When you have a specific financial goal toward which you’re working, bringing in some extra money certainly doesn’t hurt. Taking on a side hustle is one way to increase your cash flow.

You’ll have plenty of company. An estimated 44 million Americans have a side gig in addition to their regular job, according to a Bankrate survey. In terms of how much they’re earning, 19 percent of Millennials aged 18 to 36 earn $500 or more per month from a side job. Younger Baby Boomers, aged 53 to 62, are most likely to bring in an extra $1,000 a month.

That’s a decent amount of spare change, especially if you’re hoping to shore up your retirement accounts. According to the Economic Policy Institute, the mean retirement savings for working-age families is $95,776—a long way from the $738,400 that Merrill Lynch estimates the average retiree needs. If you’re thinking of using a side hustle to notch up your retirement savings, here are some rules for doing it right.

Have a Plan for Saving

Whether you’re making $500 or $5,000 a month from a side hustle, the first thing you have to decide is where to put it. If you’re already saving in your retirement plan at work, an individual retirement account (IRA) is a good way to grow your nest egg even more. But should you choose a Traditional or Roth IRA?

The main advantage of a Traditional IRA is potentially being able to deduct your contributions each year. As of 2017 you could save $5,500 in an IRA ($6,500, if you’re age 50 or older). If your side hustle is generating a significant amount of income, being able to claim a deduction for your IRA contributions could help lower your tax bill.

That will, however, make you responsible for paying taxes on Traditional IRA withdrawals once you retire. Of course, if you don’t plan to continue your side hustle for the long term and expect to be in a lower tax bracket at retirement, IRA distributions may not affect you too much in terms of taxes. Just remember that at age 70½ you’re required to begin taking minimum distributions from your account each year.

A Roth IRA doesn’t give you the benefit of deductible contributions. The difference, however, is that qualified withdrawals are 100 percent tax free. If your side hustle takes off, and you want to stick with it in retirement, your Roth IRA distributions wouldn’t add to your tax bill. You’d have to think about what your ultimate goal is for your side hustle to decide whether a Traditional or Roth IRA makes more sense.

Maxed Out Your IRA? Consider a Brokerage Account

If you’re able to hit the annual contribution limit for an IRA and still have side-hustle income to save, a taxable investment account may be the next best option. With these accounts you can invest in stocks, mutual funds, bonds and other securities for your later years. The main difference between these accounts and an IRA or employer’s retirement plan is how they’re treated for tax purposes.

With a Traditional IRA, for instance, you have the benefit of both a tax deduction on your contribution (in most cases) and tax-deferred growth. With a brokerage account you’re responsible for paying taxes on your earnings when you sell an investment. If you’re thinking of adding to a brokerage account, aim to hold your investments for at least a year or longer. That way if you sell an investment for a profit, you’d pay the long-term capital gains rate, which is more favorable than the short-term rate.

Don’t Forget About Taxes

Side-hustle income is still income, and it’s taxable in the eyes of Uncle Sam. If you’re working as an independent contractor or a freelancer or doing any other kind of side work, you’re responsible for making sure you’re paying the appropriate amount of taxes on what you’re making. Specifically, that means paying self-employment tax, which covers both Social Security and Medicare taxes.

For 2017 you’re required to pay self-employment tax and file Schedule ES with your Form 1040 if you have $400 or more in self-employment earnings. You use Schedule C to figure your net earnings from self-employment. Currently, the Social Security portion of self-employment tax is 12.4 percent on up to $127,200 of self-employment income, and the Medicare tax is 2.9 percent.

There is one other thing you need to know: Unless you’re withholding enough in taxes from your regular job to cover your entire tax liability for the year, you may have to make estimated quarterly tax payments to cover what’s owed in taxes on side-hustle income.

Failing to make estimated tax payments if you owe them could trigger a tax penalty. If you’re trying to get ahead with retirement, the last thing you want to do is sacrifice any of your savings to tax penalties, so it pays to know if and when estimated taxes are due.



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