Millions of people make extra money apart from their regular jobs by working as a freelancer, a driver, a delivery person, or a waiter. This additional income surely helps them to manage their expenses but can also be the reason for tax traps. Side hustles are normally included as self-employment, which has separate rules, extra tax forms, and of course lot of confusion for people who have to file as employees.
Also, there are several advantages that side gigs get, such as the ability to deduce legal valid business expenses and methods to save for retirement. Unfortunately, side hustlers are not aware of it, due to which they miss out on these opportunities. However, by seeking the CPA firms for taxes and accounting services in NY, they can get help with these opportunities and also with the mistakes like these:
1 . NOT KEEPING PROPER RECORDS
The self-employed ones can reduce business expenses, including advertising, internet, supplies, mileage, and other services that they use for their businesses. However, these deductions should be recorded for situations like an audit.
One can even open a different checking account for their side income and expenses and another good idea can be having a credit card. However, instead of relying on the credit card statements, it is better to have an extra copy of paper receipts. There is no denying that approaching a CPA firm is the best thing to do.
2 . NOT PAYING TAXES AS THE MONEY IS EARN
Usually, employees have taxes retained from their paychecks all around the year. However, the same thing does not happen with side gig income. If one waits until it is the time to file taxes, it can initiate big tax bills and penalties too.
The IRS wants people to pay as and when they earn money, which they can do with estimated quarterly payments. Penalties can be avoided if at least 90% of the tax bills of the current year of 100% of the tax amount of the previous year are paid by withholding and estimated payments.
3 . OVERLOOKING RETIREMENT SAVINGS OPTION
Keeping aside some amount from the side income for retirement is not only a saving done for the future, but it also helps to reduce the tax bills. Two options that side hustlers can pick are (i) SEP IRA simplified employee pension individual retirement account and (ii) Solo 401 (k).
A (SEP IRA) is easy to set up, and it permits people to keep aside up to 25% of their net self-employment income to $57,000 maximum. A solo 401(k) gives the same $57,000 cap, but it permits to keep nearly 100% of the net self-employment income. There is a lot of paperwork in Solo 401(k), and also the limit of contribution is per person.
Additional income and taxes and are intricate and one can face several issues related to filing taxes and availing right deductions. Hence, the best thing that can be done is to plan it with professionals such as CPA firms who provide expert advices along with taxes and accounting services in NY. This not only helps to avoid any penalties, but their team of experts also tells about the appropriate deductions and simplified manner to do it.