Many people are taking on second jobs and side gigs to earn extra cash, especially around the holidays. However, it’s important to keep track of your earnings and expenses, whether you are doing it part-time or have turned it into a full-time career. If you don’t know where to start, don’t worry; there are simple solutions that can help. Here are 3 efficient ways to keep track of your side gig income and prepare for tax season.
Why Do You Need to Track Your Side Gig Income?
No matter where you live or the source of your income, American taxpayers are required to report all their earned income, unless it is explicitly exempt under the U.S. tax code.
Unfortunately, it becomes harder to track your income in a gig economy since many people get paid in cash. But, if you don’t keep track of your side gig income, you will never have an accurate picture of your financial situation. And, you need to avoid this type of uncertainty when you have variable income.
It’s important to know where you stand so you can make better, more-informed financial decisions. When you record your profits, you have a tangible metric to measure your success over time. It is also easier to see profit margins, calculate losses, and report taxed earnings when you have meticulous bookkeeping. And, all this information will help you determine whether the effort is worth the profit in the long run.
Most importantly, monitoring your expenses will save you a ton of time when preparing your taxes. When you work a side gig, no one deducts your state or federal taxes from your pay; the responsibility falls on you. If you don’t make payments to the IRS, your bill will come due when you file your return. So, tracking your income allows you to know how much to deduct to mitigate your tax liability come April 15th.
3 Ways to Keep Track of Your Side Gig Income
You don’t need an accounting degree to efficiently track your income. There are tried-and-true methods to balance your books for free as well as software that can automate all your recordkeeping. Here are 3 efficient ways to keep track of your side gig income.
1. Free Options
When I started my own business, I looked for ways to save money anywhere I could. Since I’m fairly good with numbers, I decided to do my own bookkeeping. Although some people still prefer a paper ledger of their transactions, I thought it would be better to create a spreadsheet to track my expenses and income.
You can quickly set up an Excel or Google spreadsheet to help you track all your income, expenses, and deductions. While it may be lower tech than some of the other options, it is free. A spreadsheet was the perfect solution for my small businesses since I had little overhead costs and few expenses.
But, a spreadsheet is more labor-intensive than accounting software. You will have to manually enter data. But then you can use formulas to calculate your totals and get a snapshot of your finances. If you become more adept with the program, you can even create cash flow statements and visual graphics of your earnings.
2. Personal Finance Software
When my finances became more complicated, I decided to invest in the Quicken personal finance software. It was so simple to use and took the time and effort out of accounting.
When you link the software to your accounts, it will automatically pull information from your bank, credit cards, and loans. Then, it categorizes your purchases to help you sort through expenses. This saved me hours of looking through receipts and financial statements.
The software also offers additional features, such as budgeting, invoicing, and cash flow tools. These were valuable resources, especially for someone just starting out on their own. However, there are also free apps you can download that can help you as well.
3. Accounting Software
If your side gig has turned into a full-time job, then it deserves the time and attention a new business requires. As your income increases and your finances become more complicated, your recordkeeping will be even more important.
Therefore, business accounting software is an excellent long-term investment for your venture and your finances. When you purchase this software, you no longer have to spend time on time-consuming accounting tasks. Instead, you can focus on other things that will have a higher impact on profits.
Business accounting software will streamline your accounting, assess your finances, and forecast for the future. Not to mention, it will save you hours in tax preparation. Although there are several options for business accounting software, the most popular choices are QuickBooks and Xero. While there may be cheaper options, the convenience is well worth the expense.
Considerations for Multiple Side Gigs
You may not think it’s difficult to track income from your second job. But, if you have multiple side gigs or sources of income, it gets complicated. So, I maintain separate spreadsheets/books for each one. I also separate all the expenses for each one and have dedicated accounts for both my business and personal finances. Getting a business credit card can help you track, separate, and categorize your expenses as well.
When you are working multiple side jobs, you have to stay on top of your accounting and update your spreadsheets every few weeks. It makes it easier to compare profits from month to month and saves you time when tax season is here. And if you automate as much of your accounting as possible, it will save you valuable time that you can put toward more profitable tasks.
Tracking your expenses will make life simpler. Plus, it may encourage you to go after more business when you see your profits growing. However, it’s also an effective way to make sure that your expenses aren’t undercutting your profits and that the extra money is actually worth the effort.
It may be stressful to think about money management, but it’s much worse to receive a huge tax bill from the IRS. Rember that your accounting system doesn’t have to be perfect, it just has to work for you.