Gigs & Side-Hustles: What you need to know

You may have heard the terms, “gig economy” or “side hustle” before – terms that have been around for a long time, but concepts that are worth revisiting.  While these terms technically refer to different things, they are not mutually exclusive, and are often interchangeable.

But, why are these types of jobs so important to understand?

The idea of “gigs” and “side hustles” has always drawn people in.  “Gigs” – or independent, sometimes short-term positions – can be a great way to gain alternative income here and there.  “Side hustles” are no different.  This term generally refers to a small business that an individual can run on the side.  (On the side of what?)  Glad you asked!  This work is often performed from home, during “off” hours – generally to supplement the income one receives from their regular, full- or part- time employment.

Sources of additional income are always enticing.  As humble and wholesome as we would all like to be, our world is driven by money.  And, inflation is a natural part of the economic cycle.  Unfortunately, this causes some individuals to need to find additional income to bridge the gap between their salary and their cost of living.  And it is much more common than you might think.  Some individuals choose this lifestyle for themselves – maybe for fun, for pocket change, or a way to boost savings and retirement accounts.  While others may have been forced into it, needing a quick income fix due to company downsizing, outsourcing, resource optimization, or the like.

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ATLAS always aims to provide all clients, and readers, thorough and useful information that is current and relevant.
Gig economy and side hustles are both.

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“Gig economy is something we are seeing more and more of with each consecutive tax season,” said Dan Burrus, Tax Manager with the ATLAS Cedar Rapids, Iowa location.

It’s true!  As side-hustles and the gig-economy gain renewed traction, each tax season with ATLAS brings another round of newly formed LLCs, Sole-Proprietorships, Partnerships, and even S-Corporations for Dan and his Cedar Rapids team.  In fact, we are seeing a rise in newly formed LLCs in all ATLAS and CMMS locations.

Dan notes that, “The economy is such that many of our individual tax return clients are finding value in this form of supplemental income.”

A little extra cash in the bank, is great.  But there is more to it than that — at some point, you need to consider the fact that you have started- and are running- a business.

For many, there is a plan!  Maybe the “gig” will roll out on the side, grow slowly, and eventually the “gig” will become a full-time, viable business.  For others, the “gig” is just that – independent and temporary.  And for others still, the “gig” was a whim.  It blew in on a breeze, created some additional income, and now the individual running the show is not sure whether to keep it going or cut it off.

ATLAS is here to help!  Your Advisors That Listen And Serve offer a few pointers to keep in mind if you are considering a move toward the “gig” lifestyle.

 

Spend money to make money.

Dan reminds us of the importance of having qualified support and trustworthy advisors on your side whenever you form a new entity, or start a business venture – big or small.

“The way the world is now, it has never been easier to start a side hustle or small business,” said Dan.  “But you need professional help.  I call it ‘the three legged stool’ – your CPA, Financial Advisor, and Attorney.  Without these advisors, you could find yourself in more trouble than you thought possible.”

I know what you’re thinking – CPAs, Financial Advisors, and Attorneys?  That sounds like an expensive combination.  While it’s true, these professionals will charge for their time, the headache they will save you later on will be #worthit.

These key professionals can provide guidance regarding:

• Entity selection
• Entity registration
• Legal entity documentation, such as for operating or partnership agreements
• The timely completion and filing of required forms
• Other compliance requirements
• Accounting support (are may be required to file payroll or sales tax!)
• Separation of funds (do not co-mingle your business and personal bank accounts!)
• Self-directed retirement funding
• …and more!

 

Don’t miss out on tax deductions.

A lot of individuals are unaware of how many tax deductions they could be taking advantage of by starting a side hustle or small business.  This is, again, where your CPA comes into play.

Be sure to have a thorough discussion with your CPA about the type of business you are running – your inventory, expenses, product mark ups, equipment purchases, shipping costs, mileage, rent, and more.  Make the most of your relationship with a tax and accounting expert by taking this deep dive, and learning about the deductions available to you.  Without this conversation, your CPA is limited in the advice they are able to offer, and you could be leaving money on the table.

 

You can still fund your retirement.

ATLAS Partner, Michael Abbate, head of our Lifestyle Planning Group (ATLAS LPG) and Risk Management Group (ATLAS RMG), shared some insight about retirement funding for those making headway with their side hustle.

“Individuals taking advantage of the opportunities available in the gig economy are often do-it-yourself-ers,” says Michael.  “And yet, in my experience, it seems that – because gig workers are not in a typical workplace, and do not see a typical work [retirement] plan, they are not thinking, ‘I could do that for myself.’  They might wonder what they could do for themselves to establish retirement funding with their gig, but they forget that they could do the same thing as another business.  The difference is, they have to be more diligent about seeking out the retirement and investment funding on their own, because they are doing it themselves.”

Michael notes that gig workers may have one small advantage over those who are self-employed – no payroll.  Though this is not the case 100% of the time, the gig economy generally runs on 1099s rather than W-2s.

Without payroll, the timeline for contributions to retirement accounts shifts.  “Retirement plans – SEP and profit sharing – these can be funded after the year has ended, as long as it’s done by the time the tax deadline rolls around,” meaning these individuals have some extra time to determine how much they would like to fund their retirement because funding does not have to be completed by December 31st.

“There are options for retirement funding, but you have to know what your options are,” he says, with a reminder that – as Dan mentioned – working with a professional for expert advice and guidance can make a big difference.

“You have to file taxes as a gig worker, and this is just part of the tax process.  Talk to your CPA about the work you’re doing, and your interest in retirement planning.  Involve a financial planner to determine your options.  Between them, they’ll be able to tell you:  you can do a solo-401k, you can defer this, I’ll do the taxes, and so on.”

When asked if there is a ‘right’ time to establish a self-directed retirement plan as a gig worker, or individual with a side hustle, Michael responded, “I would probably frame it as: If the work you’re doing can cash flow a contribution and life, then you should look into the [retirement plan] options available.  But if you’re just scraping by, life wins versus a retirement plan.  The idea is to pay yourself first.  Handle life as it is now, and when you reach a point where there is money ‘left over,’ then be sure to save for life later.”

Words of wisdom we would all do well to remember.

 

A special thanks to our ATLAS Tax Manager, Dan Burrus, and our ATLAS Partner, Michael Abbate, for their contributions to this article.