Side hustles can be a great way to bring in extra cash or plant the seeds to grow your own small business.
As an entrepreneur, you are fulfilling many roles, and it can be easy for some of those jobs to fall through the cracks. Whatever your hustle, one of your key responsibilities is to make sure your business has a solid financial foundation. An important but often overlooked part of that foundation is getting a handle on business taxes.
As a certified financial planner professional, I work with many small business owners who have questions and concerns about their taxes. From my experience of listening to their stories and helping them navigate the ins and outs of tax considerations, I’ve learned some of the key tax challenges facing businesses today. Here are my five tips for any entrepreneur with a side hustle:
1. Hire a tax professional. When you start a business, you will likely have to take on multiple expenses, and make decisions about whether to invest in a product or service right away — or wait until your business is more established. One expense you don’t want to skimp on is hiring a tax professional. Many of you might think it’s best to either wait until your business is raking in major revenue or at least hold off until tax season, but a common mistake side hustlers make is waiting to hire someone.
A tax professional is not a once-a-year consultant who will just prepare your taxes for filing; they are someone who will actively engage in conversation with you throughout the year. I recommend hiring a tax professional who will be your collaborator. Among other services, they can help you determine what form of corporation best matches your business expenses, answer questions each quarter, save for projected tax payments and even give insight into how to best organize your bookkeeping.
2. Keep good records. Most entrepreneurs do not know which expenses are tax-deductible and which aren’t, so the best advice is to keep everything. It’s important to keep meticulous records of all expenses throughout the year and come up with your own filing system that makes sense for you and your business.
This way, during the preparation of your taxes, when your tax professional asks you questions that could uncover new areas where you can save on taxes through expenses specifically for your type of business, you will be ready to help.
3. Don’t mix personal and business expenses. Another common misstep is putting business expenses on your personal debit or credit card. In order to start your business off on the right track, open a business checking and savings account so you can keep your personal and business expenses separate. And if you have multiple side hustles, they each need their own accounts. This will help you keep track of what each business is spending, and save you time at the end of the year when you organize and report your expenses.
Most importantly, you will be prepared for the worst-case scenario: If a client sues, and your personal and business assets are commingled, your personal assets could become attached to the lawsuit.
4. Save to a retirement account. Saving for retirement is another area where many entrepreneurs think they need to wait until their side hustle becomes their primary source of income. Many entrepreneurs also leverage their business expenses as the primary method of lowering their taxable income, sometimes to the extent that they show almost no income for the year. If you are among those spending frivolously at year-end, consider opening and investing in a retirement account instead.
The best retirement account for your business will depend on the structure of your company and number of employees, but the ultimate goal is to save money while also reducing your taxable income.
5. Set aside money for taxes. Unfortunately, the old saying is true. In this world, nothing is certain but death and taxes.
You need to keep up with quarterly tax payments and be prepared to pay any tax deficit in April. A good rule of thumb to follow is to put 25 cents of every dollar you earn into a savings account for taxes. You won’t be caught off guard by additional taxes, and when tax time comes around, you can be prepared to pay Uncle Sam. As an added bonus, any money left over accrues interest in a savings account.
— By Rianka Dorsainvil, founder and president of Your Greatest Wealth