According to this article I found on the internet, more than 44 million Americans have a side hustle. It seems like having a side hustle is becoming as popular as having student loan debt. I thought about it and did a quick Google search, and according to this article more than 44 million Americans have student loan debt, as well. Is it a coincidence, or are more and more Americans resorting to side hustles to pay off their student loan debt?
Regardless, having a side hustle is becoming a popular trend that can make you quick cash in your spare time. However, there are some things you should consider before starting your side hustle. Take it from a CPA – you don’t want to make these classic side hustle mistakes.
1) Should I Incorporate?
The age-old debate – to incorporate or not to incorporate, that is the question. But this really depends on the extent of your side hustle and what your intentions are for your business. If you are just doing some freelance work with little to no liability, then incorporating might be a waste of time. If you have a side hustle with multiple partners, you’re worried about legal liability, or you’re playing with some serious cash, then incorporating might be your best bet.
You’re an independent entrepreneur and you don’t need no man: If you are side hustling alone then odds are you can hold off on incorporating your business – here’s why:
- Incorporating involves paperwork, lawyers, and CPAs.
- You can try to incorporate on your own but it takes time and you don’t want to take the risk of filing the wrong documents.
- Depending on your state you will have to file annually and pay the corporate minimum tax (It’s cheaper than an Amazon Prime subscription so don’t panic).
- Your side hustle might be a passing phase so it’s easier to skip on incorporation all together.
Two’s Company, Three’s a Crowd: If you are starting a side hustle with a partner then odds are you should at least create a partnership agreement. Working with another person requires setting ground rules, because having a business partner can be as involved as a marriage. So to avoid being burned you might want to set up an LLC. Here are some reasons why:
- When you are in business with one or more people, you’ll be required to file a partnership return, so you might as well establish an LLC.
- You can split ownership amongst other partners and agree on how profits and losses will be split.
- An LLC will protect limited partners from legal liability so they can only lose the money they put in.
2) Am I Selling A Product or a Service?
This actually makes a huge difference when you start your new business. If you are selling a service, then odds are you won’t have to deal with sales tax issues. If you are selling a product, then you have to worry about sales tax and you might have to file in several states. Here is a simple guide for sales tax for an online business.
Selling a service: If you are selling a service (let’s say marketing or website design) then odds are your taxes will be simple. Simply record your sales as income and deduct the appropriate expenses.
Selling a product: Selling products gets complicated because you will have to keep track of inventory and you might have to collect sales tax. This gets even more complicated if you are selling goods across state lines. Filing sales tax returns often requires an EIN, which means added administrative work.
3) How Do I Pay Taxes?
Don’t be mistaken, the income earned from your side hustle is taxable. If you are side hustling on your own, then you’ll file schedule C on your 1040. If you are filing a partnership return with other partners, then you’ll receive a K-1 with your income or losses. Regardless, you want to make sure you’re paying enough tax to avoid penalties and interest. Here are some tips to make sure you aren’t surprised come April 15th.
- If this is a side hustle, then odds are you’re working at a job where you receive a W2. Simply withhold more from your pay to cover the taxable income from your side hustle and you’ll be set.
- If your side hustle is generating a fair amount of income, then consider making estimated payments. Check out the IRS website for more details. This is only for side hustlers making a substantial amount of income from their side business.
Having a side hustle can be great – especially when you want to make some extra cash. However, if you are not careful you can face some serious issues. Please consult with a CPA to make sure you aren’t getting yourself in trouble with your side business. Odds are they will be more than happy to assist you and answer any questions you might have. Until next time, keep the side hustle strong!