Whether you want your side gigs to replace your day job or simply provide some extra cash, treating them like businesses can keep your finances better organized and help you work smarter.
“You can’t improve anything that you don’t track,” says Tiffany Grant, an accredited financial counselor and educator on her platform Money Talk With Tiff.
For example, Grant has driven for ride-sharing companies to earn extra income and help pay off debt. In hindsight, she wishes she would have tracked expenses, like gas and car repairs, in addition to revenue. That way, she could have better understood her profit — or how much actually ended up in her pocket.
“It’s important to keep track of that information so you can know, OK, is this really working?” Grant says.
Here are five steps you can take to approach your side hustle more like a business.
1. IDENTIFY YOUR GOAL
Entrepreneurs start with a business plan. Solopreneurs can do the same.
Think about whether you’re working toward a specific financial goal — like paying off debt or saving for a down payment — or want to increase your income on an ongoing basis.
“What is the exit strategy?” says Heath Carelock, an AFC, program director at the Financial Empowerment Center at Prince George’s Community College in Maryland and founder of Carelosophy Social Impact Solutions LLC. “Is this something you’re getting into because you want to get out of it? Is this something you’re getting into because you want to hang in there with it for years?” he recommends asking yourself.
If your side gig is meant to fund a goal, try to keep those earnings separate until you reach it.
If it’s meant to supplement your income, try to put yourself on a weekly or biweekly payment schedule instead of paying yourself right away, says Emanuel Rivero, senior director of counseling at the financial counseling nonprofit Money Management International.
“Stay disciplined so those dollars go where they were originally intended,” he says.
2. SEPARATE YOUR BUSINESS INCOME
Send your business income to a bank account separate from the one you use for your day-to-day personal expenses like groceries and bills. That will make it easier to track your revenue and expenses, plan for tax season and save for your goals.
Rivero opened an account for his side business at a different bank “to make sure that there was a little bit of friction” between his business and personal finances.
“If I would have opened that bank account at my same bank, it’s an easy transfer,” Rivero says. But keeping the funds elsewhere can help you resist the urge to spend dollars as soon as you make them.
Many side hustlers can open a bank account for their business in a matter of minutes online. Use that account to collect your revenue and pay your business expenses — plus build up savings in case you need to make a sudden purchase or repair.
“I always recommend people have extra savings for resource-intensive gigs,” Grant says.
3. WATCH YOUR REVENUE AND EXPENSES OVER TIME
Once your business income is all in one place, it’s easier to see how much you’re earning, how much you need to spend to keep operating and how much you’re actually taking home as income.
You can use that information to figure out how much work it will take to reach the goals you’ve identified.
Tracking your revenue will help you notice seasonal fluctuations and plan for the leaner months, too.
“Anticipating income variability is another very important item,” Carelock says.
4. PLAN FOR TAXES
When paying yourself, be careful not to empty your business bank account — because you’ll need to set some money aside for self-employment taxes.
Self-employed workers should make estimated tax payments if they expect a tax bill of more than $1,000, the IRS says. There are quarterly due dates, but you can pay more frequently if it feels easier to manage.
“Every situation is different, but I think the easiest way to get the money out of your hands and into the hands of the IRS is to look at things quarterly,” Rivero says.
Like saving for your goals, making tax payments may go more smoothly if you save up for them in your business account instead of depositing all your earnings into a personal account.
“Whenever possible, you want to be disciplined enough to not have those funds in your hands,” Rivero says.
5. FORMALIZE AS NEEDED
If you earn self-employment income but haven’t set up a separate business entity, you’re considered a sole proprietorship. For many side hustlers, that’s enough.
But setting up a legal entity, like a limited liability company (LLC), may become necessary as your business grows. The personal assets of LLC owners are generally protected in case of lawsuits and debts, unlike those of sole proprietors. LLCs may be taxed differently, too.
“If it’s something short-term, quick money, you might not need to go through that process,” Grant says. “But if it’s something that you think you’re going to do long term and make a significant amount, then I would separate it into its own business for sure.”
This article was provided to The Associated Press by the personal finance website NerdWallet. Rosalie Murphy is a writer at NerdWallet. Email: rmurphy@nerdwallet.com
RELATED LINKS:
NerdWallet: How to Write a Business Plan, Step by Step https://bit.ly/nerdwallet-write-business-plan
NerdWallet: How to Open a Business Bank Account https://bit.ly/nerdwallet-business-bank-account
NerdWallet: Estimated Tax Payments 2024: How They Work, When to Pay https://bit.ly/nerdwallet-estimated-tax-payments
NerdWallet: What Is an LLC? Pros and Cons of a Limited Liability Company https://bit.ly/nerdwallet-limited-liability-company
