax season off your to-do list and move right along with your business goals.