Working a side gig offers an opportunity to bring in much-needed extra income. According to a 2019 survey of 2,550 adults conducted by Bankrate, one in three people who run a side hustle do so to pay their bills. Others have a side gig to boost savings, while some side hustlers wish to earn extra spending money.
There are many opportunities today to make extra income on the side. From ridesharing to blogging to selling merchandise online, there's an opportunity for just about anyone in the gig economy to bring in some extra cash.
While a side hustle is a great way to earn extra income, it's essential to understand the legalities of a side job.
Does Your Employment Contract Limit or Forbid a Side Hustle?
Many people sign an employment contract when they begin working at a company. These contracts stipulate various rules and expectations, some of which dictate what kind of work you're not allowed to do outside of work. Going against your employment contract can get you in hot water, threatening your day job and even resulting in being sued.
Here are some limitations often included in employee contracts.
A non-compete clause is an agreement between you and your employer dictating that you aren't allowed to work outside your day job doing a service that would be considered competing. That means, for instance, if you work for a computer company, you may not be able to work on the side fixing or programming computers.
A non-disclosure clause is designed to protect your employer's private information and keep it confidential. Signing this agreement protects your employer from competitors getting a hold of sensitive data. If you slip up and disclose sensitive information, say while working a related side job, you have broken this clause and can be held liable and sued.
Intellectual property agreement
Another common agreement, this clause in an employee contract makes it clear that anything you create or improve upon on behalf of your employer belongs exclusively to your employer. That means that you can't, under any circumstances, run a side gig using this proprietary information.
Tax Ramifications of Side Hustling
As income, side hustles must be reported in your taxes. If you fail to pay taxes on your side gig income, you may end up paying back taxes and fines, which will quickly eat into any extra money you've earned. It's vital that you put aside part of your side hustle earnings to pay taxes.
Taxes for a side hustle are different from working for an employer. When you're paid through an employer, taxes are taken out and paid to the IRS and state and local government agencies on your behalf when your paycheck is created.
This isn't the case with side hustle income. You can declare income and pay side gig taxes by filing IRS Form 1099-MISC Income statements with your tax return.
You will receive a Form 1099-MISC if you make more than $600 from your side hustle during a tax year. The company or individual who paid you will file this form with the IRS, which notifies the agency regarding how much you earned the prior year.
Additionally, if your side hustle begins to generate significant income, you will also need to start paying quarterly estimated taxes to the IRS. An accountant will advise you as to when this is necessary and coordinate paying those taxes, as well as filing your tax return. A tax expert can also help you determine if your side gig is a business or a hobby. This is important because there are different tax breaks, depending on the nature of your side hustle.
If you sell merchandise, you must also pay state sales tax. With online sales, this applies to those physically living in the same state as where you are conducting business.
Legal Risks of Owning a Side Hustle
If your side gig isn't legally separated from your own finances, you risk your personal assets. If a customer sues you, they can come after your savings and your possessions, such as your house.
If you form an LLC or incorporate, you protect your personal assets. An LLC (limited liability company) is a business structure that protects you from being personally liable for your company's debts and liabilities. The fees associated with forming an LLC are minimal compared to the potential consequences if you are taken to court.
Be Aware of Side Hustle Compliance
Following the rules and regulations of the industry in which you're running a side hustle is important. Here are a few things to keep in mind to keep your side hustle compliant, protecting you and your business.
State and city laws
Keep up-to-date on any laws in your city or state that could affect your side hustle. For instance, if you're doing business out of your house, your city may require that you obtain a business license. If a federal agency regulates your industry, you may need a specific license to operate within the law.
Notices and disclaimers
Most industries require that you make disclaimers and are transparent about your side hustle. For example, if you are being paid to promote products, the U.S. Federal Trade Commission requires that you disclose that fact. Those who make money as Amazon Affiliates, for example, are required to indicate that they earn from qualifying purchases.
If you are driving as part of your side gig, such as ridesharing, you will need to check if there is insurance coverage from the company and if it is sufficient. You may need to revise your insurance to protect you in case of an accident while working your side hustle.
Additionally, you will likely want to purchase business liability insurance. Such insurance protects your side hustle's financial interests should your business face claims or lawsuits.
Running your own side hustle can be a lucrative, exciting, and fulfilling pursuit. Protecting yourself legally can help ensure that your side gig journey is successful.
File for an LLC and Protect Your Side Hustle
If you are ready to make the switch to an LLC for your side hustle business but aren't sure where to start, Swift Filings can help. We've made forming an LLC for side gigs a snap. Filing online can take as little as 10 minutes. To help ensure that your side hustle stays legal, start here.