Making extra money through a side hustle can be a great boost to your finances. But that extra income can also complicate your tax situation.
Just like your regular paycheck, money from a side hustle is taxable. And there’s no corporate accounting department keeping track of things for you. Making sure you pay — and deduct — the right amount is on you.
That means, to make your your life easier come tax time, you’ll have to be diligent throughout the year, experts say.
“You have to keep good records,” says Ed Slott, a certified public accountant and founder of IRAHelp.com. It’s best for you and your business if you focus on keeping all documents related to your side income in one place, he says.
This includes invoices, receipts, contracts and agreements related to your side hustle. Without good records, you risk misreporting your business income, missing out on tax deductions and finding yourself unprepared for an audit should the Internal Revenue Service have questions about the profits you report.
Here’s how to keep things on track.
Keeping good records should be a top priority for side hustlers
Remember, just like your regular income, income from your side hustle is taxable. At tax time, you may receive a 1099 form listing your side hustle income, or you may need to track and report your income on your own. The good news is, you can generally deduct expenses associated with your business, such as home office space, gas mileage and supplies.
But you can only claim these deductions if you keep proper records. For example, the exact dollar amount you spent on supplies for your side hustle can be difficult to calculate if you don’t save your receipts separate from receipts for your personal purchases. By keeping side hustle expenses and documentation separate, you can distinguish personal and business expenses more easily come tax time.
“Most people say they want to save on taxes, but they cost themselves because they don’t have good records,” Slott says.
He recommends organizing all business receipts and documents — such as invoices and contracts — in one place. Having these records readily available means you won’t waste time scrambling for missing paperwork during tax season.
Plus, you’ll have clear documentation that supports your deductions, which can help you avoid future problems with the IRS. In most cases, the IRS recommends keeping your side hustle records on hand for a minimum of three years in case of an audit.
How to keep your business records organized
Ideally, CPAs recommend maintaining accurate business records with a spreadsheet or bookkeeping software. At the very least, Slott recommends doing these two things:
1. Keep all documents related to your side hustle in one folder
Slott’s advice is simple. “Every time you spend money, just throw [your receipts] in a folder,” he says. “It’s that easy.”
You don’t have to have a fancy system throughout the year as long as you or your accountant are willing to take the time during tax season to sort everything out. You should focus your time and efforts during the year on cultivating and building your business instead of losing yourself in administrative tasks, Slott says.
2. Open a separate bank account for your side hustle
When it comes to paying taxes on your side hustle, opening a dedicated business account “will solve about 90% of your problems,” John Wheeler, a certified financial planner and private wealth manager at Creative Planning, previously told CNBC Make It.
Slott added that keeping money related to your side hustle separate is not only good for your business, but for good for recordkeeping as well. After all, no one wants to sift through an entire year’s worth of credit card statements for charges related to a side hustle at tax time.
“The last thing you want to do is commingle personal expenses with business [expenses],” Slott says.
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