Taking Your Side Hustle to the Next Level | Insight from Accountant Mirel Barcelo
As someone who has their own “side hustle,” it is definitely easy to get confused or even frustrated questioning whether it’s time to amp up your serious hobby into a full on business. I’ve been there, and I know many others who have run into the same challenges. However, there is a lot that goes into taking it to the next level. So how do you know when to move forward with taking that next step? Is there a right time? Do you turn your side hustle into an S-Corp or an LLC? What about filing taxes? There are so many questions that anyone with their own business or soon-to-be-business would take into account, regardless of the industry they’re in. These questions and any challenges in making that leap can apply to nearly everyone.
I couldn’t be more excited to share with you my conversation with Mirel Barcelo, founder and owner of Corp 1 Financial Services, LLC, where she offers her comprehensive services as a CPA. Today on TGB, she’s offering all of her tips into turning your side hustle into a real business, tax deductions you need to be paying attention to, steps you should be taking throughout the year to prepare for the the next tax season and so much more. I hope this insight offers some great tools to implement in your life if you may be looking to transition from a side hustle to full on biz mode!
1. How do you treat your side hustle like your business? What are accounting steps you should take with your side hustle?
A side hustle is a business, no matter how small. As such, the main thing to keep in mind is separate and clean records. This will not only help you determine whether or not you’re making a profit, but it will also help you during tax time to figure out deductions.
2. What are the 10 deductions you may be missing for your side hustle?
Most common deductions individuals don’t realize and they could be taking advantage are:
i. Start-up Costs: include every penny you spent while starting your new business.
1. Incorporation costs, licensing fees, and computer and software expenses, among others, are deductible.
ii. Cost of sold goods: everything you buy to make money will be deductible.
1. Purchases made to resell, costs of parts, and raw materials used for inventory are deductible.
iii. Basis: if you contribute an asset, the value of the asset will be transferred to the business, tax free, and serve as a base when selling or disposing of the asset.
iv. Car and travel: any miles or travel expenses are deductible if used for your side hustle.
1. Business miles used for business purposes, or actual car expenses, such as gas, maintenance, and depreciation are deductible.
2. Tolls and parking costs are deductible.
3. Actual travel costs incurred for business purposes are deductible.
v. Home office: if there is a room in your house you turned into your home office, that portion of your house can be deducted as a non-cash expense, because you already pay to be there.
1. Portions of rent, mortgage interests, utilities, home improvements, and depreciation can be deducted.
vi. Cell phone, phone, or fax line: the usage you give your cell phone, phone, or fax line is deductible. If the line is only used for your business, it is deductible in full.
1. A portion of your cell phone can be allocated to your business.
2. A dedicated phone or fax line is fully deductible.
vii. Meals: with clients, or potential clients, meals are 50-percent deductible for tax purposes.
viii. Advertising Fees: include all those expenses you make in order to promote your product, and they are 100-percent deductible.
1. Facebook and Instagram ads are deductible.
2. Business cards are deductible.
3. Event expenses, such as location, catering, and souvenirs, are deductible.
ix. Postage and other supplies: this mostly applies to people doing online business and require shipping. Those who use eBay, for example, need to pay close attention to this deduction.
1. Packing tape, boxes, and postage used on sending products are deductible.
2. Paper, pens, pencils, and clips, among others, are deductible.
x. Qualified Business Income Deduction: after the 2018 reform, small businesses qualify for a business income deduction.
1. Certain businesses qualify for a deduction of up to 20-percent of their qualified business income.
3. When is it time to turn your side hustle into an S-Corp?
Businesses should always be their own separate entity. Especially when dealing with customers and/or creditors. The most common structures for small businesses are Limited Liability Companies and S-Corporation.
As a recommendation, I usually tell my clients to start with an LLC if they’re unsure of the direction of the business at first, especially if they are single owners/members. That way, they will not be bound by corporate regulations and they won’t have to file a separate return. When the business starts being very profitable, then I recommend turning that LLC into an S-Corporation for tax benefits and put them on a salary to avoid potential audits.
4. What are the steps you should be taking now with your side hustle in order to prepare for tax season next year?
a. Keep records of income. Tracking your income will give you an idea on whether or not your business is successful or growing. It will also give you an insight on the fees you’re charging and time spent on it.
i. Keep separate bank accounts (even when the business is not incorporated).
ii. Keep an excel spreadsheet with records of jobs or products sold.
iii. Some companies (Uber, Lyft, Monat) will report all your income on a 1099
iv. Make sure you are quantifying your profit/loss quarterly to determine whether or not you will need to make an estimated payment.
1. IRS penalizes you 10% if you have a tax liability of over $1,000 come tax time and you fell below your estimated tax amounts.
v. Talk to an accountant to ensure you are not overpaying.
b. Keep records of expenses.
i. Track expenses on account or credit card designated for the business. Keep receipts and records as neat as possible.
ii. Track car mileage or car expenditures related to your business. IRS allows to use either mileage or actual expenses when it comes to reporting vehicle expenses. Having clear records of both will help determine which one will give you a bigger expense which will reduce your tax burden.
iii. Keep track of the usage of your home. If you use a part of your home for your business, it can be deductible. Make sure you keep an area designated solely for your business.
iv. If you have a separate phone or fax line, that is 100% deductible for your business. If you use your personal phone, there are calculations to determine what percentage of the expense can be deducted.
v. Your business can run at a loss for three out of five years before running the risk that the IRS will deem your business a hobby.
5. Do you think it’s always necessary, no matter what stage you are at with your side hustle to trademark it or create an LLC.? It is expensive so how do you know when it is worth the investment?
From my professional experience, I always recommend clients create an entity when doing a business venture. If you do not want to spend the money to incorporate at first, make sure your business is not high risk or high cost to consumers, as a lawsuit or bankruptcy could put you in financial jeopardy. Also, if it is almost the end of the year, and you can afford to wait, incorporate and make your entity effective as of January 1st of the following year. Corporations need separate tax returns–regardless of the number of owners–so this might cost you a bit more when presenting your income taxes.
Incorporating is not very costly and you can usually find a variety of service providers making, the process very seamless.
Trademarks are a must when wanting to preserve proprietorship of a brand. Although not mandatory, it is definitely advisable.
6. What are a few of the biggest transitions or challenges people run into when transitioning from side hustle to full on business?
The biggest challenge when running a small business is to keep things separate. Since the owners are usually funding the operation, they tend to take money from their personal accounts to buy inventory or for advertising. Also, once the business starts becoming a bit profitable, they start paying their personal expenses directly from the business. Recordkeeping is a big challenge for small business owners as well. They tend to lack the resources to hire or implement systems to document transactions. They end up overpaying taxes because they lose receipts or don’t keep proper records.
7. Do you recommend having a business credit card for your side hustle even if you haven’t created it into a full-on business yet? Or should you just pull from your checking account? When is the right time to set that up?
Definitely opening up a separate bank account or credit card is recommendable for any side hustle (even if it’s not incorporated). This will help during the taxes to recognize the true income and expenses associated with the business activity. This will help identify whether the business activity is profitable and ensure the taxpayer is not overpaying taxes.
As far as timing, the sooner the better. Best practice is to designate the bank account or credit card prior to initiating the business activity.
8. If you haven’t turned your side hustle into an S-Corp or an LLC, haven’t trademarked anything, etc. are you allowed to apply for a small business loan or must you wait until all of that is finalized and complete?
When you’re not a separate entity, you can only apply for loans on a personal level. Raising money is one of the biggest challenges sole proprietors often face. Also, since you cannot sell stock in the business, investor opportunity is limited. Banks are also hesitant to lend to a sole proprietorship because of a perceived additional risk when it comes to repayment if the business fails.
9. Can you speak on expenses and how to properly take into account what you are actually permitted to write off?
My suggestion is always to document everything related to the business, even when it is not expensed through the business bank account or credit card. If you are unsure if something could be deductible or not, record it anyways and present it to your tax preparer or accountant come tax filing.
10. Finances can always get overwhelming and confusing no matter what place you are in in your side hustle journey. What is your top tip to stay organized throughout the year?
My number one suggestion is be as organized as possible. Keep separate and clean records of your business activity. Also, meet with your accountant at least once every quarter and see where your business is headed. This will alleviate the tax filing process, plus transactions will be fresher in case of improper documentation. It is easier to remember a transaction that happened a month before, than a year before. Also, you will know whether or not you will have a tax liability come tax time and you can start making estimated payments. This will eliminate any penalties which can add up.
