Navigating the Threshold: How Much Money Do You Have to Make to Be Considered a Business?
As economies continue to evolve in the digital age, an increasing number of individuals are leveraging their skills, hobbies, or spare time to earn extra income: welcome to the world of side hustles. It’s important to understand when a side hustle crosses the line and becomes a fully-fledged business. The question on many people’s minds often is, ‘how much money do I have to make for my side hustle to be legally considered a business?”
Contrary to what one might assume, qualifying as a business isn’t entirely about the amount of money generated. Numerous factors influence this classification, including intent to profit, the regularity, and continuity of activities, along with dependency on the income generated. However, understanding the financial threshold can dictate when you need to shift gears from tax tracking as an individual to managing finances from a business standpoint.
To unravel the ambiguity surrounding the pivot point between side hustle and business, let’s explore the key indicators and considerations.
Your Earning
The Internal Revenue Service (IRS) often plays a significant role in determining when a side hustle morphs into a business. If you earn over $400 from your side venture, it mandates that you report that income on your tax return. But does crossing this threshold make your venture a business?
Not necessarily. While it might be time to start separating your finances and considering a business bank account, your hustle doesn’t magically become a business in the eyes of the IRS once earnings surpass $400. In fact, it’s possible for one person’s business to be another’s hobby, no matter the income disparity.
The IRS’s Hobby vs. Business Criteria
When decoding when a side hustle become a business, it helps to consider IRS guidelines around what constitutes a hobby versus a business. Here, the focus is not mainly on the earnings garnered, but on your intent for profit and the consistency and regularity of your operations.
The IRS adopts a three-year rule for differentiation: If your venture has turned a profit in three of the last five years, it will typically be considered a business. This test, however, does not fully apply to certain ventures like breeding horses. Here, two out of the last seven years are enough to earn a business tag.
Furthermore, the IRS also assesses whether you conduct your venture in a business-like manner (accurate record-keeping, separate bank accounts, a valid business plan), the time and effort invested, your financial dependence on the income it generates, among other factors.
Transitioning to a Small Business
Once your hustle checks the IRS boxes for a business, developing a solid plan to transition into a small business becomes critical. Registering your business, considering business insurance, opening a business bank account, keeping accurate recorded accounts, and researching the tax responsibilities of a small business owner are all parts of a robust transition plan.
Also, depending on your specific circumstances, it might be better to operate as a sole proprietorship, a Limited Liability Company (LLC), or a corporation. Consulting a business advisor or coach is recommended to ensure you’re taking all the necessary steps to protect yourself legally and financially.
Conclusion
The journey between embarking on a side hustle and growing it into a recognized business can be exhilarating, liberating, and at times, overwhelming. Identifying the point when your side project transcends from a hobby into a business is more complex than just calculating your earnings.
Navigating the threshold from side hustler to business owner requires an understanding of IRS guidelines, a solid grasp on your intentions for profit and your actions supporting these intentions, and crucially, the implementation of a comprehensive and thoughtful transition plan.
When your passion becomes more than just a supplemental income, and it begins to occupy a central position in your life – with regards to time, effort, and financial dependence – you are on the path of a full-fledged business owner. Remember to consult with a legal or financial advisor to ensure you’re taking the appropriate steps as your venture evolves. Keep hustling, and before you know it, you will not only be answering to the title of a business-owner, but also to the joys and challenges that accompany it.