At the beginning of the year, many people have goals in mind. Some of these goals can be increasing your income, starting a dream business, or both if you are aiming for the stars. Before you get your hands dirty in the sometimes messy combination of formal employment and entrepreneurship, here are a few pitfalls to avoid.
NOT HAVING A PLAN FOR YOUR SIDE INCOME
People get side jobs for a variety of reasons. It could be helping to make ends meet, saving for a dream vacation, or growing your business to the point where you can quit your job. Catching up on my retirement savings is one of the reasons why I decided to do a part-time job.
But you need a plan for that motivation to make your side gig worthwhile. Think about having goals for your income and a strategy to help you achieve those goals.
For example, you could divert funds from your side business to retirement savings accounts like an IRA. This allows you to save more for retirement, and you could reduce your taxable income depending on how much you earn, since contributions may be tax-deductible.
The plan I’ve come up with, thanks to my extra income, is to increase my 401(k) at my full-time job, so I’m on track to max out that account this year. I also opened a SEP IRA for 2023, a simplified employee retirement plan, to set aside more money for retirement and potentially reduce my taxable income.
Eric Nisall, an accountant in Coral Springs, Fla., suggests setting up what he calls a “failure fund” if your goal is to eventually transition into full-time entrepreneurship. It’s something he developed as he began the journey of working full-time and building a business.
“While I was working at my last two CPA firms, I was simultaneously working to build my own business. I (will not) suffer,” he says.
Nisall put money he earned through coupons and extra money he earned through a raise or overtime into this fund.
FILE – This file photo, dated February 13, 2019, shows a portion of a 1040 federal tax form printed from the Internal Revenue Service’s website in Zelienople, Pennsylvania. It’s the first quarter of the year and many people might be interested in starting side hustles or to finally achieve their entrepreneurial dream. Whatever the motivation, it’s important to understand the implications of starting a part-time job while working a 9-to-5 job. This includes understanding how to plan for taxes, budgeting for your side income, and deciding how to put your money to work for you. (AP Photo/Keith Srakocic, file)
Keith Srakocic NOT AWARE OF TAX IMPLICATIONS
Often people think they can make extra money with a part-time job without reporting it, says Atiya Brown, a certified public accountant and certified financial education instructor in Dallas.
“I think people need to realize that all their income is taxed,” she says. “So when they start a side business, they have to get organized so they don’t miss out on income that needs to be reported because then the interest and penalties pile up.”
The IRS says anyone making $400 or more from self-employment must file a tax return.
When I started, I wasn’t organized and didn’t have a solid tax-paying plan. When I realized I owed the IRS nearly $15,000 in taxes and penalties, I held on to my beads. I thought I would have to save and pay my taxes in one big lump sum. Well, I know there are several ways to pay taxes for the self-employed.
“Because government is an earn-and-pay system, you get to vote,” says Braun.
These options include estimated quarterly tax payments, changing your W-4 withholdings to cover your self-employment taxes, or paying a lump sum, she explains.
Brown adds that the IRS imposes penalties for underpaying your taxes. To avoid this, you can use the IRS withholding calculator to see how much you should withhold to cover your ancillary taxes. Depending on how much money you’ve made as a freelancer, you may need to fill out several new tax forms. So if you’re not sure what the best option is, you should speak to a tax professional.
PUT YOUR MAIN SOURCE OF INCOME AT DANGER
Having a 9-to-5 job and a part-time job means you choose to work in your free time. For this reason, you want to make sure that your part-time job is worthwhile financially and in terms of your health. I remember doing too much freelance work and having to work evenings and weekends. As I sat down to calculate my hourly wage, I realized I was underpaid. I went back and researched market interest rates and just wanted to say yes to higher paying jobs. As a result, I didn’t have to do as many side jobs and was able to make more money than before.
Overwork can also affect your health, which can put your main source of income at risk, says Nisall.
“You have to make sure you’re eating, sleeping, taking care of your body and your mind,” he says. “Your mental and physical health is going to play a big part in this whole thing, especially as you try to balance your 9-to-5 and growing a business.”
Speaking of jeopardizing your main job, consider asking your employer what their policies are regarding side jobs. When I came to my current job, I was transparent about my part-time jobs. My employer shared rules regarding the type of outside work I could do without violating company policy. If I hadn’t known the guidelines, I could have mistakenly violated them and risked the income that pays my bills.
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