So you’re thinking of starting a side hustle but you don’t know where to start. You’ve got a concept and an informal business plan but you want to make sure you’re not going to create any added headaches. You’re probably asking yourself questions like:
- Do I need an LLC?
- Should I buy insurance for my side hustle?
- How do I pay taxes on my side income?
Well you’re not alone! According to a recent study, over 44 million American’s have a side hustle. That means 44 million people have asked those same questions and ran into similar issues with their side hustle.
But don’t worry, these 3 tips will help you navigate the complexities of starting a side hustle.
Do I need an LLC for my side hustle?
One of the most asked questions by inspiring entrepreneurs is whether or not they have to incorporate their business. For someone who is looking to start a side hustle the answer might not be as easy to answer.
Forming an LLC is a must for those looking to form a legitimate business. If you’re going to collect sales tax, pay employees, and obtain bank financing then you want to make sure you’re creating the proper business entity. But chances are your side hustle will be a one man shop with relatively little income.
According to the Small Business Administration, 78.5% of small businesses have no employees. So if you’re starting a side hustle that’s more of a side hobby then odds are you can skip the formal incorporation process.
If you’re working a part-time gig, driving for Uber, doing some freelance work in your spare time, or working as a DJ for small parties, then you can avoid the formal process of setting up an LLC. But if you’re looking to grow your side hustle into a legitimate business then having an LLC might be right for you.
Do I need insurance for my side hustle?
Just like filing an LLC, having insurance on your side hustle will depend upon several factors. However, although you might not need to file an LLC it doesn’t mean you shouldn’t have liability insurance.
General Liability Insurance
If you’re afraid of being sued and want to protect yourself against unnecessary liability then having general liability insurance is your best bet.
Let’s say your side hustle involves physically interacting with customers at their place of business. You might be painting, landscaping, or even working on their computers. If that’s the case then you want an insurance policy that will cover any damage that might occur to your client’s property.
You don’t want to be responsible for ten of thousands of dollars for a $100 job, so getting general liability insurance is a must for side hustlers looking to create a formal business.
Professional Liability Insurance
If your business involves providing expert advice or services then you may want to consider adding professional liability insurance. This is especially important for real estate agents (learn more about professional liability insurance for real estate agents here).
Having that much liability from a side hustle could ruin your finances and put you and your family in danger. You wouldn’t want to lose your home, retirement savings, or your kid’s college savings just because of an error you made from a side hustle. This is why professionals should consider professional liability insurance to protect against issues that general liability insurance won’t cover.
How do I pay taxes on my side hustle?
Paying your taxes through your employer is simple – fill out a W-4 and have your taxes withheld throughout the year. But if you’re earning extra income on the side how do you avoid owing money at the end of the year?
The simple solution for paying taxes on your side income is to have your current employer withhold more in taxes. Your paycheck might be smaller but the extra income you’ll be earning on your side hustle should net you more than you’re losing out in taxes.
When it comes time to file your taxes at the end of the year you’ll most likely need to file Schedule C along with your Form 1040. This schedule is used for sole proprietors to report their income, expenses, and taxable net income from their side business. If you have a business partner then you may need to file Form 1065 for partnership returns.
Ask a Professional
If you want to make sure you’re protected while earning some income on the side it’s best to consult a professional. Setting up a business is complex and there is an endless sea of paperwork, due diligence, and compliance that must be done to run and operate a business.
Before starting a business or launching a side hustle consult with an advisor to protect yourself and your finances.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Photo Copyright: <a href='https://www.123rf.com/profile_stanislauv'>stanislauv / 123RF Stock Photo