- I love side hustling.
It's a great way to dabble in a new hobby
or earn extra income to pay off debt.
But whatever side hustle income you earn
has to be reported to the IRS.
So you're going to need to handle your taxes
for your side hustle.
In this video I'm gonna be talking about four different ways
that you can do that so that you are prepared
and organized come tax season.
(soft music)
Hey guys, this is Justine with The College Investor,
Investing and Personal Finance for Millennials.
So if you've started a side hustle, you're making a profit,
then you're probably wondering what you need to do
about your tax situation.
Well, there's actually four different ways
that you can do this.
And the first way being is you need to start tracking
your income and expenses.
So whatever income that you're bringing
in from your side hustle,
you should definitely be tracking as well as
whatever business expenses you might be paying out
to maintain your side hustle business.
Now, when you track these two things,
the income that you earn and the expenses that you pay
it can be a lot easier to figure out how much you owe
in taxes.
Now there's three different things
that you'll want to look into setting up.
The first being a business checking account,
your business checking account is going to be separate
from your personal checking account
so that you can account for all the side hustle,
income and earnings that you're bringing in.
The second piece you'll want is a business savings account.
What you're going to do is you're going to transfer
a portion of your income, of your side hustle income
from your checking account, into your savings account.
And that money will be used to pay your taxes,
more on how you're gonna do that in just a second.
The third piece that you'll wanna look into
is a rewards credit card.
Now you can use a business credit card
to pay for your business expenses
and then use your business checking account
to pay off that credit card every single month,
back to a zero balance.
If you're a responsible credit card user,
this is a great way to build up points
and reward systems so that you can start earning cash back
or qualifying for free trips.
Now, if you're just getting started
and you haven't really built up a profit yet, don't worry.
But the second that you start transitioning
into making a profit, you'll wanna set up this process.
Now, if you wanna really put this system into work,
you'll wanna use a really good software
to help you track the income and expenses
through these types of accounts.
Now, you can use a software called Tiller
that helps you track your income expenses,
or you can use a business accounting software
such as TurboTax.
I personally use the self-employed QuickBooks,
and that's a really easy way for me to log in
daily if I wanted to, to check what my profit is,
it syncs up with my checking, my business checking account,
and then I can see what transactions
are inside of that account and sort them accordingly.
And then I can just download a profit and loss statement
and send that to my CPA for my tax return.
One thing to know if you're still using
your personal checking account for your side hustle income
or you're paying for expenses, that's okay,
it just can get a little messy.
So you're gonna have to go through your bank statements
and look for transactions that were business expenses.
And that means going line by line,
trying to find those expenses,
keep track of them and then file them on your tax return
or give them to your CPA.
You can just use a Google spreadsheet to start tracking that
if you're just getting started, I think that's okay.
But if you end up really going full fledged
with your side hustle business,
you're definitely gonna wanna go back to that example
of the checking and savings account plus the credit card.
Also make sure that you receive a 1099
from any of your side hustle businesses.
So that's especially true if you're working with clients
or you're working through a business
such as your side hustling for Uber,
they're gonna issue you a 1099,
and you're gonna use that form to report on your tax return.
Once you have your business bank accounts set up,
and then you are going to set aside 35% of your profit
for taxes.
And I know what you're thinking.
35% is a lot of money, but here's how that's broken down.
The first way that's broken down
is through self-employment tax.
That rate is currently at 15.3% is huge, I know,
but you're both the employer and the employee in this case.
And what you are paying into is social security
and Medicare.
Now 12.4% goes towards social security.
And 2.9% goes towards Medicare.
The second portion is your federal income tax.
Now people most likely pay anywhere between 15 to 20%
of federal income tax.
And that really just depends on your tax bracket
and a CPA can help you figure out
exactly what that percentage is.
The third portion of this 35% pie is your state income tax.
Now some states don't have income tax,
which lucky you if that's the case.
Now, if you do live in a state that has income tax,
like where I'm at in California,
we have the highest income tax I think in the country
and income tax, state income tax can range anywhere from
0.3% all the way up to 13%.
And you have to factor that in when you are setting aside
money for taxes.
And so that's why the general rule
when you are running your own side hustle
and you're self-employed is 35% of your profits
should be earmarked and saved for taxes.
Now remember that savings account that I was talking about,
this is where that money goes.
And then you are going to use money from that account
to pay for your taxes,
which leads me into the third way to handle your taxes
is to make quarterly tax payments.
Quarterly tax payments are going to ease the burden
of paying taxes come April 15th.
So instead of coming up with a lump sum of a whole bunch
of money that you may owe,
you're already going to be making those payments four times
throughout the year to ease that tax burden come April 15th.
Now this is broken out into four different quarters,
and you're going to pay your quarterly tax payment
on the 15th of April, July, September, and January.
And you can actually, in most cases,
make your payments online now
that includes federal and state.
So in California, you can pay your estimated state tax
online and same through the federal system
you can make quarterly tax payments online,
which makes it a lot easier
when I'm trying to figure out how to tear off vouchers
and submit a check.
I personally find the online system a lot easier to use.
That's just me, but know that you do have the option
to mail in a physical voucher.
Now, if you're late on any of these payments,
you may end up owing interest or penalties during that year.
So just be aware to make your payments on time.
Now, the last way that I have for you on handling your taxes
is to actually legitimately lower your tax burden.
And so you can do this through two different ways.
You can write off your business expenses
and you can take advantage of tax deductions and credits.
So the first way writing off ordinary business expenses,
let's say you have a coaching business that you do online,
and you use a video conferencing service
that you pay for monthly.
You can write off that video conferencing subscription,
because it's part of your ordinary expenses.
Now you can also write off bigger purchases,
such as I wrote off this Canon camera that I am filming on
right now, because I use it for business purposes.
And I also got to write off a portion of my cell phone bill,
because I use my cell phone for my business.
The second way to lower your tax burden is to take advantage
of those tax deductions.
So there are self-employed retirement accounts
that you can contribute to including a SEP IRA, a solo 401k,
or a simple IRA.
Now, if you set up one of these retirement accounts
and start contributing to it on a regular basis,
you can actually use that as a tax deduction
for that current year.
Because you're not withdrawing that money
until ideally retirement,
you're not going to be paying taxes on that money
until you're in retirement
and withdrawing from that account.
So this is a great way to ease your tax burden
for the current year.
I highly suggest setting up one of these accounts
if you are in a legitimate side hustle
where you're creating consistent profit,
earmark some of that towards your retirement,
and you're gonna see the amount of taxes go down
and you're also saving for your future, it's a win-win.
All right, so to recap,
first thing you want to do is to track your income
and expenses.
The second thing is you want to set aside at 35%
of your profit for your taxes in a separate
business savings account.
That way, the third way,
is you can pay your quarterly tax payments
with the money you set aside every single month.
And then the fourth way to handle your taxes
with your side hustle is to write off
legitimate business expenses and contribute
to a self-employed retirement account
to ease your tax burden come tax season.
So I am a huge fan of side hustling.
If you are wanting to dabble in this,
or you've already got one going
and you wanna make this legitimate with the IRS,
then make sure you've got these four steps covered.
If you want more information on side hustling,
be sure to check out all of our free resources
at thecollegeinvestor.com.