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How to turn your side hustle into a legit business

Key Points
  • At some point your side gig could become serious business.
  • When you reach that stage, here are the next steps.
VIDEO3:0803:08
Gig economy money

As the gig economy explodes, it's easier than ever to be your own boss. But you still have to answer to Uncle Sam.

Indeed, the percentage of workers in alternative work arrangements, including independent contractors or freelancers, increased during the 2000s, after barely budging in the 10 years before that, according to a report by labor economists Lawrence Katz and Alan Krueger.

Now, about a quarter of all Americans participate in the sharing economy, according to the Pew Research Center.

But at some point your side gig should become serious business. When you reach that stage, here are the next steps:

Choose a business type

As long as you're the only owner of the business, you can operate as a sole proprietor, which is the simplest form of business entity.

"For most people that works just fine," said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co.

To establish a sole proprietorship you don't even need to register with the federal government other than filing to get a tax ID and for the appropriate licenses and permits.

Compassionate Eye Foundation | DigitalVision | Getty Images

But many experts advise forming a limited liability corporation, or LLC, which would give you some liability protection as well as tax advantages. That requires you to register with any state where you conduct business.

Plus, if anyone else shares ownership with you, the business must be organized as an LLC, partnership or corporation.

Tip off the tax man

Even if you aren't making any money — which many business owners do not, at least as first — "don't think you can ignore the taxes," Steffen said.

When it comes to income taxes, what you will have to pay varies by state but in every case you must report your business income and losses on Schedule C of your federal tax return.

HANDOUT: Earnest chart gig economy payouts June 2017

Even with income as little as $1,000, for example, you can still deduct expenses like mileage or other travel costs, cell phone use and your home office to offset what your business brings in, Steffen said.

If you don't have any expenses, make a tax-deductible contribution to a Simplified Employee Pension account, or SEP IRA, Steffen advised. Those who are self-employed can contribute up to 25% of their net earnings or a maximum contribution of up to $56,000 in 2019.

In addition, one of the new perks of the Tax Cuts and Jobs Act is the introduction of the qualified business income deduction, which went into effect last year. Anyone who files Schedule C for profit or loss from a business might qualify.

This tax break allows owners of "pass-through" entities, including sole proprietorships, S-corporations and partnerships, to deduct up to 20% of their qualified business income (although figuring out exactly who qualifies has been thorny).

Open a business account

It's important to keep your business funds separate from your personal funds. And just like with any checking and savings account, the rates and fees vary from bank to bank, so shop around before settling on a place to stash your cash. (The average interest rate on a savings account is a mere 0.17%, but top-yielding savings account are now as high as 2%.)

Once you are set up to accept or spend money as your business, the sky's the limit. But before taking off, it might make sense to speak with a tax professional who can help you on your way.

"On the Money" airs on CNBC Saturdays at 5:30 a.m. ET, or check listings for air times in local markets.

More from Personal Finance:
Small-business owners look to grab this 20 percent tax break
Work a lot? You can save more for retirement, too
How to keep from going broke from your friend's side hustle

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