3 Things You Need to Do to Protect Your Side Hustles

Does it seem to you like everyone's talking about side hustles these days? Side hustles 2019. How to make money in a side hustle. Side hustles you can do from home. These are some of the headlines I've seen. 

We've jumped into the fray here at The Money Mix too. All of the writing is about how to start a side hustle, the different types of side hustles, side hustles that generate passive income, and many other versions of the story.

I'm not suggesting that's a bad thing. Creating multiple streams of income from side hustles is the ticket to financial freedom for those willing to jump into the action.

What concerns me about the side hustle discussion is what's left out of it. I've not seen a single post about how to protect the income generated from the side hustle.

  • How does the IRS tax it?
  • How should I claim it? Should I set up a separate entity?
  • Do a sole proprietorship?
  • What are the liabilities associated with the side hustle?
  • Can I be sued? If so, how can I limit my liability?

In this post, we're going to dive into some of these questions. We'll offer some thoughts on how to keep more of what you earn through your side business.

What is a side hustle?

Let's start with a definition of what a side hustle is. For the record, I dislike the term side hustle. I'm not sure where it started. Perhaps it's been around for decades. I don't know.

To me, the term side hustle sounds a bit shady. When you think of a hustler, what's the first thing that comes to your mind? Is it someone who works hard and hustles to get ahead? Or does it represent someone a bit shady? You know, like, “that dude hustled me out of a hundred bucks.” For me, it's the ladder definition. Getting hustled is not something anyone wants to admit has happened to them. Perhaps I'm showing my age or my cynical side.

In its most basic form, it's any income produced outside of your regular job. It may be a part-time job. It may be owning rental properties. Maybe it means being an Uber driver or a Wall-Mart greeter. Whatever the means to produce additional income the popular (and accepted) term for it is the side hustle.

Even busy people get into side hustles.

Side hustles 2019

As you might expect, side hustles come in many shapes and sizes. Below is a list of ten ideas that may offer some help if you're considering a side hustle. These are in no particular order, and there are dozens of others we could list.

  • Blogging – Probably the number one way that Millennials start their side businesses. With over 2,000 blogs on personal finance out there, you'll find course after course on how to make money blogging. Be careful. Blogging is hard. Making money at it is even harder. That doesn't stop bloggers from peddling their courses, eBooks, and such to generate some income.
  • Selling on eBay – Many people make decent money selling items on eBay. It takes some work, but those who stick with it make good money.
  • Driving for Uber –  If you own a car, you can make some extra money driving for Uber. Getting started is pretty straightforward. Like any side gig, there are pros and cons.
  • Airbnb – Do you own a home? If so, it's a potential asset to get some side income by renting it out via Airbnb. You can rent the entire house or a room — your choice.
  • Mystery shopping – Many companies will pay you to go into the store or shop online and share your experience.
  • Dog walking –  Pretty self-explanatory.
  • House-sitting –  Staying at someone's house while they travel. That can be a week's vacation, several months, or even longer.
  • Get a part-time job – Going old school here. Plain and simple, go find a part-time job doing something you like.

Passive income

  • Real estate – One of the more popular side hustles and one that's written about the most. Investors buy single-family home or condos and rent them out to tenants. Another popular option is crowdfunded real estate. DiversyFund and Fundrise are two we've written about.
  • Dividend investing  – Another topic that's written about a lot is using high dividend-paying stocks to generate passive, tax-favored income. Qualified dividends have favorable tax rates from the IRS. A lot of blogs focus their writing on teaching people how to do invest in dividend-paying stocks.

Whether income is active or passive depends on many factors. My advice is to investigate those things very carefully before starting.

Side hustles 2019 –  protecting your income

Alright. You've selected your side hustle, and you're generating some income. From what does that income need protected? For one thing, taxes. Another oft-overlooked risk is being sued. Making sure you understand how both of these things place risk on your income is essential before starting your side hustle.

We'll look at each one separately.

Taxes

The IRS taxes income. Period. Whether it's passive or active determines the tax rate. Here's how the income works in most cases. The entity from which the income comes issues a 1099 tax form to the recipient of that income. There are numerous types of 1099's issued depending on the source of the income. If the income comes from dividends, you'll receive a 1099-DIV. When the income is from interest income, you receive a 1099-INT. If it doesn't fall into any specific category, the catch-all form is the  1099-MISC. The majority of the income generated from side hustles comes in the form of a 1099-MISC.

In contrast, income from an employer comes in the form of a W2. What's the difference? A big one. In a W2 income, the employer withholds taxes from your paycheck and sends it to the IRS on your behalf. How much they withhold depends on your income.

In addition to Federal taxes, they withhold taxes for your state as well. Finally, there are FICA (Federal Insurance Contribution Act) taxes. That's tax withheld for Social Security and Medicare. In W2 income, employers withhold 6.20% of the first 132,900. The employer pays the other 6.20%. Additionally, there is a tax for Medicare. The Medicare tax has no upper-income limit. You will pay a tax of 1.45% of all income. Incomes over $200,000 ($250,000 if married) pay an additional 0.9% tax.

Self-employment tax

Guess who's responsible for these taxes if you get 1099 income? You guessed it, you are. It's critical to understand this when thinking about generating additional income. If you expect your total tax bill for 2019 to be over $1,000, the IRS requires you to pay estimated quarterly taxes.

FICA taxes are killer when self-employed. Remember, on W2 income, The employer withholds 6.20% and pays the other 6.20% of the FICA tax. They also withhold the Medicare tax. Total that up, and that's 15.3%! If you fail to pay your estimated taxes, the penalties and interest are killers.

Suffice it to say neglecting the taxes on side income can cost you a lot of money.

Liability

The second major issue that can derail your side hustles is getting sued. Liability can ruin your day in a hurry. Why would someone want to sue you? It doesn't take much. Here are some examples.

Let's say you own rental properties. You have a sidewalk in need of repair that you haven't gotten around to fixing. Someone comes to the house, trips on the raised concrete and breaks their arm. Or worse. At the very least, you will be responsible for the medical bills for the individual. Assuming you have a decent homeowners insurance policy, you should be okay. Then an attorney from Dewey Cheatem and How finds the injured party. They convince them they should sue.

Rest assured, they want much more than your medical bills paid. They want damages over and above that. Homeowners policies have a maximum liability for these lawsuits. Being underinsured could be very costly. Almost any of the side hustles listed above come with liability.

Blogging risks

Blogging seems like a low-risk venture at first glance. For the most part, it is. In the personal finance space, it may not be. Why? Most personal finance bloggers write about investing, saving money, spending, and other of these types of topics. Most of them give investment advice to their readers. The vast majority have no formal training in investment management, financial planning, or many other topics they write about. Most of them have a disclaimer saying they aren't giving investment or professional advice. Fair enough.

Let's say you have an article (one of the hundreds of them) about investing in the three-fund portfolio from Vanguard. You read that this is one of the most straightforward, least expensive portfolios that cover the entire market. For the most part, that's true. So you invest in the three fund cure-all portfolio during this one of the longest-running bull markets and go about your business. Then it happens. A 2008 type of financial crisis rears its ugly head again. This time it's worse. The U.S. and international stock markets drop more than 50%.

Hold on! No one told you about the risk? You thought this portfolio was the be all do all of investing. You feel cheated. Another partner from Dewey Cheatem and How calls you. He gets you fired up about the dereliction of duty of that untrained, opinionated, mouthy blogger who convinced you that portfolio was the best thing ever created. And now you've lost more than 50% of your money. Yes, you actually did lose that money because, in the heat of the crisis, you sold everything. YIKES! That's an attorney's dream scenario.

Far fetched? Maybe. Do you want to risk it? Probably not. There are ways to mitigate these risks.

Lowering liability risk

I'll give you three things to consider to help protect your side hustle income.

  1. Pay attention to taxes – If you're a do it yourself tax person, be sure to dive into your software or the IRS website to understand how your side income will be taxed. It's best to do this BEFORE you start. Waiting until the year is over and taxes are due is not a good plan. You can manage taxes. But you have to understand how your income gets taxed to deal with it.
  2. Choose the right business entity – Setting up your side business as a Limited Liability Corporation (LLC) can limit your personal liability. They're relatively inexpensive to start. An LLC shelters your personal assets from lawsuits. Though nothing is foolproof, this layer of protection makes it much harder. You can have a one-person LLC. No need to overcomplicate it.
  3. Have adequate and the right kind of liability insurance  – Back to the rental property example, if someone gets hurt on one of your properties, having an umbrella liability policy provides an extra layer of financial protection. Umbrellas policies add additional insurance over and above the home owner's policy. They are usually relatively inexpensive and well worth the money. If you're a blogger, consider a business insurance policy that includes liability coverage. There is even coverage available specific to bloggers. Though relatively new, it speaks to the proliferation of bloggers and the potential liabilities they face.

Final thoughts

Does all of this talk about lawsuits, taxes, and liability make you want never to start a side hustle? It shouldn't. And I'll grant you that the examples I used would fall into the category of extreme. But isn't that always the case with lawsuits? Attorney's live for situations where they can set a precedent and get the big payout. 

The steps I've outlined here to protect yourself are pretty simple. An LLC is relatively inexpensive to start. Liability insurance is cheap too.

I'd say the biggest and most complicated issue to deal with for side hustles 2019 is taxes. It's essential to understand the type of income you will receive in your side business. Understanding and planning for that in advance will save you potentially big money and hassles in the future.

So, by all means, start your favorite side hustle. Find something you like and have at it. Throw caution to the wind to get it started. That is except when it comes to taxes. Protect yourself and your income from liability. Do the three things suggestion – pay attention to taxes, think about your business entity and get liability protection – and you'll be on your way.

Success is right around the corner.

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