The Danger of the Side Hustle
When paying taxes quarterly versus the end of the year, is it the same frequency as personal taxes?
It depends on the entity. I think what the person is saying is like, is the cadence to which you pay your estimated taxes the same for personal versus business. And that depends, it depends on what kind of entity you are. If you're operating as a slide hustle, you're operating as a sole proprietor, which means it's the same. If you're operating as an LLC or a corporation, well, not LLC, but partnership or corporation, according to IRS, then it's something.
What's the range of money I need to make to be considered a side business?
Truthfully, that's a pretty general question. There is never a wrong amount to say that you made in a side business, whatever you made, you should say that you made. There isn't, I don't think any penalization for making over a certain amount or not, whatever you made, you should say that you made. I think the difference comes in when you are under-reporting, if you have 1099s or any kind of evidence that you made money that someone else gave you money, you should be reporting it. The odds are the IRS already knows anyway. So, you just would be reporting it as a sole proprietor. Remember, if you're operating as a side hustle, you're actually a sole proprietorship.
The Danger of the Side Hustle
Introducing Shiloh & Benji (00:41):
Those of you just joined, welcome. Please drop in what you do. What are you side hustling on these days? Here we go. So, I'm Shiloh, founder, and CEO of ComplYant. You might have seen my face on all the ads. That's the cartoon version of me. The host for today is the wonderful Benji. You wanna introduce yourself?
Yes, I am Benji. I'm a customer success specialist here at ComplYant. I've been working in big data and customer success for a long time. I really care about customer solutions. I really care about problem-solving. And that is why I've chosen ComplYant cause it's great company culture and that's definitely why I'm here. Today we are obviously here for the dangers of side hustle. So, Shiloh, who has been in tax research and the tax business for a long time, as well as you all know, the CEO and founder of our company is gonna get us started here. And just let me know as we go along, cause we'll jump in. And feel free to ask questions as we go along, we wanna make sure that you're engaged and that you feel heard, cause again, this is really informal and we really want y'all to have a good time cause we're gonna have fun. We're gonna have fun talking about tax, which is really two hard things to combine into one.
What is a side hustle? (01:37):
Awesome. So again, I'm Shiloh, founder and CEO of ComplYant just for context. So, you know you're not getting this webinar from someone who has never touched tax. That is not me. I've been doing this for 14 long arduous years, but I love it. And we are ComplYant, a digital tax assistant here to help small businesses do what they do a little bit easier and better. So, you can go to the next slide. First, really quickly. I just wanna go over what is a side hustle? Maybe people have different definitions of it, but it is exactly as it sounds, it is just sort of operating a business without formally being a business. Maybe you just decided, I think I like making aprons. Okay. I'm gonna sell a few aprons on Etsy. That's side hustling. You don't have a full entity. You don't have a business bank account. You're not established with a business license. None of those things. That qualifies you to be a side hustle. And when you're early in the days, that's really easy and convenient. Like I'm gonna throw it up and see if anybody buys it. The downside is the moment you sell one thing, you become a business and whether or not you choose to legitimize that business. Well, that's up to you.
What is my entity? (02:48):
So, one thing to know - what entity? Obviously when you're side hustling, you're like, I don't have an entity, I'm not a business. Technically that's not true. You're actually operating as a sole proprietorship. Even if you're not like a declared entity, you haven't filed anything with the Secretary of State, you haven't gotten a business license, sales tax, any of that, you're still selling as a sole proprietorship. Anything you sell for profit makes you a retail salesperson. You become a salesperson, whether or not you report that income is totally up to you, but you technically could be codified as a sole proprietorship. So that's one thing to note. The other thing, the biggest thing to me, which is the biggest danger, in my opinion, is that all of the legal liability and all of the tax liability is on you when you are operating as a sole proprietor or as a side hustler. That means let's say you sell cookies, and you home make them, and it's your grandmother's recipe and you are killing it. You pull up the table at the picnic and you're selling to everyone at the park and then someone gets sick and then they threaten to sue you. And then they actually do sue you, they're now suing you personally because the legal liability is on you. Even if you're not an established entity. Let's say that the state of California catches wind that you've been selling cookies. And now they've assessed an audit against you, and you owe all of these back taxes. They can come after your personal assets for not complying. That's what happens when you don't set yourself up as a true entity and you just sort of operating in the gray. And if you don't make much money like, oh, I only made a thousand dollars last year. It's not a big deal. Fine, but assume that you will do better and the year after that and the year after that. At some point, it's worth evaluating whether or not the risk you're taking on is worth what you're doing.
Is your business actually in compliance? (04:46):
So anyway, next slide. Quick question for everyone. What percentage are on the track? What percentage of businesses do you think are in operational compliance? So how many businesses in the US do you think are actually doing the right thing? What percentage have I got, 30%? What else? 45. 10, at least he knows the truth. 10%. That it is 50. Okay. 10, 25. I actually looked this up. Only 30% of businesses in America are actually truly, legally and tax in compliance. Like they pay every year on time, they do all the right things and that doesn't even account for the businesses that are operating under the side hustle guys. So, I imagine it's much larger. I think with COVID we saw a massive influx of people just creating and starting things out of nowhere because either they were bored, or they found some hidden talent they didn't know they had. And I think that that number is probably doubled because of COVID. So next slide. The reason why that's so interesting too is we operate in this space of like, it's really easy to throw something up on a website. That has never happened before, right? Like we used to have to set something up, officially, sell it at a place, physically do something in order to be a business. But now in post COVID era or still the COVID era, you can start a business just with an Instagram page, like a TikTok. You can do anything. You don't even need to have a storefront. You don't even have a website. You can operate fully on Instagram and be a business. So, I think that it just gets harder and harder over time to show that earnestness.
Illegitimate businesses don’t get resources. (06:45):
Show me the money. This is my favorite one. Another danger of the side hustle is you don't get to take advantage of all of the resources that are offered when you're not a legitimate business. So, I have seen lots of businesses be turned down for lending opportunities, turned down for grant opportunities because, in your mind, you're like I've been selling these blankets for five years, but you don't have a business license. You haven't registered your LLC or whatever you have with the Secretary of State. You don't have business banking; you're not doing anything that's required to legitimize your business. You're not a Dunn's number, any of those things, but you're like, but I've been selling. But states counties, and the federal government, they don't recognize that when it comes to funding. It's really easy to get sent a bill, it's very difficult to get sent money. So, if you want the money, the benefits of being a small business owner and actually getting some of what we saw, lots of this in COVID times, everybody with the PPP and the idea, and there were so many acronyms for loans and grants, it was all over the place. People were getting money and didn't have businesses. People kind of got money halfway and had businesses. Because of that, the state and the federal government cracked down even more on making sure that businesses were actually legitimate businesses.
Get a free business license, now. (08:01):
If you try to get a grant from a city now, you have to give your firstborn, take a blood sample. I mean, it's just ridiculous because they've learned their lesson. Obviously, PPP taught them that the requirements aren't stringent enough to make sure that things don't slip between the cracks. So, we hear it all the time on Instagram, the LLC Instagram, where they tell you, you need to have a tax ID number so that you can put something in your child's name so that you can do whatever God other awful other things that they want you to do. But the truth of that is business credit is a real thing. Business credit cards, business lines of credit, business loans, all of those things require you to be a legitimate established company. And usually, it requires for you to be established company for longer than one or two or three years. So, the longer you wait in your side hustling space, the less beneficial it is for you to be able to take advantage of getting some of that money. I spoke with the city manager for the city of LA, not too long ago. And she mentioned to me that 60% of the businesses that applied for the LA city grant got denied because they didn't even have a business license. It's free. If you make less than a hundred thousand dollars in a given year and you file on time, your license is free, but nobody does it because they think it's easier to just operate in the gray. And it is not.
Next slide. Oh, well, that's supposed to say something. What it's supposed to say - I don't remember, let's got to the next slide. I updated it and didn't send the updated version. Yay. Compliance snafus. It was a question and I'm sure it was a question about something that you all might know or see but I forgot.
Your side hustle is not your personal cash. (09:48):
So, we'll move on. Another danger of the side hustle is when you operate as a side hustle, you run everything like it's your personal money. So when you sell, you put all the money in your personal bank account, you don't have any books, you couldn't file taxes even if you tried. Some of you are selling on CashApp and before IRS made the recent change, you were just leaving all the money in Venmo and CashApp and not touching it or using those, then we’ll CashApp cards to spend. That was the status of the side hustle. The problem is the IRS catches up quickly and whatever the IRS does, the states follow, they follow very closely. So, it doesn't take much time for regulation to be put in place to figure out what's happening in between the cracks.
So, the IRS is trying more and more to make sure that people are not operating in such a way that they aren't able to collect their tax revenue cause ultimately that's the most important thing for them. When you don't have proper business behavior, it gets really hard when you are ready to legitimize. So, let's say you've been running a company for two or three years as a side hustle and doing all of this co-mingling and not having proper business behavior. When you're ready to say, okay, now I'm gonna be a corporation. You now have to try and figure out how to do all of this as a functioning business. But if you do it early, when you don't have very many customers and it's really slow, it's really easy to set up. It's really easy to set up QuickBooks when you don't have much, it's really easy to set up a bank account when you just go to the bank, after you establish your entity, it's three steps. And then it's really easy to set up some kind of tax deadline trackers like ComplYant so that you are not missing deadlines. All those things are super easy to do when you've got lots of time in the early stages of your business. If you wait until you're selling 4, 5, 6, $7,000 a day and you have to ship orders, pack orders, order orders, get inventory in, customize things. Your entire day is full of order filling and tracking plus marketing and then you're on social media trying to do all of that as a party in one. Somewhere in there, banking, bookkeeping, and tax management become an afterthought. And if you don't set up early and you make it become an afterthought, now you're panicking even more. You have to pay somebody that you hope is doing it right versus you just getting a good handle on it from day one.
It seems scary, but it’s not that difficult. (12:04):
That really, I think eases a lot of the anxiety that business owners feel when they're attached to sort of this panic feeling about tax and compliance. And we get it done early when you're slower and you've got time, it's less pressure. Then you can spend some time learning how to do categorization and QuickBooks. It sounds daunting, but there's lots of education on their platform or categorization and fresh books or zero, whatever tools you're using. And those products aren't super expensive, you're not spending a ton of money every single month, 10, 20, $30. Some of those tools are relatively free if you're a party of one. So, take the time to learn your business behavior early on. Don't assume that well, I don't have sales, so I don't need to do that. That's not true. When you don't have sales is when you should do it so that when you do have sales, it just is part of the process. And you know, every week I spend 30 minutes on bookkeeping, I'm done. I take five minutes, look at my ComplYant account, and make sure I'm good to go on that. I take a few more minutes to look at my tax budget. I'm good to go on that. And then you're done. You're back-office stuff can be done in an hour versus you're trying to piece it all together during December 31st tax season, trying to hurry up and get everything to your tax person, looking up all these receipts. Nobody has time for that.
Make it easy on yourself, create the business behavior early and have coffee with other people that are accountants and lawyers, and pick their brains a little bit. You don't necessarily have to pay them this massive fee in order to be operational. But when you wait until you're further down the line and you're in New York Fashion Week with the apparel brand, someone's gonna charge you up the Wazu because they think you can afford it. But if you're early in and you're like, I'm just trying to get started and make sure that I started out on the right foot. People will have coffee, and give you 10, 15 tips. You can find some articles online. We have lots of blog posts, top five tips, top 10 tips so that you can get in the good space. Create business behavior early. It will save you so much money. So, so, so much money. Next slide.
You still have to pay sales tax. (14:13):
How many of you think that you still have to pay sales tax? If you're able to hide your sales, do you think you still have to pay sales tax? Anybody? Yes or no. If you successfully can hide those coins in CashApp, pre-IRS change, do you think you still have to pay sales tax? Absolutely, absolutely. You think you're hiding? You're not hiding at all. Sales are cyclical. You're not the only person involved in the sale. The person that is buying from you is involved in the sale. The place you are selling at is involved in the sale and all of these parts are reporting to the government in some way. You're not hiding. You're not. I assure you. If you use technology in any way, you're not hiding, unless you are cash selling hair out of the back of a trunk on the corner of Slauson and Crenshaw, cash-only transactions. That is the only way you are hiding income and the amount of people that use cash in 2022 is next to none. You're not hiding. You are not.
It's just taking time for the local government, the state government, and the IRS to find you, but you are not hiding. What actually happens in the audit process is the IRS waits. If you never file a tax return for your business, they just wait. They wait until you become large enough of a liability that they can actually get money from you on penalty and interest. And then they send you a little letter that says, hey, we know you've been doing stuff. You owe us money. Five, 10 years down the line you're like I got away with it. I never had to pay. The statute of limitations never closes - that's for sales tax that's for income tax. It stays open forever. What that means is they can take as long as they want to come after you to say, we know you sold in whatever year, and we want our money. It never closes. Now, that's not true if you file. If you file your returns, let's say you make a mistake. Three years go by four years go by, depending on where you are, the statute is close. They can't audit you about it anymore.
Pay, pay, pay. You're not hiding. I assure you. And the conversations I have heard around how to improve sales tax filing are changing. So obviously nexus laws have changed. I've heard conversations around real-time tax sales tax payments, meaning the second you buy the item, the tax goes directly to the state. All of these things are coming around that are changing the way that tax is reported, which means they're improving their ability to figure out how sales are being done and to make sure they're being reported properly. You're not hiding. I assure you. Next one.
I mentioned this already in my question, but I will dig into it a little bit more. If you sell any physical goods, any physical goods at all, there is something called nexus. We've all heard folks talk about it. The Delaware issue, everyone. There's all this legality around legal changes around what's been happening and how sales tax is reported. Very simply put, nexus is just the way that items are categorized as taxable. So it just says that if you sell in a certain place, here's what we think you should be paying or not paying. That's all. It is determining when and where you have to pay sales tax. This becomes more common because obviously with the wake of the internet, people can sell all over the country. So, it used to be that if you lived in a certain state or wherever you were housed, that's the state that you pay sales tax. That's not the case anymore. Now it's basically whatever place you sell to based on a certain dollar amount, once you hit that dollar amount threshold, you now have to pay tax to that state. Even if you don't live there. That's what nexus is. It's just the tracking of your transactions. Most of you, you're probably really small businesses. You don't have to worry about it for a while. Those thresholds are pretty large, usually like a hundred thousand, hundred and fifty thousand, 250,000. So, once you get to the massive space, marketplace space, then yes, it'll become an issue. But I've actually been reading more and more about how they want to adjust those thresholds to make sure that smaller or midsize businesses are being sort of included in that. So, there's been some talk about that. I've also seen talk about taxing digital transactions, so marketing transactions. So, when you sell on certain sites, the revenue that the site makes for you to advertise on that site will then become subject to sales tax.
So, there are all these sales tax things that are changing. And you never know where you fall in that. So, staying upfront and at least filing the return, even if the amounts are zero, register, get a permit, and file. Also, you can't buy wholesale without a sales tax permit anyway. So, you might as well set it up and just start filing your returns, even if they're zero so that the statutes of limitations can close. If you don't do that, they stay open forever and they can always come after you.
Q&A Intro (19:26):
Okay. Time for some questions, Let's hear ‘em? What have we got? Did anyone submit anything in Q and A? Or we can throw some questions up that we got beforehand. I know we got some questions submitted before
Absolutely. It doesn't look like we have any open Q&A at this moment, but I think we can absolutely jump into the questions that we had.
Go ahead and read them.
And then while he's doing that, if you all wanna throw any questions in the chat please feel free to. You don't have to bring them up. You can just read them.
I'm looking right now. I appreciate you all. So
Start at the top and we'll work through if whether or not we can answer them.
Q1- What’s the max dollar amount to be considered a side business? (20:34):
You got it. So, the first question that I'm showing is from Marcus G. Marcus, we really appreciate you submitting that question. And it says what is too much to say that you made in a side business? And I think the question and forgive me, Marcus, if I'm incorrect, but I think we're also kind of looking at what that range is and what determines whether that side business becomes a main business, I think what he is diving into.
Truthfully, that's a pretty general question. There is never a wrong amount to say that you made in a side business, whatever you made, you should say that you made. There isn't, I don't think any penalization for making over a certain amount or not, whatever you made, you should say that you made. I think the difference comes in when you are under-reporting, if you have 1099s or any kind of evidence that you made money that someone else gave you money, you should be reporting it. The odds are the IRS already knows anyway. So, you just would be reporting it as a sole proprietor. Remember, if you're operating as a side hustle, you're actually a sole proprietorship. What's the next question?
Q2- Can you open an LLC as the registered agent? (21:46):
Absolutely. The next question we have here looks like we're having trouble reading the name, but they're registered as Myser J so we're gonna go with that. Is it possible to open an LLC with myself as a registered agent or as the registered agent?
Quick answer. Yes
We'll probably leave that question at the quick answer, cause again, we are not looking to give specific or really any advice on legal or financial matters. So, this quick answer is yes.
The quick answer is yes, anyone can be a registered agent. You just have to fill the form out.
Q3- What’s the frequency tax payment? (22:27):
Absolutely. And the next question, I believe this is a more general question, but it's still similar along the same lines. However, I believe I know the answer, but the question is paying taxes quarterly versus the end of the year, is it the same frequency as personal taxes?
It depends on the entity. I think what the person is saying is like, is the cadence to which you pay your estimated taxes the same for personal versus business. And that depends, it depends on what kind of entity you are. If you're operating as a slide hustle, you're operating as a sole proprietor, which means it's the same. If you're operating as an LLC or a corporation, well, not LLC, but partnership or corporation, according to IRS, then it's something. So-
Q4- Tax codes and write-offs for family working in the business? (23:14):
Thank you Gina for submitting that question. That's a great question. And then I have Nicholas asking tax codes and write-off for using family members working in the business.
You guys really... Quick answer, you should consult a CPA.
That's a great question Nicholas and we really appreciate it.
Thanks, Lisa. Good to see you. Well, I didn't see you, but bye.
Yes. Thank you for stopping by Lisa
What's the next question?
Q5- How to do taxes for the side hustle? (23:45):
Next question we have from John and it's how to do taxes for the side hustle.
Let ComplYant help you. Visit us at complyant.co and we can help you get started on how to manage your tax. That's the best answer.
Q6- Personal 1099 VS Corporate? (24:03):
And the next question we have is from Alejandro and it's just a general question between personal 10 99 versus just a corporate.
Oh, I don't what...
I believe in regard to a side hustle
Maybe they wanna know the difference. Could that have been the question?
I believe that is the question.
That's the question for a CPA, I'll say you should consult a professional. The tricky thing about some of these questions is that they're really case-specific and you guys don't wanna go-
Q7- Pros and Cons of having S Corp versus an LLC? (24:35):
Oh, pros and cons of S corporate. That's a good one. Okay, I'm gonna switch it up a little bit and answer Jamie's question. What are some of the pros and cons of having an S Corp versus an LLC? So, the interesting thing is an S Corp is sort of an IRS designation. The IRS doesn't necessarily recognize LLCs, they're called disregarded entities, which is such a tricky thing cause everybody signs up for an LLC. All of the internet says you need an LLC. LLC is only one part of the function in terms of entity management, but when it comes to the IRS, they don't actually recognize it as an entity. So, you have to actually either declare yourself as a partnership, a single-member LLC, or you can decide to declare yourself as an S Corp. But you don't actually register as an S Corp. You register as a Corp or an LLC with your state.
So, it's very confusing. But basically, it's just, do you wanna be taxed as a corporation, or do you wanna be taxed as single-member LLC or sole prop? It just depends on, I think a few factors - the state you're in, I think the biggest difference is tax liability. How do you wanna be taxed? Corp taxation is obviously higher than what might be your tax bracket if you don't make a ton of money if you're operating as a single-member LLC. So, it's a gray area, but it depends on a few factors. Just obviously your income bracket, what state you're in, and state taxability would help to, I think, contribute to that conversation. But those two are very gray area-ish. That's probably the best answer. Next question.
Q8- SM LLC tax liabilities (26:10):
Absolutely. We have a few more questions and one I think is also a little bit more in-depth, but I think it does fall along the lines of tax liabilities. Someone's asking… Miss Stacy's actually asking us to discuss the SM LLC tax liabilities.
That's a little more specific. That's a very specific question. I would say consult a CPA. You wanna make sure with that type of entity, you wanna make sure that you're getting correct guidance according to your state liability and government liability. So, I'll defer that. What else have you got?
Q9- Good or Bad? Using personal funds to support your business. (26:52):
I believe there is one last question that we may have already answered actually. Let me just pull that back up here. I appreciate y'all's patience. Is there a benefit or a disadvantage to using personal funds to fund or support your business?
Oh, I don't know of a disadvantage, I'll say that. There is a benefit only if you're doing proper bookkeeping. If you're funding your own business, you are investing in your business, and that investment serves as the basis of your ownership. So, if you just pay for everything on your own money and you don't do any kind of bookkeeping or categorization. Let's say later down the line, you wanna sell it, or later down the line, you want to get investors or something else. You sort of grow and it gets bigger than what you imagine. And you haven't done any bookkeeping around how much money you personally put in. You don't get to take the tax benefit of that. And on the other side of that, it gets really tricky when you are ready to sell. For instance, I had a client once that had a business that he had poured all this personal money to, and I said, let's create a lender/lendee scenario. So, I had him draw up just a simple lending agreement to and from himself. And so, he got to say that if I ever sell this business, all loans are repaid back first when in an acquisition. So, he would've gotten his money back first if he is ever to sell.
So, there are little loopholes like that, where if you're pouring all this money and you can set up like a loan agreement with yourself, you can set up an investment agreement with yourself. And now you have stake and ownership that further down the line could become really helpful. It may not matter to you now when you're like, I don't sell much, or I'm not that big of a deal, but later down the line, it could be really beneficial. Don't think about what your business is today, think about what your business can be five or 10 years from now, and then operate that way. That way you're setting up and walking in the direction of success. If you treat it like it's nothing, it's gonna be nothing. If you baby-stepping it, kind of niggling around and not really taking it seriously, it's not going to be serious.
Take it seriously and walk in the direction of success and you'll get there. Set up properly, have the business behavior. That way, you're not in between. Oh, I think we have, oh no, that's it. Do you have any other questions? You can visit us at email@example.com. It's been so nice talking to everyone today. Hopefully, some of this, any of this, all of this was helpful. And as always, please reach out to us if you need anything else.
Absolutely. And we really hope you come back for our future webinars as well. We have absolutely enjoyed all of your company here today and your engagement. We hope to have more engagement in the future and we continue to serve you and wanna bring you value as much as we can. And I thank y'all again. And Shiloh thank you for presenting this information here for us so we can get our side hustles on.
Thanks, Benji. Everyone take care.
Bye, everyone. Have a great day.