The Importance of Planning to File Taxes for Side Income

money-finance-bills-bank-notesEarning extra money can be great. If you are an independent contractor, freelancer, or work various different side jobs throughout the year, you’ll need to file taxes on the income you earn as long as you earn more than $600 annually.

If you are getting paid via cash, you’ll need to track the income you are earning and your expenses, but if you are being paid via check and taxes aren’t being taken out, you’re still not off the hook. Odds are, you’ll need to take it upon yourself to set aside money for taxes and pay quarterly estimated taxes as well.

Tracking Your Part-Time Income

If you don’t carefully track your side hustle income, you may have to learn how to file taxes for it the hard way. DC, Personal finance blogger who runs the site Young Adult Money and author of Hustle Away Debt, learned about this the hard way when he and his wife ended up with a huge tax bill a few years ago.

“A few years ago my wife had various part-time jobs throughout the year,” DC said.

“Unfortunately for us, her employers were taking almost nothing for her taxes which meant we should have been setting aside money on our own to account for this income.”

DC and his wife failed to set aside a portion of their income to pay taxes for the following year and ended up owing about $8,000 in taxes.
“To make matters worse, that year I had made a considerable side income from blogging and other side hustles,” DC said.

“I paid almost nothing in taxes and there were definitely tears that year as we were devastated.”

Since then however, DC and his wife have bounced back from their unexpected tax crisis and started setting aside money from their earnings each month and making quarterly estimated payments to the IRS.

A good rule of thumb is to set aside anywhere from 20%-30% of your earnings for taxes when you have side income or work as a sole proprietor or freelancer, but you should talk to a tax professional about your specific situation for advice first. CPAs (certified public accountants) can help you determine which expenses you can write off annually to lower your tax liability.

Being Careful With the DIY Method

DIYing your taxes can be tricky and stressful especially if you have no idea what you are doing. Taylor, a freelance writer and owner of the site Tay Talks Money, says paying taxes are the absolute worst part of running a business in her opinion.

It sounds harsh, but when you think about filing your own taxes whether to save money or become more knowledgeable about the process, things can get very complicated.

“I was nervous when I attempted to file my taxes for self-employment income for the first time,” said Taylor.

“I started off using one of those online programs and went through the sole proprietor questions but when I got to the business deductions I wasn’t 100% confident that I knew what I was doing. I was super scared I’d make a random business deduction and get audited by the IRS. This is why I decided to hire someone instead.”

Even though Taylor hired a professional to file her taxes instead, she still got a letter from the IRS a few months later. The letter came in the mail because the IRS was claiming her taxes had never been filed and as it turns out, her accountant somehow forgot to submit her paperwork to the IRS.

After everything was sorted out and her accountant apologized for dropping the ball, Taylor realized that she needed to be extremely careful when choosing someone to help with her taxes and the importance of following up.

It’s Never Too Early to Start Preparing

If you are looking for tax assistance or guidance, it’s never too early to start seeking advice so you can get organized and prepare all your documents ahead of time to eliminate stress around the busy tax season.

If you have side hustle income, this is especially true. When you have extra side income, it’s best to allow a professional to help you with your taxes for at least the first year until you understand how the process works and what you need to do each year.

When it comes to finding the right accountant or tax advisor, ask around in your network first for word-of-mouth referrals. Also, lean toward working with someone who is experienced and has lots of great reviews.

Do you have a side hustle? How are you preparing to make tax season run more smoothly?

Posted in: Money

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