4 Big Business Accounting Tools Every Side Gig Needs
While side gigs are becoming an increasingly common way for Americans to bring in extra income, many people do not understand how that additional income can affect their taxes. If you're not prepared, freelancing or working on the side can lead to serious issues with the IRS, costing you thousands in penalties and fees.
If you plan on taking business deductions for expenses, you'll need some tools to manage your reporting and minimize your tax headaches. Treat your side hustle like a small business. Below are four business tools you should use to keep your side gig from overwhelming your finances. (See also: 6 Signs It's Time to Make Your Side Gig Your Career)
1. Business bank account
If you have a side business, you should seriously consider opening a dedicated business bank account. It will make tracking your expenses and profits so much simpler, which makes tax time simpler as well.
Keeping your business and personal finances separate is not just easier, it's also important. Should the IRS ever take a closer look, you want them to see a clear distinction between personal and business expenses, as well as all of the business income you've earned. Jumbling this together with your personal banking is a recipe for confusion and possible contention.
Having a business bank account lends you more professional credibility, too. Asking a client to write a check to your business, for example, feels much more legitimate than having them make it out to your name.
All of the business income you earn doesn't have to stay in your business bank account. You can pay yourself the appropriate amount after considering taxes and expenses. Simply transfer that money to your personal account, and leave the rest in your business account.
2. Business credit card
Similarly, it's a good idea to have a separate credit card you use solely for business expenses. (See also: When You Should Get a Business Credit Card Over a Consumer Card)
By having a card solely for your side gig, you will be able to manage your business deductions quickly and accurately. When you do your taxes, or if you work with a tax professional, you just need your credit card statements to get an accurate picture of your expenses and deductions. Some business cards even offer special reporting tools that automatically itemize your spending for you. This can greatly streamline your accounting process and save you some trouble come tax time.
Many business credit cards offer other unique benefits, such as extended warranty protection and rewards targeted specifically for business-type purchases. They also tend to come with higher limits than personal credit cards. If you need to make a substantial business expense but don't want to dip into your own savings or take out a business loan, these higher limits can be a huge help. They're also a great way to build credit for your business, should you ever need a loan or other financing down the road. (See also: The 5 Best Credit Cards for Small Businesses)
3. Invoicing system
While you can find free invoice templates online and create your own in Microsoft Word or Google Docs, it's a good idea to use a professional invoicing system. Invoicing software tracks clients, invoice numbers, and your profits. They are more accurate than something you create on your own, and they look more professional than the do-it-yourself approach.
And you don't have to spend a lot of money to create polished invoices. There are a number of free and low-cost bookkeeping programs out there that are designed specifically for freelancers and side hustlers. PocketSuite, Freshbooks, and Wave are excellent and no-cost options that can help streamline your business management.
4. Tax professional
While many people opt to do their own taxes, when you add a side business to the mix, a tax professional can be a huge asset. When you're self-employed or freelancing, even on a part-time basis, you owe self-employment taxes, which can be complex and confusing. You'll receive forms 1099-MISC from any clients that have paid you more than $600 during the tax year. If you receive a 1099-MISC, you have to pay self-employment taxes. Not to mention if you add expenses in the mix, you'll want to make sure you are claiming the proper deductions.
Tax professionals can help you navigate paying estimated quarterly taxes, or calculate how much money you need to withhold from your main job's salary to avoid paying quarterly taxes. They can also identify deductions and credits you may be eligible for, such as a home office or education deduction. These are substantial tax breaks that no self-employed individual should overlook. You want to be sure you're claiming any deductions or credits accurately in order to receive the maximum benefit possible. A tax pro can help you do this.
By working with a professional, you'll have overall peace of mind and avoid any surprises at tax time.
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