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Your financial goals may include increasing your income, starting a dream business, or both if you’re reaching for the stars. Before you get your hands dirty in the sometimes chaotic combination of making extra money while working full time, here are a few pitfalls to avoid.
Not having a plan for your side hustle income
People get side hustles for different reasons. It could be to help make ends meet, save toward a dream vacation or grow your business to a point where you can quit your job. Catching up on my retirement savings is one reason I decided to start a side hustle.
But you need a plan for that motivation to help make your side gig worthwhile. Think about having goals for your income and a strategy in place to help you achieve those goals.
For instance, you could divert funds from your side hustle into retirement savings accounts like an IRA. This is a way to put away more for retirement, and you could reduce your taxable income, depending on how much you make, because contributions may be tax-deductible.
Eric Nisall, an accountant in Coral Springs, Florida, suggests having what he calls a “failure fund” if your goal is to eventually transition into full-time entrepreneurship. It’s something he developed when he began the journey of full-time employment and building a business.
“When at my last two CPA firms, I was working at building my own business at the same time. I realized, if I'm going to do this, I need to start putting money away so that if I don't grow, I [won’t] suffer,” he says.
Nisall put money he saved from coupons and any extra bucks he made from a raise or overtime into that fund.
Not being aware of tax implications
Oftentimes, people think having a side hustle means they can make extra money without reporting it, says Atiya Brown, a certified public accountant and certified financial education instructor in Dallas.
“I think that people need to realize all of their income is going to be taxed,” she says. “So, if they're starting a side hustle, they need to get organized so that they don't miss any income that needs to be reported, because then the interest and penalties are going to pile on.”
The IRS says anyone who earns $400 or more from self-employment must file a tax return. But there are multiple ways to pay self-employment taxes.
“Because the government is an earn and pay system, you can choose,” says Brown.
These choices include estimated quarterly tax payments, changing your W-4 withholdings so it covers your self-employed taxes, or paying in one lump sum, she explains.
Brown adds that the IRS has penalties for underpaying on your taxes. To help avoid this, you can use the IRS withholding calculator to see how much you should withhold to cover your side hustle taxes. Depending on how much freelance money you made, you might have several new tax forms to fill out, so if you aren’t sure what the best option is, consider talking to a tax professional.
Putting your main source of income in jeopardy
Making extra income while working full time means you’re choosing to work during your free time. For this reason, you want to make sure your side gig is worth your time financially and healthwise. Calculate your per-hour earnings, and consider whether you want to say yes only to higher-paid jobs.
Overworking can also affect your health, which can put your main source of income at risk, says Nisall.
“You gotta make sure that you're eating, sleeping, taking care of your body and your mind,” he says. “Your mental and physical health are going to play a big part in this whole thing, especially if you're trying to balance your 9-to-5 and growing a business.”
Speaking of putting your main job at risk, consider asking your employer what its policies are around side gigs.
This article was written by NerdWallet and was originally published by The Associated Press.