For more and more Aussies just having a day job isn’t enough and having a side-hustle business is becoming main stream. The decision to go after a side-hustle varies greatly but the most common reasons are to put a bit of extra money in the hip pocket, to pursue a passion or to open the door for a corporate exit.
Regardless of the motivation, this strategy can help alleviate the pressures of the cost of living or help you to explore your passion on a deeper level, when it is managed properly.
For the unaware, tax can be the biggest threat to the livelihood of the side-hustle entrepreneur if it is left unattended. So, here are the key factors to watch out for and how to handle them in to your day to day.
A quick note on structures
When people start a side-hustle, they are typically starting small and looking to see where it goes. The most common business type for these entrepreneurs is as a Sole Trader, so that structure will be the focus of this article.
Your tax is paid separately
While you are working as an employee, it is your employer’s responsibility to deduct tax (PAYGW) from your income and pay it to the ATO. They look after the nitty gritty so you don’t have to.
For your side-hustle, paying tax and reporting for your tax are your responsibility. At a basic level, you will need to report your side-hustle income and claim your business expenses. It is always a good idea to use a separate bank account to make your income reporting easier and investigate using a free app like Solo & Smart to keep track of your expenses.
How much tax will I need to pay?
The amount of tax you need to pay is dependent on your total income and determined by the ATO tax tables.
Your employer will be putting aside the relevant tax on your behalf for your day job. So, you need to work out how much extra you will be earning from your side-hustle and make sure you put aside some savings.
Your extra income may put you into a higher tax bracket, so make sure you add your side-hustle income to your regular income to work out what tax to pay. Make sure you see an accountant or financial advisor to take in your full financial position and give you the right advice.
When do I need to pay tax?
Typically, your side-hustle income won’t be addressed until you submit your first tax return at the end of the financial year. Once your first return has been submitted, the ATO will calculate how much your estimated tax will be for the next financial year and charge you quarterly instalments (PAYGI).
Where does the money for my tax come from?
The additional income a side-hustle can bring in is fantastic, but you need to remember that all of this income includes a component of tax and someday soon that tax will be due.
Earlier we said that tax was one of the biggest threats to side-hustle small businesses when it’s left unattended and we meant it. Each financial year tens of billions of dollars are owed to the tax office and micro business owners owe the most.
Without a doubt, the best strategy for managing your tax when you are an employee with a side-hustle is to put the extra tax aside as you go. Keep it in a separate savings account, where it is out of sight and out of mind. The Solo & Smart app can automate this process by putting aside your set percentage from every payment your side-hustle receives. Consistency is key here and it is important to make sure the money is there when the tax bill comes.