Whether you have a steady independent contractor position or several side gigs, most of the same rules will apply when it comes to handling your finances and taxes. The IRS considers anyone who doesn’t receive a W2 form as an employee to be “self-employed,” which means you are required to file a business Schedule C within your personal tax return.
1. Reporting correct income
Some folks think if they didn’t receive a 1099 at year end they are free and clear from reporting their income. This is false, as you are required to account for all of your income, whether it was originally reported to the government or not. Failing to accurately report your income will cause big headaches later on and of course tax, penalty and interest assessments from the government. There are also new rules for cash apps, which we discuss here.
2. Estimated tax payments
Paying estimated quarterly taxes is usually the most important aspect of your finances when you are self-employed. Many taxpayers are unaware that estimated payments are required, but they will save you a lot of stress during tax time by preventing you from facing a large tax bill. Get yourself a good tax professional to help set you up with quarterly tax payments.
3. Keeping track of business versus personal
Our suggestion to our business clients is to have a separate bank account and credit card to handle all your business income and expenses. This makes it much easier at year end when you or your bookkeeper are reconciling your business’s transactions to create a Profit & Loss and Balance Sheet. Commingling your business and personal transactions will also make things more difficult in exam and audit situations.
4. Business structure
When your side hustle gets popular and you start making significant business income, you should consider converting to an LLC or Corporation. Depending on your situation, it could make sense to convert your business structure. Before going online and creating that LLC or Corporation, you should consult a tax pro because there are many factors and responsibilities that come with making that change.
5. Hire a good tax pro
One of the leading reasons clients get into tax trouble is because they took advice from a friend or family member. The best advice a good friend can give you is to hire a tax pro. Since there are so many factors involved in tax, you need someone experienced to analyze your entire situation and put you on track for success.