Side hustler or small business owner: Which one are you?

Holy hustling, Batman! Are 39% of Americans really working side gigs to bring in extra income?

Yes, they are! But are such endeavors simply so-called side hustles…or do they cross the threshold to be counted as small business enterprises? And in the end, does it even matter?

Let’s suit up and investigate!

A (Very) Brief History of Freelancing

In medieval times, horse-mounted knights often carried lances—long wooden shafts tipped with pointy steel heads.

If a knight’s lord passed away, the armored soldier had to look elsewhere for income. Sometimes this meant renting out their services to the highest bidder! Such self-employed warriors eventually became known as “freelancers”…and as they say, the rest is history.

The Rise of the Gig Economy

Today, nearly 40% of the nation is freelancing or working on side projects, thanks to the rise of the gig economy. As the IRS defines it, the gig economy is an “activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.”

The fact that the IRS is talking about it should make you sit up and take note. Because while this brave new world of gig work has empowered countless hustlers to bring home extra bacon, it’s not without its complexities. And those complexities matter, not only to the workers but to their clients!

Side Hustler or Small Biz Owner?

If you’re earning extra income in the gig economy, are you doing so as a side hustle to make extra cash…or are you pursuing a passion, hoping to launch a small business? For that matter, are you already at a point where you should be thinking of your venture as a small business entity?

Many people have trouble accepting that they are running a de facto small business. For those who’ve worked for an employer for years, it’s easy to experience impostor syndrome. They may not feel confident enough yet to recognize that their side hustle is (or should be considered as) a full-blown business!

On the flip side: A side hustle, no matter how profitable, may remain nothing more than a way to supplement your income while you stick with your day job. Nothing wrong with that!

But you might want to reflect on whether that day job is fulfilling you…and whether that side gig could be transformed into a full-scale business. If the latter, would you picture it as a solopreneur situation, or is scaling up in the cards? Is there enough potential business to onboard some employees or freelancers to help out?

Taxes Considerations

How you work and get paid always has tax implications you need to understand and comply with. Here are some of the basics related to side hustlers and small business owners!

Self-employed, independent contractors

As TurboTax notes, individual income tax filers use Form 1040 if they are “employees and independent contractors.” But in addition to filling out a Form 1040, anyone who receives payment as a “self-employed individual (a.k.a. an independent contractor, consultant, contract-to-hire, etc.)” should receive a 1099-MISC form “from any client who paid you for your work during the tax year if it was more than $600.”

The 1099-MISC serves the same purpose for self-employed workers as a Form W-2 does for employees. Employers withhold payroll taxes (such as Social Security and Medicare) from their employees’ wages, whereas self-employed persons have to pay these in to the IRS themselves—in addition to their income taxes.

Having a Form 1099-MISC can help you keep track…but not every client bothers to send their freelancers a 1099-MISC. Whether they do or not, you still have to report it as self-employment income, regardless. In fact, the IRS notes you have to report self-employment earnings over $400.*

*Specifically, “You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions.”

We highly suggest reviewing the IRS’s website to learn more, and to understand any quarterly payment requirements you may be obligated to submit.

What about freelancing platforms?

Clients who hire workers through freelance platforms such as Upwork may not be required to send 1099-MISC forms. Why not? Because freelancers who use such third-party apps typically submit their tax information to that platform, usually via a Form W-9. In Upwork’s case, the platform files a Form 1099-K to the IRS when U.S. freelancers “receive at least $20,000 through Upwork in a year with at least 200 transactions.”

Whether you get forms from clients or third-party apps or not, it is your responsibility to pay your taxes. If you receive income, you’ve got to report it to the IRS. The good news is you can generally run reports from third-party sites that list your earnings. You may also be eligible for certain freelancer tax deductions!

What about LLCs and Sole Proprietors?

Some people establish a small business entity, as either a sole proprietorship (i.e., “a business that’s owned and operated by one person”) or a limited liability company (LLC), which can “be formed by an individual or a group of entrepreneurs.”

LLCs require more paperwork to establish, plus there are separate tax filings to deal with. Still, an LLC is a more appropriate route in many circumstances. Rocket Lawyer lists a few “pros of freelancing through an LLC,” such as asset and liability protection, tax flexibility, better marketing potential, more room to expand, and the ability to earn business credit.

So if you’re loving your side gig and can imagine it growing into something greater, what’s holding you back? What are the obstacles to pursuing that dream?

Maybe you’re sitting on the fence because of anxiety. Or maybe you just need to read our next blog—“Signs it’s time to turn your hobby into a business!”

The good news, no matter where you’re at, Ruby’s on your side and here to help! From professional virtual receptionist support to personable live chat agents, we’ve got your back, 24/7, 365 days a year—with flexible, scalable packages suitable for every budget!