The gig economy offers great opportunities to diversify your income and earn extra cash that will add up to help you achieve your financial goals.
But these side streams also come with some unique financial challenges. Here are 3 financial tips to make the most of your side hustle.
1. Plan for taxes
With a traditional job, your employer typically withholds taxes from every paycheck so that you can pay tax on your income gradually over time. With a side gig, you may instead need to make quarterly estimated tax payments to both federal and state governments. This means you might have to make four larger payments each year instead of smaller, regular deductions.
To avoid scrambling for cash when taxes are due, set aside a percentage of all your gig income. This way, you'll be prepared when it's time to pay.
For more information, visit the IRS Self-Employed Individuals Tax Center, or read more tax tips for the self-employed.
2. Stay organized
Tax time can be stressful if you don't stay organized throughout the year. You'll need to provide a clear accounting of all income from your side gig, as well as any expenses that may be deductible. So make sure to keep records of all income and expenses. If you operate your side gig on cash, make sure to keep written receipts of all transactions. Consider keeping your records in 2 different places, just so you have a backup.
Some gig workers also find it helps to open a separate bank account for their business finances. This can help make income, expenses, and balances easier to track.
3. Always have a backup
Emergency savings are crucial. If you're counting on income from side hustles, consider building up your savings so that if a customer pays you late or your gig income dries up, you're still able to make ends meet.
Aim to set aside $1,000 initially, then work towards saving enough to cover 3 to 6 months of essential expenses. If you have family support, 3 months might suffice. However, if you have more responsibilities like a mortgage or children, aim for 6 months or more.
To learn more about establishing an emergency savings, read Viewpoints at Fidelity.com: Preparing for emergencies.