The money you earn from a side hustle can help you make ends meet and/or save up for a large upcoming expense like a vacation or a car. A side hustle can also give you the opportunity to pursue something you enjoy and feel passionate about, which you may not get with your day job. But when is your side hustle considered a business?
The answer depends on why you are doing the activity that’s giving you extra income and how much you are actually earning from it. Here’s what you need to know.
What Is a Side Hustle?
A side hustle is an employment opportunity outside of your full-time job that brings in supplemental income. This can help you cover living expenses or work towards a short- or long-term savings goal. Unlike a part-time job, a side hustle typically involves more freedom and more control over what you’ll do and when you’ll do it.
Many people pursue a side hustle that involves their passions and talents, such as writing, graphic design, knitting clothing, or caring for pets. Some may eventually make their side hustle their primary line of work.
Side Hustle vs Business
Is your side hustle a hobby? Or, is it a business? The primary difference between the two is that a business operates to make a profit, whereas a hobby is something you do for fun or recreation. But there isn’t one single deciding factor. To help you determine whether you’re side hustle is a business versus a hobby, the Internal Revenue Service (IRS) suggests you ask yourself the following questions:
- Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Does the time and effort you put into the activity show that you intend to make a profit?
- Does the activity make a profit in some years – if so, how much profit does it make?
- Can you expect to make a future profit from the appreciation of the assets used in the activity?
- Do you depend on income from the activity for your livelihood?
- Are any losses due to circumstances beyond your control, or are the losses normal for the startup phase of your type of business?
- Do you change your methods of operation to improve profitability?
- Do you and your advisors have the knowledge needed to carry out the activity as a successful business?
When Your Side Hustle Could Be a Business
If you read the above list and found yourself frequently nodding your head, perhaps you’re ready to begin moving your side hustle into the realm of a formal business. Here are some signs that your hustle has what it takes to become an official business.
- You’ve done the research and determined there is a strong demand for your product or service in the marketplace.
- You’ve become an authority in the industry.
- You are profiting from your side hustle.
- Your competitors have noticed you.
- You’re looking for a change and prefer this work to your current day job.
- You have a plan for how you’ll cover health insurance and retirement savings on your own.
- You have a comfortable cushion of savings, including an emergency fund.
- You can keep up with the demand for your sideline’s product or service.
- You’ll eventually be able to earn enough income from this business to cover your living expenses.
How to Turn a Side Hustle Into a Business
If you’re interested in turning your side hustle into an official business, here are some initial steps you’ll need to take.
Create a business plan
A business plan is a formal document that puts all the important details about your business into one place, including the goals of the business, how you will achieve those goals, and the time-frame for achieving your goals. It should include details on how your company will be structured, how your finances will work, how you will market your business.
Determine Your Target Market
Before you launch your business, you’ll want to conduct research to determine your target market — these are the people who are most likely to use your products or services. How old are they? How much do they earn? Where do they live? This data can help you determine how viable your business idea is, as well as help you market your product or service and grow your business over time.
Choose a Business Structure
You can choose from several different business structures, including a sole proprietorship, partnership, and limited liability company (LLC). The legal structure of your business can affect everything from your taxes to what you’re personally liable for, so it’s a good idea to talk to a tax professional about which structure is the right fit for your new business.
Establish a Legal Business
If you’ll be doing business under a name other than your own, you may need to register your business business name with state and local governments. You’ill also need to apply for a federal tax employer identification number (EIN) through the IRS. This number is necessary for most businesses to file taxes, open bank accounts, and perform other essential tasks. The online application only takes a few minutes.
When Should You Open a Business Bank Account?
If you have a business plan or you intend to see your side business grow, it can be a good idea to open a business bank account. This allows you to keep your business finances separate from your personal spending and saving. It can also simplify your life come tax time. If your side hustle is going to stay just that — a side hustle — the answer is less clear. Business checking accounts work in a similar way to personal checking accounts but tend to come with higher fees. So you’ll have to weigh the benefits and costs.
Side Hustles and Taxes
Whether you consider your side hustle to be a hobby or a business, the IRS may have a different opinion. If your side hustle nets you more than $400 a year, you must report it on your taxes. Once you pass that threshold, the IRS considers you to be in business (as a sole proprietor) and earning income. In addition, if you accept more than $600 for goods (even personal items) and services using online marketplaces or payment apps, you may receive a Form 1099-K, according to the IRS.
The Takeaway
If you have a side hustle to bring in extra income, and also find you have a passion for that work, you may want to consider developing it into a full business. You’ll need to go through a variety of steps, including setting up a legal business structure, writing a business plan, and opening a business checking account.
If you plan to keep your side gig just a side gig, you might simply put your extra earnings into a high-yield savings account, where the money can earn an above-average annual percentage yield (APY). This can help that extra income grow faster over time.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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5 super smart spending strategies
When it comes to budgeting, some of us live by the saying, “Out of sight, out of mind.” If you can’t see those charges coming through on your credit card, did they ever really happen?
Only two in five Americans keep a budget or track expenses, but burying your head in the sand can only go on for so long.
At some point, bills will be due, and everything will need to be sorted out. Instead of letting your spending hit you like an avalanche, consider adopting some smart budgeting strategies that take the stress out of spending.
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For many implementing smart spending strategies, the first instinct is to enact a strict budget. However, it’s hard to get a true sense of what your budget will look like if you’re not familiar with your spending habits.
You could start by excavating last month’s spending using the highlighter method. Print out statements from credit cards, bank accounts and ATM cards, and armed with an assortment of fun highlighter colors, go through each statement, highlighting by spending category.
There’s no hard and fast rule regarding categories; you might highlight all food expenses one color, or perhaps you want to drill down and dedicate different colors for spending on meals out versus groceries. A simple category breakdown might look like this:
• Household expenses (rent/mortgage, ultities and home insurance)
• Food (groceries, dining out, coffee, etc.)
• Transport (car payments, rideshares, gas, auto insurance, etc.)
• Debt and monthly bills (student loans, credit cards, not including home utilities)
Once you’ve gone through and highlighted by category, you can add up the totals for each. While the numbers certainly matter, the visual can be just as helpful.
Are you highlighting credit card statements like crazy with transactions on food? Might be time to reconsider your eating out budget. Is there an Uber charge every other line? Maybe your spending weakness is your daily rideshare habit.
The one thing you shouldn’t feel from this exercise is shame or embarrassment. Most of us over-highlight in at least one category, or overspend when it comes to specific items. Pat yourself on the back for highlighting the issue, and addressing it.
Not one for paper and highlighter? Your bank might provide a similar budget tracking feature online.
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After you see where you typically spend, then you can start moving forward with a budget. Budgets can seem complicated and boring, but what it drills down to is spending less than you make each month — it’s as simple as that.
While tracking is about examining what you’ve already spent, budgeting is about looking forward to what you will spend. And just like no two people are the same, neither are budgets. Here are a couple of jumping-off points. Try one out, or mix and match a few to find the perfect fit for you.
50/30/20 budget
The 50/30/20 rule breaks down your after-tax income into three buckets:
• 50% on needs
• 30% on wants
• 20% on savings
Needs are defined as things you must pay, as well as items necessary for survival, such as:
• Rent or mortgage
• Car payments
• Healthcare
• Groceries
• Insurance
It also includes minimum debt payments.
Wants are things you spend money on that are nonessential like dining out or entertainment activities. This includes the “upgrade cost” of things.
For example, you might pay for super fast internet or more data on your phone plan. Beyond the bare minimum pricing, these charges fall into the wants category.
Finally comes savings. This 20% can be divided among a few different accounts, including retirement, emergency funds and investing. While minimum debt repayments fall under needs, anything above and beyond that monthly charge can be taken from savings.
While it’s not for everyone, the 50/30/20 rule can be a good introduction to budgeting.
Zero-based budget
Zero-based budgeting is less about percentages, and more about the big goose-egg: zero. Each month, you’ll want your expenses to match your income, essentially leaving nothing left over by the end of the month. Each dollar will be assigned a job as it comes in. Bottom line, if you make $4,000 a month, your expenses should add up to $4,000 a month.
Sounds simple, right? It can be, with a little practice. After tracking your monthly income, you’ll need to take note of your monthly, then seasonal or annual expenses.
Seasonal planning is essential in zero-based budgeting, you’ll want to plan ahead for these expenses and allocate a little to it every month. Once you have your income and costs down, you’ll subtract the later from the earlier.
If this doesn’t add up to zero right off the bat, you’ll need to balance your budget. That might mean taking a look at your expenses and cutting a few line items.
Now, a word of warning. Just because the concept is called zero-based budgeting doesn’t mean you’ll want to end each month with zero dollars in your bank account.
Instead, you should have zero left to budget — meaning if there’s a month sitting in your checking account, it has a job. That could mean it’ll be spent in a few months, or it’s simply getting transferred over to savings.
Budgeting apps and online tools
For the tech savvy, pen, paper and spreadsheets might not do the trick. If you’re looking for a way to passively track your dollars and have access to your budget at the swipe of a finger, you might want to use an app to track your budget.
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Once you’ve started tracking your expenses and budgeting your income, staring at your monthly statements shouldn’t be scary. Instead, find enjoyable ways to maintain your budget and break bad habits around spending.
Sushiman/istockphoto
Shoot for a no-spend day once a week, or see how far you can get in your day without spending anything. This doesn’t mean you can’t leave the house, but it will challenge you to find creative ways to enjoy yourself, without pulling out your wallet.
That might mean hosting a pantry leftovers potluck with friends, where everyone brings something from home. Or, it could mean turning to a local library to check out movies, games, or magazines for entertainment. No-spend days will make you reconsider each purchase you make which could help you save a little money.
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While we tend to be hush hush about spending habits, getting an accountability partner can help you spend smarter. Maybe it’s someone you check in with a few times a month, or maybe you share budgeting tips, either way, bringing your spending habits into the open can make it easier to stick to them.
Plus, cluing in a close pal on your smart saving can help reduce that dreaded sense of FOMO you might get when you miss out on spending opportunities.
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Getting spending under control can bring peace of mind to your pocketbook, but it also makes it easier to save or pay down debt.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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