Being an entrepreneur can require a substantial financial and emotional commitment. For many individuals, testing business ownership out on a small scale before making a bigger commitment makes sound business sense.
For others, having the ability to supplement their other professional endeavors at their own convenience is also appealing. For these reasons, the “gig” economy has really taken hold. While estimates vary widely, we can all agree the number of people with a “side hustle” is in the millions and growing.
However, just because your side business is part time, it doesn’t mean you can abdicate your responsibilities, have sloppy accounting or not take it seriously. To that end, below are four things you should know to make sure that your side hustle or gig business is successful.
1. Treat it Like Any Other Business. Testing a business out on a small scale does not mean you should forget that it is still a business. You should consider creating a separate legal entity, which can help to protect you personally from liability and also make accounting and operational endeavors easier.
This also means you should have a separate bank account and not co-mingle your personal and business revenues and expenses. “Often having a separate business bank account can be a deciding factor in whether the IRS treats this income as a business or a hobby,” said Dee Dee Stone, CPA, a tax strategist for small- to medium-sized businesses and owner of Dee Dee Stone, LLC, who works extensively with hobby-business owners and gig economy entrepreneurs. “Business income is taxed after the expenses have been deducted and businesses can show a loss that offsets other income on the taxpayer’s return. Hobby income is taxed purely on money received with no deduction for expenses incurred to earn it.”
2. Make Accounting a Priority. Those who are new to businesses, and particularly those running small and/or part-time businesses, are often sloppy with accounting, which makes end-of-year tax filing a nightmare (and can also get you into trouble with the IRS). “If you utilize a separate bank account and file your receipts by category at the end of each week, you will find you generally have more deductions than you realize without trying to sneak in personal expenses,” Stone said. “In the event you are audited, you will generally be required to produce business bank statements, another reason to have a separate account, along with receipts for purchases and a mileage log to substantiate any auto deduction.
“Today, because we can buy nearly anything we need from a one-stop shop and items can be business or personal, receipts are required to prove the business nature,” she added. “The burden of proof is on the business owner that items are ordinary and necessary for their business and are only allowed to be deducted at the discretion of the auditor so trying to sneak in all your personal expenses for the extra deductions can result in increased penalties in the end not to mention, if you ever try to sell your business it will not look as profitable.”
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3. Don’t Forget to get Paid. While some gig jobs make it easy to collect money, many do not. It is your responsibility to make sure you are invoicing your clients regularly and accurately for completed work and/or services or goods provided. Sloppy invoicing that isn’t systematized can delay your payment. In some cases, I have seen entrepreneurs who have lost payment because they haven’t tracked their work well. And, of course, delays in invoicing can create cash flow issues for your business if you are planning to use the money you have earned immediately.
Several technologies and tools can help you manage invoicing, like those incorporated into Quickbooks and more. Do your research to see which is best for your business. There are also a host of tech products that help track expenses, including those you need to bill back to your client.
4. Know the Limitations of a Hobby vs. a Business. While it is important to take any business endeavor seriously, side hustles have limitations you should be aware of. Make sure set your expectations and investments accordingly.
“As the gig economy grows, we have seen more attention from the IRS on taxpayers claiming losses from their ‘businesses’ for multiple years in a row to offset their other income,” Stone said. “If you show a loss for more than two years and are not exercising every opportunity to make your side hustle profitable, you have a hobby for tax purposes. To avoid being limited by the ‘hobby loss’ rules, running your gig business will require proper accounting and recordkeeping.”
The gig economy is here to stay. If you want to participate in it effectively, make sure you are prepared and professional in your approach to ensure you get the most benefits possible.
- Is the Gig Economy right for you? Some things you should consider.
- How to Adjust Your Business to the Gig Economy.
About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
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