App version: 0.1.0

When Does a Side Hustle Become a Business

When Does a Side Hustle Become a Business
Chris Alexis
Chris AlexisUpdated May 8, 2023
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
The money you earn from a side hustle can help you make ends meet and/or save up for a large upcoming expense like a vacation or a car. A side hustle can also give you the opportunity to pursue something you enjoy and feel passionate about, which you may not get with your day job. But when is your side hustle considered a business? The answer depends on why you are doing the activity that’s giving you extra income and how much you are actually earning from it. Here’s what you need to know.

What Is a Side Hustle?

A side hustle is an employment opportunity outside of your full-time job that brings in supplemental income. This can help you cover living expenses or work towards a short- or long-term savings goal. Unlike a part-time job, a side hustle typically involves more freedom and more control over what you’ll do and when you’ll do it. Many people pursue a side hustle that involves their passions and talents, such as writing, graphic design, knitting clothing, or caring for pets. Some may eventually make their side hustle their primary line of work.Recommended: How Much Should I Have in Savings at Each Age? 

Side Hustle vs Business

Is your side hustle a hobby? Or, is it a business? The primary difference between the two is that a business operates to make a profit, whereas a hobby is something you do for fun or recreation. But there isn’t one single deciding factor. To help you determine whether you’re side hustle is a business versus a hobby, the Internal Revenue Service (IRS) suggests you ask yourself the following questions: 
  • Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
  • Does the time and effort you put into the activity show that you intend to make a profit?
  • Does the activity make a profit in some years – if so, how much profit does it make?
  • Can you expect to make a future profit from the appreciation of the assets used in the activity?
  • Do you depend on income from the activity for your livelihood?
  • Are any losses due to circumstances beyond your control, or are the losses normal for the startup phase of your type of business?
  • Do you change your methods of operation to improve profitability?
  • Do you and your advisors have the knowledge needed to carry out the activity as a successful business?

When Your Side Hustle Could Be a Business

If you read the above list and found yourself frequently nodding your head, perhaps you’re ready to begin moving your side hustle into the realm of a formal business. Here are some signs that your hustle has what it takes to become an official business.
  1. You’ve done the research and determined there is a strong demand for your product or service in the marketplace. 
  2. You’ve become an authority in the industry.  
  3. You are profiting from your side hustle.
  4. Your competitors have noticed you.
  5. You’re looking for a change and prefer this work to your current day job. 
  6. You have a plan for how you’ll cover health insurance and retirement savings on your own.
  7. You have a comfortable cushion of savings, including an emergency fund.
  8. You can keep up with the demand for your sideline’s product or service.
  9. You’ll eventually be able to earn enough income from this business to cover your living expenses. 

How to Turn a Side Hustle Into a Business

If you’re interested in turning your side hustle into an official business, here are some initial steps you’ll need to take.

Create a business plan

A business plan is a formal document that puts all the important details about your business into one place, including the goals of the business, how you will achieve those goals, and the time-frame for achieving your goals. It should include details on how your company will be structured, how your finances will work, how you will market your business.

Determine Your Target Market

Before you launch your business, you’ll want to conduct research to determine your target market — these are the people who are most likely to use your products or services.  How old are they? How much do they earn? Where do they live? This data can help you determine how viable your business idea is, as well as help you market your product or service and grow your business over time. 

Choose a Business Structure

You can choose from several different business structures, including a sole proprietorship, partnership, and limited liability company (LLC). The legal structure of your business can affect everything from your taxes to what you're personally liable for, so it’s a good idea to talk to a tax professional about which structure is the right fit for your new business. 

Establish a Legal Business

If you’ll be doing business under a name other than your own, you may need to register your business business name with state and local governments. You’ill also need to apply for a federal tax employer identification number (EIN) through the IRS. This number is necessary for most businesses to file taxes, open bank accounts, and perform other essential tasks. The online application only takes a few minutes.

When Should You Open a Business Bank Account?

If you have a business plan or you intend to see your side business grow, it can be a good idea to open a business bank account. This allows you to keep your business finances separate from your personal spending and saving. It can also simplify your life come tax time. If your side hustle is going to stay just that — a side hustle — the answer is less clear.  Business checking accounts work in a similar way to personal checking accounts but tend to come with higher fees. So you’ll have to weigh the benefits and costs.Recommended: How Many Bank Accounts Should You Have? 

Side Hustles and Taxes

Whether you consider your side hustle to be a hobby or a business, the IRS may have a different opinion. If your side hustle nets you more than $400 a year, you must report it on your taxes. Once you pass that threshold, the IRS considers you to be in business (as a sole proprietor) and earning income. In addition, if you accept more than $600 for goods (even personal items) and services using online marketplaces or payment apps, you may receive a Form 1099-K, according to the IRS.

The Takeaway

If you have a side hustle to bring in extra income, and also find you have a passion for that work, you may want to consider developing it into a full business. You’ll need to go through a variety of steps, including setting up a legal business structure, writing a business plan, and opening a business checking account.If you plan to keep your side gig just a side gig, you might simply put your extra earnings into a high-yield savings account, where the money can earn an above-average annual percentage yield (APY). This can help that extra income grow faster over time. With Lantern by SoFi’s online banking marketplace, it’s easy to compare high-yield savings accounts based on annual percentage yield (APY),  fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

What qualifies as a side business?
Do I have to report my side hustle?
Is my side hustle a hobby or business?
Photo credit: iStock/blackCAT

About the Author

Chris Alexis

Chris Alexis

Chris Alexis has been putting pen to paper and fingertips to keyboard since his youth. He ultimately grew into an accomplished and award-winning writer who loves using the power of language to connect with audiences. He also strongly enjoys learning about who he is writing for so he can create something that will truly resonate with them. He has worked for a variety of companies, each of which have given him more experience and insight.
Share this article: