Unless you start a secondary job solely to pursue an interest or to provide a free service, most side gig workers are in it to grow their overall income. Whether your intention is to make a couple of bucks or rule the business world, most people initially fly by the seat of their pants and operate on instinct.
However, there comes a time when you have to make significant changes, whether by necessity or the desire to take things to the next level. When your side gig starts to grow, you’ll have to make some tough financial decisions you wouldn’t have imagined when you began.
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Here are three critical things to keep in mind when you see your side gig become more successful, with some vital input from expert Cody Schuiteboer, president and CEO of Best Interest Financial.
Separate Personal and Business Financials
Of course, if you have a side gig, you should have treated it like an actual business from the very beginning. But you’d be surprised at how many people operate on an ad hoc basis (e.g., to earn extra money to put toward a specific savings goal) and often fail to track expenses, even after being “in business” for a substantial amount of time.
If you haven’t already, Schuiteboer suggests side giggers open “a dedicated business checking account for recording their income and expenses. Then, a bookkeeping software such as Wave (which is free) or QuickBooks Self-Employed (with a low monthly cost) will categorize their income and expenses.”
For those whose side gig involves driving, “A free mileage tracker will help record their travel-related expenses,” he said. “Finally, reconciling transactions monthly will help avoid losing 30% to 50% of their deductions by simply failing to record the expense at tax.”
Should You Incorporate as an LLC?
There are many benefits to starting a side hustle, among them is the relative low risk attached to the secondary work. They are called side gigs for a reason; you’re still earning an income from your real job, so if the side hustle doesn’t work, you’re not risking your financial security.
However, there may come a time when you’ll need to establish a private limited liability company (LLC).
“In general, most beginners run their side gigs as a sole proprietorship without filing anything extra (their income goes straight to Schedule C),” said Schuiteboer. “This works for most side gigs, but there comes a moment when incorporating becomes necessary.”
An LLC is frequently the simplest and least expensive form of incorporation for sole proprietors or small business owners who want to protect their personal assets and lower their tax burden. But creating an S-corporation might be the way to go for a growing side gig too. Switching “to an S-corporation tax structure would reduce self-employment taxes significantly,” said Schuiteboer.
“The moment net income from the side gig exceeds around $40,000 to $50,000, incorporating the side gig becomes beneficial, provided that there are no issues with liability,” he added. “There will be extra costs in setting up payroll, maintaining books and appointing registered agents, but it’s worth discussing with a [certified public accountant] CPA before going further.”
Jumping to a Higher Tax Bracket
Seeing your side gig pet project grow into a successful business can be a satisfying and potentially profitable surprise. However, as your income grows, your tax bracket naturally shifts upward.
Although a person’s total income is not immediately subject to a higher tax rate just because they move into a higher tax bracket, there will be some other things to keep in mind as your side gig, and income, grow.
“Another important detail is that additional income also influences benefit phaseouts,” Schuiteboer noted. “Some benefits like the Child Tax Credit, the student loan interest deduction, IRA contribution limits, and premium tax credits become unavailable once income exceeds a certain level.”
When any business grows, it’s crucial to constantly review your financial plan. Increased income may result in additional tax liabilities and business expenses, both of which can be handled by being proactive.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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