According to this survey from Bankrate.com, almost 4 out of 10 Americans (37%) has a “side gig”. Soon, someone asking “what’s your side hustle?” is going to be as common as “what do you do for a living?”
Working a second part-time job has evolved into the age of the side hustle or side gig. How people earn a second income has exploded into freelancing, the sharing economy, selling products online, blogging, and more.
There are many reasons. Of course, some are only in it for the extra income, but many are pursuing a passion. Whether you’re just casually trying to make a hobby pay off or you have dreams of building an empire, it’s important to manage your side hustle income and outgo properly.
Side gigs aren’t part-time jobs. They’re self-employed microbusinesses. As a business, there are practical challenges in managing your income. Here are 5 tips to help you navigate those challenges and avoid tax headaches.
Open a separate business account
Don’t be tempted to use your personal accounts to deposit the extra income. Having everything in one place will make accounting confusing and time-consuming and could cost you at tax time.
A separate business account will help you keep track of your business income and spending. You don’t want to eyeball this because your earnings need to cover expenses.
Consider opening a separate credit card for business expenses to make tracking even easier. Plus your statements turn into a done-for-you business record.
Who wants to spend more than 2 minutes figuring out all the numbers? Automating as much as possible leaves you free to do more meaningful things like marketing and more work.
Back in the day, people used apps like Quicken and QuickBooks. Today there are many alternatives with fresh technology at different price points. Most let you upload data, sync and link your accounts for tracking and budgeting.
Others offer premium features like invoicing, time tracking, project management, reporting, and accepting online payments (eChecks, ACH and credit cards). Do your research, and choose a solution that can grow with you.
We all like to get paid. And the faster the better. But cash and checks are sooooo 20th century.
Some are plug-ins to e-commerce platforms. Others offer fraud protection, reporting, time tracking and even accounting functions like invoicing. There are apps, physical card readers and virtual wallets that accept cryptocurrencies. You can even receive and send money via Facebook Messenger and Google Pay for Business.
Figure out how your customers prefer to pay and make it a no-brainer for them.
Keep the IRS happy
The “gig economy” adds up to big business. Lots of people are adding extra income while pursuing their passions. This means the IRS will want their share.
Your employer at your day job figures out all the tax withholding for you. That’s not happening with the income from your microbusiness. You’re responsible for figuring out and paying the taxes. Yes, that’s right, taxes: both self-employment tax (Social Security and Medicare) and income tax.
One of your biggest expenses is paying estimated taxes every quarter. The reporting feature of most accounting software includes calculating estimated taxes.
Depending on how much income you’re generating, your goals and the type of business you have, a few sessions with a good accountant and attorney can be worth every penny. They can help you figure out the best ways to handle taxes, insurance and various legalities.
Make a marketing and growth plan
If you don’t know where you’re going, you’ll never get there. Figure out your ultimate goals for your side gig so you can structure things early on to head off bottlenecks and trouble.
Do you want a steady side income just as long as it’s still fun? Or do you want to build things up to the point you quit your day job and start hiring employees? What will you do if there’s a sudden sales spike or slump?
List your goals in writing. Be specific and include short and long-term goals. Do you want to increase income by 10% per year? Add 1 new client every month? Replace your full-time income in 5 years?
Make a marketing plan. Your business can only get so far relying on word of mouth. Your marketing plan defines what you sell, who buys it, why they buy from you, and the methods you use to get leads and customers.
Research and decide which channels and tactics will help you reach your target audiences. Who are your competitors and how is what you’re selling or providing better or different?
Set a budget for re-investing a certain percentage or amount of money from your side hustle income back into the business. Don’t forget to budget enough time, too. Even if you’re not looking to grow, you need a way to win and keep customers if you want to maintain steady income.
Evaluate the ROI (Return On Investment) regularly of the time and money you spent on your marketing activities. Adjust, rinse and repeat.