When running a side hustle, your profit margin doesn't have much room for error. Because a side hustle is sometimes the first step toward a full-fledged business, people starting out often make a few common financial mistakes. From mixing business and personal expenses to missing out on tax deductions, these missteps can trip you up and hold back your growth.
Rather than learn the hard way, here's a look at five of the potential trouble spots to avoid.
1. Not establishing an emergency fund
If something can go wrong with a side hustle, eventually it will: A client won't pay an invoice, your sales go through a dry spell or you might need time off because of an illness or other personal reasons. Without having extra cash and working capital on hand, these potholes can turn into serious financial obstacles. For example, when I lost a key client during my first year of business, I had to dip into my retirement account and pay a tax penalty.
Having an emergency fund with cash makes dealing with these problems much simpler. Many experts recommend that the typical person have at least three months of living expenses in their emergency fund.
As your side hustle starts to make money, don't forget to reinvest back in the business.
With the monthly income swings and uncertainty of running a business, consider keeping even more in savings. This is particularly important if one day you plan on quitting your regular job and completely relying on your side hustle, because then you won't have a regular paycheck to fall back on.
If you don't have an emergency fund just yet, you might consider using small-business loans as a backup until you build your savings.
2. Not separating personal and business accounts
If you combine all your money in one account, it's hard to tell how your side hustle is performing. Your profit gets blurred with your primary work income and savings. It also puts you in a less serious mindset, like your side hustle is more of a hobby rather than a standalone business.
Instead, consider setting up a business checking account that you only use for your side hustle. That way you can see exactly how much you're earning and whether you're making a profit.
As the owner of a side hustle, you could also qualify for business credit cards with rewards like cash back or rewards. A business credit card can give you flexible borrowing power and makes it easier to track your business expenses for tax season. If you charge everything to your personal card, you might forget what spending was business-related and miss out on possible deductions.
3. Forgetting about taxes
When you work as an employee, your employer automatically takes taxes out of your paycheck, so it's not something you have to think about. But when you get paid for your side hustle, that money is all pre-tax. If you don't pay your estimated taxes to the IRS every quarter, you may find yourself writing the IRS a pretty sizable check come tax season.
I remember the shock of preparing my first tax return for a side hustle. I was expecting a refund, as always, so when the software flashed that I owed money, I almost got sick. It was only a few hundred dollars because I had just started, but still a tough hit for a new business.
4. Missing tax deductions
Business owners enjoy a much wider range of possible tax deductions and they're all available for your side hustle. According to the IRS, you can deduct any expense that's “ordinary and necessary" from your business income. This could include:
- Buying a new computer and office supplies
- Part of your rent/mortgage for a home office
- Your phone and internet bill
- Travel expenses to see clients
- Website costs and any other marketing materials
- Training and education for your side hustle
Anytime you spend on something that might be business-related, take photos of the receipt or make the purchase through your business credit card. When you prepare your taxes, you can provide this information to your accountant or tax software so you don't overlook any possible deductions.
Just don't skip mentioning a possible deduction, because if your tax preparer doesn't know about it, they won't claim it for your tax return.
5. Under-investing for growth
As your side hustle starts to make money, don't forget to reinvest back in the business. Think of how you could increase your sales even more quickly: Upgrade your website? Pay for online ads? Hire an assistant?
For years, I used a homemade, basic website. It was functional but not impressive. I eventually got with the times and hired a professional web designer for $5,000. A month later, I landed my best client ever and earned five times what I spent on the upgrade.
Would they have hired me without a quality website? I'm not sure—and who knows how many clients I missed over the years because I didn't invest in my side hustle.
If you see some ways to turbocharge growth but are short on funds, small-business loans could free up working capital to get things moving. Just a small boost to your monthly income could make the investment worthwhile.
I've made some of these mistakes and so have countless other small-business owners. But that doesn't mean you have to. By following this advice, you'll keep your side hustle in solid financial shape as you get things off the ground.
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