I made a big tax mistake when I started side hustling, but my new system makes tax time a breeze
- I was excited to earn $30,000 my first year side hustling, but I didn’t track my income or expenses.
- At tax time, I had to go back and find every dollar I earned and spent to file my taxes.
- Now, I use GoDaddy Bookkeeping to keep track, and have a separate business checking account.
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I’m one of the more than 33% of Americans who have a side hustle today. Making extra cash with a side hustle can be great. For me, though, one of the main drawbacks has been figuring out how to handle taxes on my extra income.
In 2015, I got really serious with my side hustle and ended up earning well over $30,000. While I was proud of the extra money I’d made, I realized I’d made one major mistake when tax season rolled around — not closely tracking my income or expenses. I was so excited about making money with a side hustle, but I paid for it the following spring by spending hours trying to organize my financial documents and data.
Not tracking my income meant not knowing how much tax I might owe
As a freelancer or contractor, I did receive a few 1099 forms from companies I worked for. As long as you earn $600 or more as a contractor, it’s a requirement that companies send you a 1099 form stating how much you earned; this also gets sent to the IRS.
Even though I’d heard stories from freelance friends who received 1099s with the wrong amount of money listed, I didn’t do a good job of tracking my own earnings.
At tax time, I ended up going back and tracking down every payment I’d received then categorizing and organizing everything for my accountant.
I also hadn’t tracked my expenses
Tracking and reporting my income was only half of the battle to catch up for tax season. As a contractor, I also realized I could write off certain expenses, which would lower my taxable income. But that meant I’d have to go back and track expenses and go through receipts to report accurate amounts.
As a freelancer, I was able to deduct expenses on my taxes including:
- Office supplies
- Software
- Travel expenses and conferences I attended
- Marketing and advertising costs to help me find clients
- The cost to produce my own business cards
- A portion of my internet and phone bills
- Work-related transaction fees
I talked with a tax professional to see what I could deduct, which helped lower my taxes a bit. Still, organizing everything and trying to remember all my income and expenses for the past year was a pain. I wondered if there were a better way and a strategy that could help make tax season a little more tolerable.
After talking with my CPA, I came up with a better way to handle my side hustle taxes, and I’ve used this system every year since.
I keep my side hustle finances separate
I like to keep finances for my side hustles separate from my main income so I’m not mixing the expenses with my regular checking account. I opened a separate checking account that I use for all my side hustle/side business expenses and income. This helps me track everything that’s coming in and going out.
I use a bookkeeping software throughout the year
Now, I automatically track income and expenses with an affordable tool called GoDaddy Bookkeeping. It’s around $10 per month, but it’s worth it because it helps me keep track of all my paid invoices, expenses, and more. I can also go back and compare my earnings from previous years and create new income and spending categories as needed.
GoDaddy Bookkeeping also provides timely updates and weekly reports, but I like to check in once a month to go over my numbers and make any adjustments as needed.
I keep track of my net income
GoDaddy Bookkeeping provides a profit and loss statement each month, which is important because I need to calculate my net income from side hustling around tax time.
Net income is just expenses subtracted from what I earned; that is the amount I pay taxes on. When my husband drove for Uber for a few years, we also tracked his net income by subtracting car maintenance and repairs, along with mileage costs, from his total earnings to come up with a net income figure.
GoDaddy Bookkeeping also provides a printable income and expense report, along with a Schedule C worksheet, so it’s perfect for side hustlers or anyone with a business where they’re responsible for paying their own taxes.
Using GoDaddy Bookkeeping software helps me keep meticulous records
Side hustling has helped me increase and diversify my income so much over the years. However, one of my biggest fears was not knowing how to properly report taxes for my income or worse, getting audited by the IRS. Bookkeeping software has made it so much easier to track my income and expenses so I can file my taxes without worrying about errors or leaving anything out.
Since I juggle so many day-to-day responsibilities, automated tracking has been one of the best ways for me to keep meticulous records of my earnings. It also helps to know that I can focus on doing work I love and making money, and not having to hire someone to do all the financial management for me.
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