Got a side hustle? This is what you need to know before filing taxes
Getting a successful side hustle up and running takes a ton of effort. So, it can feel like salt in the wounds when tax time rolls around and you’re still working harder than everyone else. Unfortunately, it comes with the territory. Adding new income streams often means a more complex return, and sometimes even owing more money than you’re expecting.
However, there are some easy ways to keep your taxes as simple and as low as possible. Better still, most of them are legal. So, if you’re concerned about how your other job is going to affect your tax bill, here are some easy tax tips to help keep your side hustle hustling.
1. Understand How Freelance/Contractor Work Is Taxed
Before anything else, be sure that you know whether or not you’re an employee or a contractor in your side business. If you get a W-2 from your employer, that makes you an employee and all of your payroll taxes will automatically be deducted from each paycheck, making things really simple on your taxes.
No taxes are taken out of self-employment income, however. That means you’re responsible for paying up, and if you’re not careful, this can create a very unpleasant surprise come tax time. If you are earning 1099 income, it will mean paying estimated tax each quarter and having to keep track of businesses expenses so that you can ultimately deduct them.
Do You Know? How to File Self-Employment Taxes
2. Open a High-Yield Savings Account
There are a wide variety of reasons for opening a high-yield savings account whether you have a side hustle or not. However, if your side hustle is freelance or contract work, there’s an additional benefit. Since you’ll need to set aside a big chunk of any 1099 income to pay your estimated taxes each quarter — about 40 percent for most people — earning interest on that money as it accumulates is a smart move
RELATED: Take a look at the 10 U.S. states with the highest income tax:
3. Take the Home Office Deduction — IF It’s Legitimate
Not every side hustle will involve working out of your home, but if it does, be sure you’re taking the home office deduction. Figure out how much square footage your dedicated workspace takes up relative to your apartment or home and then deduct that portion of your housing costs. Just be sure it really is a dedicated workspace and that you really do use it for your side hustle. This is one deduction that can mean your return will get additional scrutiny from the IRS.
4. Keep Every Receipt
Your side hustle probably wouldn’t be your side hustle if it wasn’t tied to an area of interest for you personally — possibly a hobby or avocation that you’ve discovered you can actually make money with. If that’s the case, remember that you can now deduct anything that helps you develop as a professional as a business expense. That could mean a lot of what you might do on a regular basis now qualifies as deductible education that “maintains or improves skills needed in your present work.”
Write It Off: Self-Employment Tax Deductions 101
If you, say, started writing film reviews for your local paper, your subscriptions to Netflix or tickets at the local multiplex now qualify as business expenses. If you run an Etsy store, deducting your mileage to and from a craft fair is acceptable. And attending a conference in your field can mean deducting much, if not all, of your airfare and/or lodging whether you sign new clients or not.
So hang on to every receipt and think hard about what is really important to allow you to excel in your side hustle.
5. Hire Family Members Where Appropriate
Depending on how you’re covered for health insurance, hiring a spouse and setting up a family health insurance plan for them through your business could provide some major benefits. The cost of insurance that you provide your employees is deductible from your self-employment income. So, basically, if you hire your wife, you can provide her with an insurance plan that also covers her family (i.e. you and your kids) and then the cost of her entire plan is deductible.
Plus, you can also find some benefits to hiring your children if you have work they can do. Wages paid to children under 18 don’t owe either Social Security or Unemployment taxes, and unless you have some sort of miracle child, they probably won’t owe any income tax because they aren’t earning enough elsewhere. That basically means you can shift self-employment income that you’ll owe taxes on to your child, who won’t owe nearly as much.
6. Hire an Accountant
Although using one of the many available online services for filing taxes is a great option for someone with just W-2 income, the complexity of dealing with various deductions and estimated tax payments make an actual tax professional working for you a lot more valuable. You will probably feel a lot safer getting more aggressive in making deductions if you have a trained pro in your corner to let you know what’s an overstep. Plus, their fee is ultimately tax deductible for the self-employed — something that’s no longer true for W-2 workers.
Click through to read more about how to fill out a W-4 tax form.
More from GO Banking Rates:
The New Rules for Claiming Your Boyfriend or Girlfriend on Your Taxes
New Homeowners: Here’s What You Need to Know for Your Taxes
18 Medical Expenses You Can Deduct From Your Taxes
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This article originally appeared on GOBankingRates.com: Got a Side Hustle? This Is What You Need to Know Before Filing Taxes