Side Hustle is the New Black (but don’t let taxes put you in the red)
A couple of weeks ago I mentioned a great podcast I’ve been listening to called “The Side Hustle School.” Hosted by Chris Guillebeau, each podcast is a quick 15-minute-or-less segment that features a person who has been able to make side income in new and sometimes unexpected ways while still keeping their day job. A Shark Tank junkie and entrepreneur myself, I love hearing these inspirational stories of business-building and creativity.
But fellow entrepreneurs, aspiring entrepreneurs and side hustlers, beware! There’s a dark side to your creative endeavors…
Taxes!
Taxes get a bad rap but they do not have to be the big, bad wolf waiting in the shadows – as long as you are prepared. If you are embarking on a side hustle of your own, here are some general guidelines to keep in mind :
#1. Ask yourself, is my side-hustle a “hobby” or a “business”?
If it’s a hobby or work that takes up little time or is very occasional, then you’ll likely declare whatever income you make from it as “other income” for tax reporting purposes. If you’d like to deduct expenses from the hobby or work, you will need to itemize them (rather than taking the standard deduction) and add them to your Schedule A as a miscellaneous deduction. Note that only expenses that exceed 2% of your adjusted gross income will be counted and that you’ll only be able to deduct expenses to the extent of the income generated by the hustle.
If, however, you consider your side gig as a business, and you plan to deduct expenses associated with it on Schedule C of your tax return, make sure you follow certain IRS stipulations on what’s considered a business and what is not.
For it to be qualified as a business, one of the factors the IRS looks at is whether your intent is to make a profit. How will the IRS determine this? A common method is by reviewing past tax returns and making sure there are profitable years. Note that not every year has to show a profit. Typically, if the first couple years of a new business show a loss, it’s not a red flag; however, the IRS usually likes to see some profit in three out of five years.
#2. Keep good records.
If you do not have the records to show profit because your side hustle is a new business, the IRS may look at other factors such as your bookkeeping, pricing strategies (are you pricing enough to create revenue?), and other factors such as whether you are actively promoting and marketing the business to obtain customers, and running it as a typical business would. It is imperative, therefore, that you keep very good records of your activities and document things like your pricing and processes in case you are ever audited. You also may want to even keep a log of how much time you are spending on the side hustle; if you are still working a 9-5 job, this is a possible way of showing the IRS that your intent is to make profit and not simply to use it as a way to get deductions on your tax return.
#3. Think twice before deducting your home office as an expense.
A home office used for business is an allowable deduction that can make a significant difference on the taxes you end up owing, so if you are confident that you would be able to meet the guidelines set up by the IRS for use of a home office deduction, there should not be a problem. Be mindful, however, that this used to be considered a trigger for a possible audit (in addition to home office deductions, passive losses, extensive Schedule C activities, etc. were considered audit risks). With the new economy and more people working virtually from home, this may be more of a myth than truth. Still, if you are deducting your home office, simply do a second or third review of your numbers and back-up documentation to be on the safe side.
#4. When in doubt, ask!
While there are many articles written on the subject (including this one!) and you can google information to familiarize yourself on the topic, it’s best to go directly to the source: The IRS.
The IRS has numerous publications on this subject so, as much as it gets a bad rap, it is your friend here. Use the site as much as possible to gather information that might be relevant for your circumstance. If it’s too complex, don’t hesitate to consult your tax advisor or accountant directly.
Being able to general additional income outside of your day job is a wonderful thing…, so don’t turn your side “hustle” into a side “hassle” and risk getting audited!