Whether you’ve been laid off or furloughed and are investing more time and effort into a “side hustle,” or you’re just looking to boost your earnings amid all the uncertainty of the present times – it’s never a bad idea to specialize in a specific skill or provide a special service outside of your primary career field. Not only can these side gigs offer a nice plan to fall back on should something happen with your 9-5, but some professionals even become successful enough where they leave their career to pursue any side work full-time.
But there’s one catch when it comes to side gigs that many people don’t realize right away, and that’s that it’s usually independent, self-employment. In other words, you don’t have a company taking out state and federal taxes, social security, healthcare premiums, retirement savings and more out of your paycheck. It’s something you have to do yourself, and failure to properly account for your taxes can be a rude awakening come tax time.
In light of more Americans likely working harder than ever with their side hustles, we thought it would be a good idea to take a look at how to properly manage any self-employment.
#1: Set Aside 30 Percent for Taxes Each Time You’re Paid
Yes, you have to pay taxes on your side hustle. And while what you’ll owe Uncle Sam can vary depending on how much you’re earning and what type of deductions you have, a good rule of thumb is to just set aside 30 percent of your earnings each time you’re paid to go toward taxes.
We strongly suggest also making quarterly estimated tax payments to the IRS in addition to filing an annual tax return. This can save you a big tax bill when you go to file your annual return. In many cases, your quarterly payments to the IRS will likely exceed what you owe in taxes, so you may receive some money back when you file your annual return.
#2: Set Aside 10 Percent for Retirement
We also strongly suggest setting aside some money from your earnings toward your retirement. Usually 10 percent is a good rule of thumb. Even if you’re working a full-time job in addition to your side hustle, double dipping into a retirement account is only going to help you in the long run. Perhaps you’ll even be able to retire earlier.
#3: Pay Yourself the Other 60 Percent
Consider the other 60 percent of your side hustle earnings your salary. Depending on what type of overhead costs you’re dealing with, you may adjust this number so that it’s 55 percent, and put the other 5 percent into a business expenses account. But remember to “pay yourself” a salary for what you’re doing. After all, while you may enjoy your side hustle and it may even tie in to a certain hobby, you’re not doing it for free. So make sure that you’re making it worthwhile.