Thinking of starting a side hustle?
According to the latest New Business Insights survey commissioned by Intuit Quickbooks, millions of Americans are planning to start businesses in 2023 – the majority of whom say inflation is driving their decision.
While building a new revenue stream can increase your income, it may also come with a few surprises. Here are seven things to know before starting a side hustle.
1. You Have Business Structure Options
Every business has an underlying business structure that determines how the business and its owners are taxed – and if owners are personally responsible for business liabilities.
By default, businesses are categorized as sole proprietorships, which means you and the business are one entity. If you go this route, you’re fully responsible for all of your business’s liabilities. Further, you’ll need to file a Schedule C with your personal income taxes.
Alternatively, you can take the required steps to set up another type of structure, such as a general partnership, limited liability company, C-corp, or S-corp. LLCs and corporations limit your personal liability, while each structure handles taxes differently.
Before taking any steps, research the business structure options and implications.
2. Taxes Will Become More Complicated
If you’re currently an employee, your taxes are probably pretty simple. Employers pay half of Medicare and Social Security taxes, and your income is likely automatically withheld throughout the year to cover taxes.
When you start a side hustle, however, things get more complicated.
“Taxes on your business earnings are not automatically deducted like with a traditional paycheck or W-2. You’ll want to estimate and earmark a portion of your earnings for when tax time comes to avoid an unpleasant surprise,” Karen Barson, vice president, customer segment and product leader, small business-self-employed division at Intuit, says.
Many experts recommend setting aside a third of your earnings for taxes, but it can vary among businesses. You can consult a tax advisor to ensure you cover your bases.
3. A Side Gig Is a Real Business That Requires Planning
The term side gig sounds pretty casual, but it refers to a real business that requires planning. Take some time to research the market you’re entering and the customers or clients you’ll serve. Consider how you’ll position yourself, how much you’d like to make, what your expenses will be, and what it will take to be profitable.
“Oftentimes people get a brilliant idea they’re excited about and they dive in head first – before they’ve thought about a business plan, their goals or basic startup expenses,” Barson says,
“By taking a moment to ask yourself a few crucial questions about what your side business really is – you’ll put yourself in a much better position to succeed,” she says.
4. You’ll Face Legal Risks
As a business owner, it’s important to think about liabilities. Businesses can be held responsible for damages they cause to others and their property.
For example, if you become a pet sitter and someone’s pet gets hurt while under your care, you could be held responsible for the medical bills. Or, if you become a rideshare driver and get in an accident, you would generally be liable for the resulting damages.
If you decide the risks are too high, you can protect yourself with business insurance like general or professional liability or commercial property coverage. Certain business structures will also help to ensure you can’t be held personally liable for damages.
5. Side Gigs Aren’t All Smooth Sailing
Starting a business can be very rewarding, but it’s not necessarily easy.
According to the U.S. Bureau of Labor Statistics, only about half of businesses make it to the five-year mark.
Along with selling a product or service, running a business requires administration work, accounting, marketing and advertising, customer relationship management, customer support, workflow management, financial planning, and more.
Additionally, business owners can face a variety of problems such as fluctuating demand, poor press, disgruntled customers, fraud, theft, and supply chain shortages.
It’s important to go into a new business with a realistic mindset about the journey ahead.
“Challenges are inevitable but with a bit of preparation you can meet them with clear goals in place,” Barson says.
6. Technology and Tools Can Be Your Friends
With businesses requiring a wide range of tasks, many experienced owners recommend adopting productivity tools.
“Maximize the use of automation to cut down on manual tasks and get up and running faster, “ Alice Rowen Hall, co-founder, and creative director at Rowen Homes, says.
“Invoicing, scheduling, and social media posting are just a few examples of the kinds of processes that may be automated with the right tools and software,” she adds.
Additionally, Brian Clark certified registered nurse anesthetist and founder of United Medical Education, says, “Consider using productivity tools such as Trello, Asana, or Google Suite to keep your tasks organized, and financial management tools such as QuickBooks or Wave to track expenses and revenue.”
7. Time Management Is the Key to Success
Starting a side gig requires a significant amount of time and effort.
Some may approach it thinking that they’ll do whatever it takes to make it work. It’s easy to overwork and burn out, however, which can negatively impact your main gig, side gig, and overall health.
While dedication and grit can be good, it’s important to find a sustainable schedule that works for your life as a whole.
On the other side, some may not dedicate enough time to the gig, thinking they’ll just wing it.
“One common mistake is underestimating the time and effort required to run a business. Make sure you have a solid plan and realistic expectations,” Clark says.
To find the right balance, schedule the amount of time that you’ll dedicate to the gig each day or week and track the results. Then, you can make adjustments over time.
A Side Hustle Is a Legit Business
Most side gigs aren’t get rich quick hacks. They require research, a solid plan, persistence, and patience.
“Ultimately, remember that your side hustle is a business, not a hobby,” Barson says.
“If you don’t know where to begin, there are great free online resources that will guide you step-by-step, like this one from the Small Business Administration,” she says.