So you've found a new way to bring in some extra cash. Maybe it pays really well, or it's just too easy to pass up, or you're broke and need the cash no matter what! Whatever your reason, it's important to know that when you start a side hustle, you're essentially becoming your own business owner, which is no small thing. In fact, there are many ways that having a side hustle impacts your income beyond just brining in more money. Here are five things to keep in mind as you get started:
1. Income Taxes
If you're a W2 employee, the company for which you work is responsible for estimating how much you might owe in taxes, then deducting that money from your paycheck throughout the year to send to the IRS. But if you work for yourself, not only are you responsible for paying your own taxes, but for 1099 contractors, you must also send in those taxes to the IRS each quarter. Even though it would be great to be able to spend 100% of your income, you want to make sure you set aside a certain percentage for the tax man. One quick tip is to find a percentage you think might be appropriate and transfer that percentage to a separate account each time you get paid. Doing so will allow you to separate your tax money from the funds you use to operate your business.
2. Tax Deductions
Working as an employee for a small business or large corporation can sometimes require you to pay for certain supplies or pay to attend conferences. Fortunately, it's not uncommon for these expenses to be reimbursed, or even paid for with a company card for which you're not responsible. Headed into business for yourself? That changes things. Now all of the things that you want or need to pay for are your responsibility. The good news is that many expenses that are used to maintain your side hustle could be a tax deduction you can claim at the end of the year. Build a relationship with a CPA or tax preparer and ask them what is and isn't deductible when it comes to the expenses for your side hustle. Are the miles you drive for Uber a business expense? If you have to buy new sheets for the room or house you use for AirBnB, can you claim it as a deduction? Ask them and keep track of your receipts, as they can come in handy when you're trying to reduce the taxes you might owe from all that new money coming in.
3. Legal Status
If you're just entering into business for yourself, it's possible that you've not experienced the increased liability that comes with being your own boss. You want to have an idea of what an appropriate legal structure might be for your new business. Do you want to be a sole proprietor, which might make things a bit easier when it comes to filing your taxes, but could put your business and personal assets at risk to potential creditors? Would you like to operate as an LLC, which might protect more assets but possibly lead to more stringent reporting requirements or a higher tax liability?
Whether you're offering a good, a service, or generalized advice, there's often some inherent risks in our side hustles that are worth taking off of our shoulders and placing on the shoulders of an insurance company. In fact, you might be required to do it. Auto insurance companies often require their drivers to notify them in advance if their vehicle will be used for ridesharing services like Lyft or Uber, and special riders to your coverage might be needed to make sure you're not denied if you make an insurance claim. The same is often true of homeowners insurance providers, who also require notification if a property will be used for AirBnB, HomeAway or VRBO. It's important that you have an idea of what the inherent risks are for your business, and how insurnace can help mitigate that risk or transfer to a company better prepared to handle it than you are at this stage of your side hustle.
5. Impact On Your Dream Job
While I think it's great that there are so many ways to make money in today's gig economy, I do think it's worth asking yourself if your side hustle is something that's just adding a few extra bucks to your bucket temporarily, or is it actually positioning you to make a sustainable, higher income in your DREAM JOB. If you're in pursuit of your dream job every day from 9 to 5, it's very possible that you have to do things after hours to add income potential in that chosen field. It might mean getting a higher degree, networking at different events, or simply getting a good night's rest so you're more effective at your job. If you have a side hustle that takes so much time that it's negatively impacting your ability to add income potential in your chosen profession, it might not be the fit that it looks like at face value. Whether you're picking up scooters, dogsitting for your friends or renting out a spare room, make sure you're not sacrificing $100,000 of future income to make $10,000 now.
It is my hope that you go on to live the most prosperous life you can, and if side hustles help make that a possibility, I'm all for it. I hope the tips we've shared give you a few things to get started as your business grows, and that maybe they'll even simplify your life as your income increases. Happy hustling!