Sean McBride

Associate Editor

Loyola University Chicago School of Law, JD 2025

Younger employees have been increasingly engaging in side-businesses or “side-hustles” to earn extra income. This once innocently perceived practice has become a substantial compliance risk for employers and individuals who may not realize they are falling out of compliance with Internal Revenue Service (IRS) regulations. Both employers and individuals should take active steps to mitigate breaches of private agreements and public regulations.

What is a “Side-Hustle?”

A side-hustle or side business is an activity that a person pursues to attain additional sources of income, usually in addition to the income received from a full-time job. The term is increasingly used in scenarios where employees are using their free time outside of their 9-5 job to pursue entrepreneurial endeavors. 

Niche Becomes the Norm

Side-hustles have become increasingly common among millennials and Gen Z. More than half of young Americans are engaging on side-hustles in some form and averaging about $1,250 a month in additional earnings. Major publications have even begun compiling lists of the most common and best side-hustles to pursue.

The increasing prevalence of side-hustles has been widely attributed to the COVID-19 Pandemic which led to many Americans losing their jobs, working reduced hours, or working from home and having more time to spend on other projects. Both experts and Americans with side-hustles have also attributed the recent rise in inflation to cause so many Americans to pursue other means of earning. Unsurprisingly the most common reason cited for pursuing a side-hustle is to earn additional income to pay for bills. 

The most common side hustles include selling products online, babysitting, delivering food and groceries, consulting, day trading, and in some rare instances illegal substance sales. 

Harmless Earning or Trojan Horse?

At first glance, the concept of a side-hustle may seem like a harmless way for Americans to help make ends meet and spend their free time productively. However, employers have become increasingly concerned with the risk that side-hustles could pose to their business. There are two primary threats that side-hustles face: lost productivity and breaches of confidentiality. 

It can almost go without saying that side-hustles will inevitably take up an employee’s time and energy. This could cost their primary employer indirectly in instances where an employee is not giving their best effort because of burnout from managing their primary employment in tandem with their side-hustle. Even more concerning, the employee could harm their employer directly if the employee uses designated work hours to promote or work on a side-hustle. In the age of hybrid or work-from-home employment, this risk factor is exponentially increased.

In some cases, employees leverage their experience to begin a side-hustle within the same industry as their primary employment. When this occurs, employees risk breaching confidentiality agreements with their primary employer if they use knowledge gained from employment to build or strategize for their side-hustle. Further, a direct conflict of interest may arise if the side-hustle it is competing with their primary employer for business or using information gained to exploit a weakness and profit. 

These considerations would not only harm the employer but also risk breaching an implied or explicit duty of fidelity. Additionally, employers themselves risk liability if they inadequately monitor employee side-hustles and the employee uses confidential information or other employer assets to perpetuate civil or criminal wrongdoing in their side-hustle’s business. 

IRS Always Comes Knocking

The risks associated with side-hustles extend beyond generalized liability and can risk audits during tax season and throughout the year. Recently, the Internal Revenue Service (IRS) has released information to assist (or warn) people with the tax implications of side-hustles. Since most commerce is done through online payments or payment processing applications, the IRS has publicly stated that any earnings in excess of $600 will likely result in a form 1099-K needing to be completed. 

For many people, it may be difficult to distinguish between a side-hustle and an innocent hobby. However, the IRS is less concerned with the individual’s intent and more focused on the earnings and operations of the activity. This could lead to an individual inadvertently having a side-hustle and not realizing until the IRS initiates an audit. 

Act Now or Forever Be at Risk

Many employers have already taken steps to outline policies regarding employee side-hustles and the dos and don’ts for employees. However, the conversation can be an awkward one if the employer is seen as attempting to police an employee’s actions outside of the workplace or limit the employee’s ability to earn more money to make ends meet. Employers should recognize the human element to side-hustles and incorporate this into enforcement to whatever extent reasonable. 

Given the large size of many organizations, having a simple policy that outlines the requirements for a valid side-hustle is insufficient. Active engagement and enforcement of the policy is necessary to protect both employee and employer. As part of yearly compliance training that all employees are required to complete, organizations should incorporate a section devoted to side-hustles to ensure employees know the rules and can identify if their side-hustle is currently in violation of those rules.

Managers and divisional leaders should also be given yearly training on how to:

• Encourage employees to come forward proactively about their side-hustle.
• Identify and monitor activity to know when a side-hustle is presenting issues.
• Cascade company policies to employees to enable them to self-regulate when possible.

Individuals should maintain thorough and well-organized records of their side-hustle earnings and activity to ensure they are in compliance with the IRS rules. This includes an accurate accounting of all earnings, expenses, and other business activity. Further individuals should take a cautious approach and report all earnings to demonstrate a good faith attempt to comply with IRS rules. 

Rather than seeking an economy without side-hustles, employers and individuals need to recognize the ongoing prevalence of this activity and work to ensure positive long-term success in a dynamic employment environment.