Many of us dream of the day we can do what we love and get paid for it. When we’re able to turn a hobby into a business, it can be a win-win. This is why so many people choose to sell crafts, do freelance work or adopt a side hustle that allows them to make some extra money each month. Unfortunately, there’s a thin line between “side hustle” and “small business.” When your hobby crosses into the small business category, there are some serious decisions that need to be made. To ensure you and your business are fully protected, you’ll want to ensure you take the appropriate measures. Whether you’re running a side hustle you hope to someday turn into your main income or you’re not sure whether or not you have a small business or a hobby, here are a few things you need to know or do.

Understanding the Difference

Before you do anything else, you need to know how you’re classified within the eyes of the IRS. While you may believe your side hustle is just a hobby, the IRS may actually classify you as a small business or vice versa. The IRS does not provide strict guidelines outlining the difference between a hobby and a small business. However, if you rely on income from your side hustle or you hope to be profitable from your hobby, it’s likely considered a small business to the IRS. The IRS will also classify your hobby as a small business if you were profitable in the past, if you changed productivity to be more profitable or if you are operating at a loss because of start-up purchases.


Protect Yourself and Your Business

Whether your side hustle is already classified as a small business or you hope to turn it into a profitable activity, you need to protect yourself and your company. You can do this by establishing either an LLC or a corporation, even if you’re the sole employee. LLC or incorporated status can help protect you as an owner while also giving you new benefits for your business. How you decide to establish yourself will depend on what products or services you provide, how many people you have on your team and what growth you expect to see in the future.


Know the Rules and Regulations

When you become a full small business, there are certain rules and regulations you will need to comply with. From trademark laws to safety regulations, you’ll need to be sure you understand the ins and outs of each. Ignoring the laws could cause major trouble for both you and your business in the future. There are also various ISO standards you’ll need to comply with, depending on the products or services you offer. To ensure you’re meeting all the expectations, you may want to consider consulting a professional.


Open a Business Bank Account

A business bank account allows you to separate your small business money from your personal money. When you’re trying to operate with just your personal bank account, it can be difficult to log expenses or keep your funds separate. This can be a major problem if you’re ever audited by the IRS. See if your bank of choice offers a business bank account you can sign up for, but be sure you understand the fees and regulations. Many business bank accounts have high minimums and deposit limits. Shop around until you find a bank account that fits your needs and won’t force your business under.


Prepare to Pay Taxes

Many side hustlers believe they don’t need to pay taxes on their hobby income. Unfortunately, any kind of income — no matter the amount — is subject to taxation. If you don’t pay taxes throughout the year, you could be given a hefty tax bill you can’t afford to pay. You’ll want to pay quarterly taxes throughout the year on any income you make through your side hustle. Keep in mind that because you’re considered a business owner, you’ll also need to pay self-employment tax. This means your taxes can add up rather quickly. To ensure you have enough money to pay your taxes each quarter, set aside 20–30% of everything you make into your business bank account.


Track Your Income and Expenses

Depending on what your hobby is, you may get paid in cash. Whether you’re selling crafts at an art fair or performing tasks at a neighbor’s house, getting paid in cash can make it difficult for you to keep track of how much you’re making. If you’re not logging your income, you could be facing a major headache when tax season comes along — especially if you’re ever audited. The same applies to your expenses. There are many different programs out there that allow you to log your income and keep track of your expenses. Keep your receipts in a safe place. At the very least, keep an updated spreadsheet you can point to whenever you need it. This can be a real life-saver when you’re ready to do your taxes. Going from hobby to small business is a major step. It can come whether you’re prepared for it or not. Knowing what you need to know and do when your hobby becomes a small business is incredibly important. With these tips, you’ll be fully prepared whenever the shift happens.

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