“The IRS has entered the chat”
If you’ve ever made even a few dollars from a side hustle then I have a message for you: Congratulations!
Unfortunately, many of us get so caught up in trying to make our first few dollars from a side hustle that we forget about the many dangers that come with making extra money.
These dangers include:
- Paying taxes
- The IRS
- Paying more taxes
Money coming in from a side hustle will make anyone want to kick back with their feet crossed and say “I made it.”
But now it’s time to decide whether or not you want to say “I made it” into a business.
When does a side hustle become a business?
Technically, as soon as you start making money from a side hustle, it becomes a business. You’re considered the sole proprietor of the business if you’re the only one providing a service and making money from it.
For this reason, it’s not uncommon in the slightest to scale a side hustle up into a full-blown business. Anyone who’s ever made a single cent from a side gig has already taken their first steps to be a business owner.
If you want to be really technical about it, the IRS considers an activity a business if “it is carried on with the reasonable expectation of earning a profit and can report a profit made in any three of the last five years.”
Do any of your side hustles fall under those qualifications of a business?
Tax season is friendlier to businesses
If you’re new to filing taxes with the IRS after a year of making money with side hustles, let me be the first to tell you that the term unpleasant is an understatement.
I remember my first time, I was completely blindsided. One minute I’m plugging in my information on TurboTax and the next minute a $300 payment I need to make is staring me in the face.
The IRS considers income from side hustles as an extension of your annual income. And thanks to 1099 forms, they know we didn’t pay taxes on our side hustle cash.
Sadly, even if you own a home and have dependents, you’ll more than likely owe some money on tax day. It all depends on how much money you made on the side.
But that’s honestly okay. As crazy as it sounds, you shouldn’t want to receive a tax return. The extra money might seem nice, but really it’s money the government owes you all year round because they took out too much from your paychecks. Hence why it’s called a tax “return.”
Nevertheless, tax season is friendlier to side hustles that have ascended into businesses.
A great way to get a nice tax break is by reporting business expenses. It’ll help cut into the money you owe the government on tax day.
Some of my favorite expenses to save receipts from and report are:
- Business lunches
- Business retreats at hotels
- Some gas money
- Charitable donations
And these expenses are just scraping the surface. You can report mileage on your car if you’re a reseller, use of your work laptop/Wi-Fi if you’re a writer, and so much more.
Don’t believe me? Look it up!
Reporting your expenses is one of the biggest benefits of owning a business compared to just doing side hustles.
Separate your personal and business finances
The need to separate your personal finances from your business finances is a clear indicator it’s time for your side hustle to ascend into a business.
Nothing is worse than seeing money start to roll in from your side gigs and getting it confused in your banking accounts and while paying your credit cards.
I’ve been there, it sucks.
Open a business bank account
Most — if not all — business bank accounts require you to have a registered business to actually open one.
Business bank accounts include features geared toward business owners. These features could include airline miles, better APY on your money, and financial protections.
Another great feature is the ease of reporting your income to the IRS. Yes, taxes once again have entered the chat.
Imagine a bank account that receives all of your payments and tracks them for you as income. It also tracks your spending and tallies it up as paying your business expenses. Then when tax day comes, you get an alert that you have everything you need to send to the IRS.
Those are the benefits of having a business bank account.
Get a business credit card
Just like business bank accounts, most business credit cards require you to be a registered business owner to reap the benefits of owning one. If you become an online entrepreneur, a business credit card might be a necessity for you.
Business credit cards are where you can really start racking up the rewards as a business owner. You’re spending money on expenses that are essential to your business, you might as well get thousands of free airline miles while you’re at it.
Other benefits include:
- Purchase protections
- Cashback rewards
- Streamlined account management
- Easier expense reporting to the IRS — You guessed it
Learning the benefits of business accounts and credit cards was what made me originally want to roll some of my side hustles into a business.
Who should turn their side hustle into a business?
I know I said technically once you make money with a side hustle the IRS will want you to make it a business.
But if you’re just starting out and not making too much money yet, it might be best to report it as additional income to your annual earnings. It’ll be easier for you to manage and it shouldn’t hurt your pockets too much come tax day.
But if you’re doing thousands of dollars in business every year then your side hustle is long overdue to become a business. Get that bad boy off its training wheels and start reaping the benefits of owning a business!