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When to Separate Your Side Hustle From Your Personal Taxes

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Illustration for article titled When to Separate Your Side Hustle From Your Personal Taxes

Illustration: Richard Drury (Getty Images)

We live in the age of the gig economy, as nearly half of Americans earn extra cash through side gigs, according to a 2019 Bankrate survey. But when should you consider your side hustle a proper business and pay taxes separately from your individual tax return?

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Knowing when your side hustle has become a business

When your side gig has become more than just a hobby, it’s time to separate your finances. The IRS defines a hobby as an individual pursuit “without intent to generate a profit.” It’s a vague definition, especially since you can still make money through a hobby (e.g., selling paintings on Etsy), but the rule of thumb is if you’re making a profit in three out of five years, the IRS will likely assume you’re running a business. Other questions the IRS will also consider:

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  • Does the time and effort you put into your hobby indicate an intention to make a profit?
  • Do you depend on income from the hobby?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to run the hobby as a successful business?
  • Have you made a profit in similar activities in the past?
  • Do you expect to make future profit from the appreciation of assets used in your hobby?

From a tax perspective, there are no deductions you can claim for a hobby. A business, on the other hand, offers the benefits of deductions.

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Why filing as a business is a good thing 

Claiming a business allows you to offset losses incurred on some transactions against profits earned on others. In fact, most business expenses can be deducted against your business’ gross income, which pre-limits your taxable income before the IRS can get to it. This includes:

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  • Capital expenses spent on improving the business
  • Interest on loans
  • Dues and subscriptions paid to business-related organizations
  • Office space and equipment, including furniture and computers
  • State and city taxes
  • The business portion of your home
  • The business mileage on your car
  • Tuition for related education
  • Insurance, employee salaries and benefits.

Further steps to keep your business finances separate

Separating your business finances will simplify your taxes and save you a lot of pain if you ever get audited by the IRS. Below are some common guidelines for keeping personal and business finances divided.

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Create a separate checking account and credit card 

Mixing personal and business expenses will lead to headaches at tax time. For easier bookkeeping, keep your personal funds and business funds (and receipts) completely separate.

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Set aside 30-40% of your side hustle income for taxes

Business taxes relating to freelance income can be difficult to predict down to the last dollar, but a common rule of thumb is to put aside 30% to 40% of your income for federal, state and self-employment taxes. You’ll be required to make quarterly tax payments if you expect to owe $1,000 or more in taxes on freelance income in your annual tax return.

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Make your business a legal entity

If your side gig ends up in legal trouble, your personal assets could be at risk. You can protect your assets by making your business a legal entity, either by forming a Limited Liability Company (the simplest business structure for a one-person business) or through incorporation. You might want to consult with a CPA on what options are best for you.

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Apply for an employer ID number (EIN)

Instead of providing your Social Security number to a client, customer, or vendor, you can give them an EIN instead. Also known as the taxpayer identification number, the EIN is used by the IRS to track your business earnings. You will also need an EIN to open a business account at your bank, and to hire employees.

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Apply for a DUNS Number

A DUNS number establishes a credit identity for your company that’s completely separate from your individual credit profile. Establishing and monitoring your business’ credit is essential for setting up payment terms with suppliers and qualifying for credit.

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Implement a separate accounting system

Hiring an accountant or bookkeeper can be costly if you’re running a very small business on your own. Fortunately there are good accounting software options available with automated features available, such as syncing your transactions from PayPal or Square. Some of the most commonly used programs include QuickBooks, FreshBooks, Xero and Wave (which is free).

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Log the hours you spend working on your business

Your time is valuable. For a true assessment of your income, you need to make sure the total price you’re charging the client is greater than the cost to your business of completing that project.

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Charge Your Phone Wirelessly With 50% off a Multifunctional LED Lamp

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Best Tech DealsBest Tech DealsThe best tech deals from around the web, updated daily.

White Wireless Charge Lamp | $18 | Amazon | Clip coupon + code ABC88699
Black Wireless Charger Lamp | $20 | Amazon | Promo code ABC88699

When you’re ready to turn in for the night, you don’t want to forget to charge your phone— especially if your mobile device doubles as your alarm clock.

With this wireless charger lamp, you can make this crucial step of your nightly routine even easier by just setting your phone on the wireless charging pad and… well, that’s all there is to it!

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Other functions include multiple lighting modes as well as a sleep timer option for auto shut-off of the light after 30 or 60 minutes.

This lamp can be yours in white for $18 if you clip the coupon on Amazon (it’s below the original $40 price) and add promo code ABC88699 at checkout.

You can snag the black version for $20 using the same code—no coupon though, sorry.

Don’t sleep on this deal! Who knows how long stock or the coupon code will last?

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Keep That Hotdish Hot With 65% Off a Luncia Casserole Carrier, Only $11 With Promo Code

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Best Home DealsBest Home DealsThe best home, kitchen, smart home, and automotive deals from around the web, updated daily.

Luncia Double-Decker Dish Carrier | $11 | Amazon | Promo code SDDU9S7F

It has been a long time since the days we could safely have a potluck or other gatherings, but we have a fantastic deal perfect for once those times return. These double-decker Luncia dish carriers can be had for 65% off when you add promo code SDDU9S7F at checkout and clip the coupon on the site (it’s just below the price). These holders fit 9″x 13″ sized baking dishes.

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That means you can insulate and keep two dishes of food warm for only $11 instead of $30. What’s more, your Luncia carrier will arrive by Christmas if you order today as a Prime member.

Just add promo code SDDU9S7F and clip the 5% off coupon to bring the price down to $11 for the blue or the grey option.

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Grab this offer while it’s still around!


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Conquer Your Pup’s Dander and Fur With $700 Off a Cobalt or Charcoal Bobsweep PetHair Plus Robot Vacuum

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Best Home DealsBest Home DealsThe best home, kitchen, smart home, and automotive deals from around the web, updated daily.

Bobsweep PetHair Plus Robot Vacuum & Mop (Cobalt) | $200 | Best Buy

Bobsweep PetHair Plus Robot Vacuum & Mop (Charcoal) | $200 | Best Buy

Allergies can be bad enough as the seasons change. Don’t let pet hair and dander add to that by vacuuming it up early and often. That chore is easier said than done— unless you have a robot vacuum to do the work for you. This lovely bright cobalt Bobsweep PetHair Plus robot vacuum and mop, only $200 today at Best Buy seems like an ideal option. That’s a whopping $700 off, by the way.

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You can get the same deal for the charcoal version of the robot vac, too. This model is not only specially made for picking up pet hair, it self docks and charges when it’s finished with the work.

It also comes with a mop attachment, so it can take care of those kitchen floors for you as well. Grab it while it’s still available for this fantastic price!

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