Many people set goals at the start of the year. If you are aiming for the stars, some of your goals could include increasing your income or starting a dream company. Here are some pitfalls to avoid before you dive into the often chaotic world of entrepreneurship and formal employment.
No plan for side hustle income
People get side hustles for different reasons. You could use it to make ends meet, save for a vacation, or grow your business until you are able to quit your job. One reason I started a side business was to catch up on my retirement savings.
You need to have a plan in place to motivate your side hustle. You need to set goals and have a strategy to achieve them.
You could, for example, divert money from your side hustle to retirement savings accounts such as an IRA. You can save more money for retirement by doing this. Depending on how much you earn, you may also be able to reduce your taxable income. Contributions may be tax-deductible.
My side gig income has allowed me to create a plan to increase my 401k contributions at my full time job. I am on track to max that account this year. To put more money aside for retirement, I opened a SEP IRA (a simplified employee pension plan) for 2023. This will allow me to potentially lower my taxable income.
Eric Nisall is an accountant from Coral Springs, Florida. He suggests that you have a “failure plan” if you want to transition into full-time entrepreneurship. This is something Eric Nisall developed as a way to help him start his journey into full-time employment and starting a business.
“When I was at my two previous CPA firms, my main focus was on building my business. He says that I realized I needed to put money aside if this was to be possible.
Nisall deposited money he had saved from coupons, as well as any extra dollars he earned from overtime or a raise, into this fund.
Not being conscious of tax implications
Many people believe that having a side business means they can make more money and not report it. Atiya Brown is a certified public accountant in Dallas.
She says, “I believe that everyone needs to understand that all their income will be taxed.” They need to organize their side hustle so they don’t miss any income. Otherwise, the penalties and interest will pile up.
According to the IRS, anyone earning $400 or more through self-employment must file tax returns.
When I started, I wasn’t organized and I didn’t have a plan to pay taxes. I was shocked to discover that I owed $15,000 to the IRS in penalties and taxes. I was assuming that I would have to save money and pay all my taxes in one lump sum. I now know that there are many ways to pay self employment taxes.
Brown says, “Because government is an earn-and-pay system, you have the freedom to choose.”
She explains that these options include estimated quarterly tax payments or changing your W-4 withholdings to cover your self-employed taxes.
Brown also stated that underpaying taxes can result in penalties from the IRS. You can use the IRS Withholding Calculator to calculate how much to withhold for your side hustle taxes to avoid this. You might need to fill out several tax forms depending on how much you earned freelance. Talk to a tax professional if you’re not sure which option is best.
Put your main source income at risk
You can choose to work part-time while working a 9-to-5 job or a side gig. You want to ensure that your side hustle is both financially and physically rewarding. I can remember working too many freelance jobs and then having to work weekends and evenings. When I finally calculated my hourly earnings, I realized that I was not being paid enough. I did some market research and decided to only accept higher-paying jobs. This allowed me to work less side jobs and earn more.
Nisall says that overworking can also be detrimental to your health. This can lead to a loss of your primary source of income.
He says, “You have to make sure you are eating, sleeping, taking good care of your body, and your mind.” Your mental and physical health will play a major role in this entire thing, especially if your 9-to-5 is not balanced with growing a business span>
If you don’t want to risk your job, ask your employer about its policies regarding side gigs. I was open about any side gigs that I had when I started at my current job. My employer gave me guidelines about the types of side work that I could do while not violating company policy. If I didn’t know about the policies, I could have missed them and lost the income that pays my bills.
This article was written and published originally by The Associated Press by NerdWallet.