An additional source of income can help you pay down debt or save for retirement, but the more you work, the more dollars and taxes you have to keep straight.
However, “Mo’ money, mo’ problems” doesn’t have to be your personal anthem if you’re juggling more than one job.
Whatever your “side hustle” of choice is — part-time employee, freelancer or full-fledged small business owner — here are a few tips for keeping your finances on track as you take on extracurricular employment:
1) Plan ahead for income tax costs.
If you moonlight as an evening Starbucks barista after your 9-5 office job, you’re already paying income tax on each paycheck.
However, if you’re a freelance or contract worker, most of the checks you get in payment won’t reflect any federal taxes withheld. Instead, it will be on you to collect 1099-MISC tax forms from each client, report your earnings and pay taxes to the government.
The 1040-ES IRS tax form comes with a worksheet to help you estimate your taxes each quarter if you are able to roughly predict how much you’ll be bringing in.
A little extra planning now will keep you from going into financial shock when you have to send the government a check later.
2) Track your expenses to take advantage of tax deductions.
If you are going to make income tax payments over the course of a year, do what you can to make the payments as small as possible.
Carefully tracking all your expenses on a spreadsheet and saving those annoying paper receipts can make it easier to add up all your deductions when you sit down to do your taxes.
Designating one specific bank account and/or credit card to use for side work-related expenses can also help keep all the financial information in one place. Need a new printer, paper and ink to send out invoices? Charge it all to the same credit card.
However, excessive business deductions can increase your risk of an IRS audit, especially home-office deductions by the self-employed, according to Matt Frankel of The Motley Fool investing advice community.
If you are going to claim a deduction for the contents of your home office, make sure your claims are only for the things that you use exclusively for your side work. That laptop you’ve already had for two years and now occasionally use for sending work-related emails from Starbucks doesn’t count.
3) Weigh the costs and benefits of extra work.
Taking on some extra work or starting a part-time business can be a great way to strengthen your cash flow, help pay down debt or provide you with a creative outlet, but make sure you’re not biting off more than you can chew.
In order to profit from your side hustle, you have to get back more than you put in. For example, if you are physically making items for sale locally, the money you receive for the goods must at least be more than the costs of materials (not to mention the amount of time you put in). If the scale tips the other way, you risk putting yourself in debt.
On the other hand, if you really enjoy the work and make enough to break even, that has value, too. For some, fulfillment and leisure may be worth more than a few extra bucks. Just be sure to acknowledge your financial needs and overall goals before getting started so you aren’t disappointed — or in debt — later.
4) Don’t neglect your full-time job.
At the end of the day, having extra money may be nice — or even necessary — but if you are putting so much into your part-time job that it starts to take away from the time and energy you need for your full-time job, it might be time to take a step back and re-evaluate the situation.
Are you dedicating more time to your side job because you just enjoy the work more? Consider taking the necessary steps to make it a full-time job.
Is the side work so demanding that you’re spending your evenings and weekends working and any free time (and a good night’s sleep) is becoming an elusive concept? Maybe it’s time to find a different endeavor if slowing down isn’t an option.
Or, if you’re so financially strapped that you can’t cease any extra work, it might be time to chat with your full-time employer about your salary or start looking for a better-paying job.
Also be wary about rules your employer may have about employees working other jobs, especially if you are offering a similar product or service to theirs, Suzanne Kearns of Money Crashers warns. You could be risking termination or even a lawsuit, in more extreme cases.
Whatever your situation is, make sure the couple hundred extra bucks you’re earning each week won’t cost you a steady, full-time income and a positive employment record.