3 Common Mistakes Side Hustlers Make (and How to Avoid Them)

3 Common Mistakes Side Hustlers Make (and How to Avoid Them) 3 Common Mistakes Side Hustlers Make (And How to Avoid Them) 3 Common Mistakes Side Hustlers Make (And How to Avoid Them)You work hard for your money. Avoid these oversights to make sure your side gig or freelance job is working for you and not the other way around.When cash is tight, people often turn to side gigs and freelancing or contract work. And while this work is flexible and may help pad your bank account, it also comes with a set of rules and requirements than many people â€" especially those who are used to working as a true full- or part-time employee â€" simply don’t know. These pitfalls can actually end up costing you money. Here are some common mistakes to avoid when taking on a side hustle.Mistake No. 1: Not paying quarterly taxesBeverly Miller, a Pittsburgh-based personal finance coach, says one of the most common mistakes side hustlers make is not setting aside money â€" or not setting aside enough money â€" to pay taxes. Side hustlers often don’t realize they have to pay self-employment taxes, essentially 15%” of your income, she says, which covers Social Security and Medicare obligations. When you are an employee, your employer withholds this part of your paycheck for taxes, but when you are side hustling, you are the employer.Keep in mind this is an additional tax on top of your income tax. “Between federal, state, and local income taxes, plus the self-employment tax,” says Miller, “that can eat up 25% to 30%” of your earnings.Setting the money aside â€" the full 30% of earnings â€" is important because most people are used to having their taxes taken out of their paycheck and sent to the tax authorities by their employer. When you side hustle, that responsibility falls on you. That means you can’t spend your entire paycheck once you get it, or you could end up thousands of dollars in the hole when Uncle Sam comes knocking.You also can’t wait to shore up at the end of the year as your would if you were someone’s employee. You have to pay quarterly via the estimated quarterly tax p ayments, Miller says. That means you have to pay four different times throughout the year. (See the Freelancers Union 2019 guidelines for the payment schedule and other tips.)According to the IRS website, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” Yes, that includes side hustlers and freelancers. If you don’t pay estimated taxes, don’t pay enough taxes, or if you pay them late, you may be subject to fines, penalties, and interest, which can add up quick. “I’ve seen plenty of folks in debt on their taxes due to these mistakes,” Miller says.In general, in order to avoid fines, you must pay at least 90% of your owed taxes for the current year through quarterly payments, or 100% of your obligation from last year, whichever one is smaller.In order to avoid tax surprises or penalties, you may want to consider hiring a tax professional to help you. They will make sure you are following the rules and paying exactly what you owe â€" and not more â€" on time. They frequently “pay for themselves” when you consider how much they help you save.Mistake No. 2: Not staying organizedSteven Byrd, a financial coach at Hearthstone Financial Coaching, has plenty of experience helping side hustlers with their finances. In addition to coaching, he has also worked as a 2018 IRS-certified volunteer income tax preparer, running a Volunteer Income Tax Assistance) tax site for a nonprofit called Impact America, which had many clients that did contract work on the side.“The absolute biggest way I have seen people lose money on side hustles is a lack of organization,” Byrd says. The first step he recommends for anyone who runs their own business or side gig?   Opening a separate bank account for their business. “Its pretty easy to open a business bank account as a side hustler now,” he says.A business accou nt that is separate from your personal account helps you easily keep track of money coming in and money coming out of your business. When you combine your personal and business expenses in one account, finances can often get blurry and complicated, which can become a mess when it comes time to pay your taxes. Housing all of your income in one bank account also makes it easier to spend money you should be reserving for your business, which can lead to financial problems.A crucial component of your side hustle to track? Your business expenses, which can reduce your tax burden at the end of the year. “Businesses need to track absolutely everything, and Ive seen a lot of people leave money on the table at tax time because they didnt have receipts to actually deduct their expenses,”Byrd says.Mistake No. 3: Not accounting for the cost of doing businessMike Scott, senior mortgage and loan originator at Independent Bank, reviews tax returns on a daily basis and has seen the mistakes sid e hustlers make first hand. “Probably the single biggest mistake I see is that people focus on the immediate cost and benefit, rather than taking into account the long-term costs,” he says.He uses ride-share drivers as an example. “They look at it and say that they have made $160 in 8 hours of driving, and that all it cost them was a tank of gas, since they have a vehicle that gets 40 mpg, for example,” Scott says. “What they do not take into account is that they drove 300 miles in that 8 hours to make the $160.” Those 300 miles means the car requires more maintenance, such as replacing oil, filters, windshield wipers, tires, and more. This also doesn’t account for the depreciation of the vehicle due to regular wear and tear.According to Scott, an average low-end estimate for the cost to operate a vehicle is about 40 cents a mile. This accounts for the types of maintenance costs listed above as well as long-term costs, such as replacing an engine, and some of the vehic le depreciation costs.“The driver that made $160 but put 300 miles on their car typically only subtracts the cost of gas, or about $20,” to find their profit, Scott says. “In their minds, they made $140 for 8 hours of side hustle.”However, this is far from the truth. “The reality is that it cost them about $120 to drive that 300 miles, so they made $40 for 8 hours of work. That ends up being less than minimum wage.”This is just one example. Depending on the industry in which you work, you may be required to obtain specific licenses or certifications, follow certain zoning laws, or carry specific types of business insurance. Following these laws and regulations costs a certain amount of money, and failing to follow them can end up costing you money in fines, penalties, or legal ramifications. For more information on this topic, visit the Small Business Administration website.When side hustlers run into debtNot paying taxes, disorganization, and ignoring the cost of doing business can have dire effects on your pocketbook when the whole point of the side hustle was making extra cash.People who have trouble paying monthly expenses are more prone to looking for short-term solutions, such as running up credit card debt or seeking out risky short-term loans, such as no credit check loans, bad credit loans, or other types of personal loans. These products can often do more harm than good, leading people into a cycle of debt they can’t escape.For side hustlers or gig workers who could use some extra tips, check out this article from OppLoans: “6 Financial Bummers of Going Freelance â€" And How to Make Them Not Suck.”