Money Management is a key part of your side hustle!
A side hustle or side gig refers to employment in addition to your full time job, like freelance work, to make some extra money. Generally, a side hustle is different from a part-time job in that instead of having an employer calling the shots, you are your own boss and get to decide how much time and energy you spend on the work and how much you will earn.
As of June last year, almost half of Americans had a side hustle and earned an average of an extra $1,122 per month. About a third said that this extra income was needed to pay regular living expenses, while a little over a quarter said it was to boost their savings. Millennials are more likely than other generations to have a side hustle, typically earn more from their side hustles, and are more likely to put this additional income towards savings. Some examples of side gigs include tutoring, dog walking, making and selling products on sites like Etsy, or freelance work like photography and copywriting. One of my friends teaches yoga in addition to her full time job, and I do freelance marketing work in addition to my full time job.
Unsurprisingly, the number of people turning towards side gigs or increasing the amount of time they spend on their side gigs has increased during the pandemic. As millions of Americans have been laid off, furloughed, or received pay cuts, it’s shown us how important it is to have multiple streams of income. Some of us may have also started side gigs or increased the amount of work we do on the side to have additional money to put towards savings or an emergency fund as our economic future remains uncertain.
We know that spending less than we earn is a key way to be financially healthy. But, earning even more money is, obviously, another way to help you reach your financial goals faster and side gigs are one way to accomplish that. Whether you already have a side gig or are thinking about starting freelance work, I’ll be talking about some important things we need to keep in mind about this additional income.
One of the first things to remember is to set aside time to manage the income from your side hustle! When you’re planning out your work schedule, make sure to incorporate money management as one of those tasks. You want to make sure you’re planning ahead and keeping track of it instead of, for example, scrambling at the last minute during tax season!
Similar to how we have a personal budget, we need to keep track of the amount of money we’re making and the amount of money we’re putting into our side gig. For example, if you want to reinvest some of that money back into your business, like upgrading your equipment or revamping your website, you’ll know how much money you can afford to spend or how much more work you need to do in order to afford that investment!
Or, if you’re still in the process of starting your new business, plan out ahead of time how much money you might need to start the business, whether it’s purchasing a domain name or buying materials to create the product you’ll be selling. Then, we need to make sure we keep a record of these business expenses.
If you’re putting side gig money towards your daily expenses and savings, keeping good records will make sure you know how much you’ll have at the end of the month for bills, and how much you can move over to your savings account. Depending on how much money you’re making and how complex your side gig income and expenses are, it could make sense to use a service like Wave or Freshbooks to help you with record keeping. Most of these have monthly fees, so do some research to make sure that it’s the best service for your business and worth the cost! Of course, you can always keep track of everything in an Excel spreadsheet as well.
The next big one: taxes!
Whether you’re filing the taxes yourself, working with a CPA, or using a service like TurboTax, it’s super important that you’ve been keeping track of all of the money going in and out of your business and setting aside money to pay taxes! This includes holding onto business receipts, whether you keep the paper copies, or scan or take a photo for your records and keeping track of mileage on your car for business usage. Keeping detailed records makes sure that you can take advantage of potential tax write-offs or small business tax credits.
Two things I want to emphasize here: One, I am absolutely not, in any way, a tax professional. I’ve gotten a lot of questions about taxes for freelancers, so I’m hoping to get my accountant on an episode in time to answer your questions for tax season! Stay tuned…
Second, which is my main point: It’s really, really important to set money aside for tax season. You don’t want April to roll around and realize that you can’t pay the IRS! Personally, living in California, I immediately put 40% of my income into my business savings account for tax purposes – but I am definitely being conservative. You can also take your gross business income and do a calculation — starting with a federal tax rate of about 10%, social security of 15%, and state tax of 8% — to get a rough estimate of your tax payment.
As of June 2019, almost half of Americans had a side hustle and earned an average of an extra $1,122 per month. Millennials are more likely than other generations to have a side hustle and also earn more from their side hustles!
Lastly, the IRS likes to get their money throughout the year – not just in April. This means that if you’re only making a few hundred dollars from your side gig, you can probably just file during tax season in April and not worry about this next part. But, if you’re making enough money that you’d pay more than $1,000 in taxes from your side gig, you may need to pay what’s called estimated taxes.
You have a couple options to do that:
Some people opt to have more income tax withheld from their full time jobs to make up for their side gig taxes, but this may not make sense if your extra income fluctuates. The IRS does have a Tax Withholding Estimator on their website if that’s an option you want to explore further.
Or, you can use Form 1040-ES to submit your estimated tax payments quarterly on the 15th of April, June, and September, and January of the following year.
Form 1040-ES is used to pay tax on income that isn’t subject to withholding – like your full-time salary is. This includes (but is not limited to) money you make from self-employment, like side gigs, interest, dividends, and unemployment compensation.
Again, this is a simplified explanation, but don’t freak out! You can find more information on the IRS website, and resources like Turbotax have entire pages dedicated to helping you figure out how to calculate if you need to make estimated tax payments. If you are making a substantial amount of money from your side gig or freelance work – first of all, that’s awesome and you are a badass – a tax professional can help you navigate your taxes. Taxes can get confusing and overwhelming, and can really depend on your specific situation like how much you make and where you live, which is why I focus on keeping good records, putting money aside to pay the taxes, and letting my accountant handle the rest.
Okay. Now that that’s out of the way, I promise my last tip is simple!
Keep your personal and business finances separate.
Your side gig is a business, and like I mentioned before, you can write off some of your business expenses which can help you lower your tax bill! But, sorting through your personal and business expenses can get confusing and muddy really quickly, which is why it’s important to keep track of all of your side gig finances and keep those finances separate.
This can be done by opening a checking account that is dedicated only to your side hustle. There’s a variety of small business checking accounts, and you can look online to find the best one for you. Different banks can have different fees, minimums, restrictions around transferring money, customer service, etc. so make sure you do your research to find the one that best fits your business. All of the money going in and out of your business should come from this account. This means that when your clients and customers pay you, that money goes into this account. If you need to buy business supplies, it gets paid for through this account. For example, I recently produced a photoshoot for a client. I have the receipts from the props I purchased, noted the mileage to and from the shoot, and paid the photographer through my business checking account. Having this separate account creates a very clear boundary between your business and personal finances and, while it might seem like a hassle, I promise it will make your life infinitely easier in the future. If you end up opening a credit card through this business account, you could get rewards for your side hustle expenses as well!
Having a side gig is an awesome way to make some extra money in your free time! By keeping your finances separate, making sure to take good records of your business income and expenses, and preparing ahead of time for taxes, you can get the most out of your hustle and focus more on making money instead of stressing about it.