The gig economy can provide great opportunities to diversify your income and earn extra cash that will add up over the year to help give you a nice boost toward your financial goals.
But these side streams also come with some financial complexities that traditional employees typically don't have to think about. Here are 3 financial tips to get the most out of your moonlight.
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 have to file quarterly individual estimated tax payments at both the federal and state levels. This can mean you have to make 4 larger payments each year (instead of paying a small portion out of each paycheck).
If you don't plan ahead for these payments, you may be scrambling when it comes time to pay (or worse, face a cash shortage). It could be a good idea to set aside a percentage of all your gig income just for taxes, so you're prepared when it's time to submit those payments.
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 incredibly stressful if you don't stay organized throughout the year. You'll need to be able to provide a clear accounting of all income from your side gig, as well as any of your 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 even 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 to keep their business finances separate from their personal finances. This can help make income, expenses, and balances easier to track.
3. Always have a backup
Everyone should have some emergency savings. If you're counting on income from side hustles, consider beefing 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.
We suggest starting by setting aside $1,000, then aiming to put away enough emergency savings to cover at least 3 to 6 months of essential expenses. If you're single but have family you could count on for support (if you ever needed to), you might be comfortable with 3 months of savings. However, if you have a spouse, kids, and a mortgage, or if you worry about replacing a lost job or other income quickly, you might feel better with 6 months or even more.
To learn more about establishing an emergency savings, read Viewpoints at Fidelity.com: Preparing for emergencies.