Setting Up Your Side Hustle

Matt Butler |

How To Structure Your Side Hustle



So You Decided To Get A Side Hustle, Great!  Now Comes The “Fun” Part, How Do I Structure It?


Having a side business or "side hustle" as the kids say, involves creating additional income that is taxable, and depending on the type of work you do, it could be subject to different taxes. Even if you are earning a small amount of money from your side hustle, it’s important to understand how to structure it for tax purposes.


The first step in structuring your side hustle for taxes is to decide how you want to set it up. Depending on the nature of your business, you may need to establish a separate business entity such as a sole proprietorship, limited liability company (LLC), S-corporation, C-corporation, or partnership. Setting up an entity can help protect your personal and financial assets from being held liable for any debts or liabilities related to the business.


Another important step in structuring your side hustle is to obtain a tax identification number, or EIN. An EIN is required for any business that has employees and/or files taxes quarterly. It also allows you to open a bank account specifically for the side hustle, which can help keep your personal and business finances separate.


Finally, you should research your local and state tax requirements in order to determine what taxes must be paid. Depending on the type of business and where it is located, there may be additional taxes such as sales or payroll taxes that you are responsible for paying.


Here are the following types of tax structures for businesses:


1. Sole Proprietorship: This is the simplest way to structure your side hustle. As a sole proprietor, you are legally and financially responsible for all liabilities and debts associated with the business. You will report profits or losses from the business activity on your individual tax return (Form 1040).


2.LLC (Limited Liability Company): The main advantage of setting up an LLC is that it provides personal liability protection. This means that if your business is sued, only the assets of the business itself can be targeted. You will also have to file a separate tax return (Form 1065) for your LLC in addition to filing your own individual tax returns (Form 1040).


3.C Corporation: This type of corporation is the most complex to create and maintain but also offers the greatest protection from liabilities and debt. A C Corporation will pay taxes on its net income, with shareholders then paying taxes individually on any dividends that are distributed. Form 1120 must be filed for a C Corporation in addition to filing your individual tax return (Form 1040).


4.S Corporation: This type of entity offers the same liability protection as an LLC, but with somewhat different tax consequences. An S Corporation allows you to pay yourself a salary and receive distributions from profits without being taxed twice. Form 1120S must be filed for an S Corporation in addition to filing your individual tax returns (Form 1040).


5.Partnership: This entity is similar to an LLC in that the partners are personally liable for any liabilities or debts incurred by the business. A partnership can be formed by two or more persons and each partner will report their share of profits and losses on their individual tax return (Form 1040). Partnerships also require a separate tax return (Form 1065) to be filed with the IRS.


With the right setup and tracking system, you can maximize your profits from your side business and minimize your tax liability. Depending on the amount of income you are earning and what you intend to do with your business in the long term will help guide you into the appropriate tax structure. It is vitally important to consult with a tax professional and financial planner to go over your estate and long-term goals.


If you have any further questions please contact:

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Matt Butler

Investment Executive

AFIN Family Wealth Management

1220 Kensington Rd, Suite 220, Oak Brook, IL 60523

Direct: 630-686-3267   Main: 630-686-1463

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