Side Hustle Taxes Part II: How to Track Income & Expenses and Audit-Proof Your Deductions
So you have a side hustle and you're probably confused about how to pay taxes on your side hustle income.
Am I right?
Navigating the tax landscape with a side hustle can be confusing, but you've come to the right place! This is a three-part series aimed at simplifying the tax puzzle for your side hustle and this one is number two of three.
In this blog post, I'll guide you through the nuts and bolts of tracking income and expenses for your side hustle. But that's not all! I'll also give you essential tips to audit-proof your deductions, giving you peace of mind come tax season.
By the way for those of you who don't know me, my name is Noel Lorenzana. I'm a CPA with over 25 years of experience. I'm here to help folks with side hustles like you demystify taxes and get a handle on their finances. I also believe that you should pay no more in taxes than you legally owe and that you don't need to be afraid of taxes or the IRS.
Read on as I'll be sharing some essential insights with you answering questions about your side hustle taxes that you can't easily find anywhere else.
Let's get to it.
How to Best Track Income and Expenses for a Side Hustle?
For those active in the world of side hustles, one of the keys to success is efficiently tracking your income and expenses.
And guess what?
You don't need any fancy software tools to do this. A simple spreadsheet is your best friend here. Let me break it down for you.
- Set Up Columns. Using software like Google Sheets or even a notebook, what you want to do is set up columns. Start by setting up columns for the date, description, income, expenses, and any notes you might want to add.
- Make Regular Entries. Every time you earn or spend money for your side hustle, jot it down on your spreadsheet. Whether it's a sale you made or a supply you bought, record it.
- Categorize Expenses. As your side hustle grows, you'll find that categorizing your expenses can be beneficial. Maybe it's marketing, supplies, or travel. This way, you can quickly see where your money is going.
- Monthly Overview. At the end of the month, total all of your income and expenses. This will give you a clear picture of your profitability and where you might need to make adjustments.
Regarding backup and access, one of the advantages of a spreadsheet, especially if you use a platform like Google Sheets, is that you can access it from anywhere and it's always backed up online.
And that's it.
Keeping things straightforward with a basic spreadsheet, you can ensure you're on top of your finances, allowing you to focus on growing your side hustle.
The best part is that you can have my Free Google Spreadsheet to track your side hustle's income and expenses.
How to Audit-Proof Tax Deductions?
One of the questions I get from individuals with side hustles or businesses is, "How do I make sure my deductions are audit-proof?"
It's a valid concern, especially when you're trying to maximize your deductions and minimize your tax liabilities. Let's dive into some key steps:
- Detailed Record-Keeping. This cannot be stressed enough. Keep every receipt, invoice, and any other documentation related to your expenses. A well-organized filing system, whether digital or physical, will make it easier for you to locate those records later on. Additionally, if the IRS ever does question a deduction, having this paper trail can be the difference between successfully defending your claim and facing penalties.
- Separate Business and Personal. If you haven't already done so, get a separate bank account for your side hustle. This way, there's a clear distinction between personal and business transactions. This makes your records cleaner and easier to defend if it's ever questioned.
- Stay Educated. Tax laws and regulations are always changing. It's important to stay updated on what's deductible and what's not. That's where I come in. As a CPA and Content Creator, I regularly post updates and insights to help you navigate these changes. So if you want to make taxes less taxing, consider subscribing to my YouTube channel.
- Digital Backups. In today's age, it's always a good idea to have digital copies of everything, scan or take photos of physical receipts and store them in a dedicated folder. Cloud storage solutions like Google Drive or Dropbox can be a great option.
- Consult a Professional. Even if you're a DIY type, it's wise to have a professional like a CPA review your deductions at least once. They can offer guidance, point out potential red flags, and suggest additional deductions you might have missed.
- Be Honest and Reasonable. The Golden Rule only claim legitimate business expenses. If you're ever unsure about a particular deduction, air on the side of caution or consult with a professional.
Remember, the goal isn't to fear audits, but to be so well prepared that if one occurs, you can confidently showcase your meticulous records and valid deductions. Keeping things organized and above board will not only give you peace of mind but also make tax season a breeze.
Did I deliver on my promise? I really hope I did.
By the way, if you haven't checked out part one, where we discuss reporting income and understanding deductible business costs, be sure to do so. And stay tuned for part three, where we'll round out your side hustle tax education! I'll link that up at the end of this blog post.
Free Google Spreadsheet to Track Side Hustle's Income and Expenses
As my way of saying thank you for taking the time to read this blog post, I have a special gift for you. It's my free Google spreadsheet to track your side hustle's income and expenses. Just click here and save a copy for yourself. Go grab that while you're thinking about it. Thank you so much and see you again soon!
