When side-hustle money hits your bank account, especially if it doesn’t happen regularly, it’s easy to let it slip through your fingers. To make the most of it, make sure you have a plan for your side-hustle income, including how you’re going to pay taxes on it, pay for growing your side business and pay for the time you spend working on it, too.
Because let’s be serious, if you’re not making any money for yourself, why are you spending 20 hours a week on your side hustle outside of your full time job?
But it’s only $100…
When your side-hustle money comes in bits and pieces, not big chunks like your day-job paycheck, it’s easy to think that you don’t need to manage it.
“Oh, I’ll just use that to cover dinner tomorrow,” or “I guess that takes care of those new running shoes” does not an effective side-hustle money plan make.
For every amount that comes in, you should be able to quickly figure out how much you need to save for taxes (because you totally pay taxes on your side hustle income, right?!), how much you want to reinvest in your business and how much you want to pay yourself.
Because yes, the entire amount isn’t necessarily going to go toward padding your running-shoe fund.
Build a tax plan for your side hustle
To figure out how much you need to save for taxes on your side-hustle income, you’ll need to figure out your marginal tax rate. That’s the amount of tax you pay on an additional dollar of income — and if you’re near the top of a particular tax bracket, beware: your side hustle could trigger even more taxes if you earn out of your tax bracket.
Luckily, you don’t need to get the IRS involved just yet. You can use an online calculator like this one to figure out your federal and state marginal tax rates. That percentage is what you should be aiming to set aside out of every side-hustle payment that comes through your bank account.
Yes, even if it’s $20. If your marginal tax rate is 35 percent, then you need to sock away $7 from that $20 to cover taxes.
As a bonus, this will help you get clear on the economics of your side hustle — and realize how much you really need to make to ensure you’re getting the take-home income you want out of your side gig.
Figure out how much you want to re-invest
The best side hustles, and the most profitable ones, are the ones you treat like a business.
Businesses tend to invest back into themselves if they want to grow, so if you’re looking for more clients, better star ratings or just bigger projects for your side hustle, you should consider setting aside a portion of your earnings to reinvest in the biz.
Once you’ve set aside this money, you’ll have a pool of funds to do things such as update your Etsy listings, get professional headshots taken, buy bottled water to keep in your car for Uber rides or just about anything else you can think of to up-level your side hustle.
How much are you taking for yourself?
While you’re busy paying Uncle Sam and putting money back into your business, don’t forget to take care of your #1 employee: yourself.
We’ve come full circle right back to that running-shoe fund, or that dinner you want to pay for using your side-hustle cash. You should allocate a set percentage of every side-hustle payment to paying yourself — and then use that money for anything you want.
Maybe you want to save up for a big vacation, or you want to use it to tackle your student loans, or maybe you just want to go to the bougie gym down the street. Whatever it is, if it comes out of your side hustle “salary,” go for it. You’ve earned it.
Leftover money isn’t a bad thing
If you’ve built a plan that handles your marginal tax rate, investing back into your business and paying yourself, and those percentages don’t add up to 100 percent, that’s OK. If anything, having a bit of leftover money in your plan is arguably a good thing.
When that’s the case, the best thing you can do is to keep the extra little bit of money in the account you use for investing in your business. If a good opportunity comes up, or you need a bit more to pay yourself one month, it’ll be there patiently waiting for you.
Trust me, you won’t be mad about it.
Have something to add to this story? Comment below or join the discussion on Facebook.
Header image: Adobe Stock