The Hidden Risks of Non-Compliance For Side Hustle Entrepreneurs

Millions of people are starting side hustles, whether it’s selling crafts on Etsy, landing gigs on Fiverr over the weekend, or running a drop shipping store part-time. It’s nice to earn extra income, but many side hustlers unknowingly cross legal lines in the process. Legal compliance isn’t just applicable to big businesses. Anyone earning income from a side gig, no matter how small, is subject to certain laws and regulations. Ignoring these laws can put you at risk for fines, penalties, and even being shut down.

If you’re running a side gig to earn extra income, here’s what you need to know about legal compliance.

1. You are responsible for data kept in the cloud

No matter how small your gigs are, you’re legally responsible for any customer or client data you manage. This means if you’re using software to run your business, even a simple email marketing tool, you’re responsible for making sure that data is secure and meets all regulatory compliance requirements.

Before using any software, make sure it’s compliant with the laws and regulations you’re required to follow. It’s also helpful to use software that embodies voluntary compliance standards, like SOC-2. Just because a compliance standard isn’t a legal requirement doesn’t mean it won’t help you get compliant. Sometimes it’s best to go above and beyond to cover all of your bases.

2. You might need a business license

If you’re just mowing lawns and hauling garbage to the dump, you might think you don’t need a business license. Well, your state laws might disagree. It all depends on your business and state. In some states, you can operate under your legal name without a business license as long as you’re not collecting sales tax.

However, some states require all independent contractors to register for a business license, which includes people who drive for UberEats, Uber, Lyft, and DoorDash. If you’re not sure if that requirement applies to you, consult with an attorney to get an accurate answer.

3. You’ll  need to pay income tax

All income earned through your side gig is taxable at the state and federal level. If you don’t have state income tax, you’ll still need to pay federal income tax. Since it’s money earned outside of a W2, you’ll also need to pay self-employment tax (Social Security and Medicare) on all of your earnings. When you earn income through an employer, they pay 50% of this tax. When you’re earning money through gigs, you’re responsible for the whole tax, although you can write off the employer-equivalent portion as an expense.

If you get paid for your gigs through PayPal, Cash App, Venmo, or similar companies, you’ll receive a 1099-K if your gross yearly payments exceed the set threshold. In 2025, that threshold is $2,500, but it’s set to be $600 in 2026 and beyond. When you receive this form, it means the company has reported the same amount of income to the IRS, making it extremely risky to not report this income.

4. You might need a permit

Depending on what you’re selling, you might need a permit or two. For example, it’s okay to make tamales at home and give them to friends and family, but it’s not legal to sell them to the public. Still, many people make decent side cash advertising homemade dishes on local Facebook groups. It’s just not legal.

If you’re going to sell food, you need a permit, and you’ll be required to meet strict food safety standards. You probably won’t be able to use your home kitchen to prepare the food, and you’ll be required to use a commercial kitchen with the proper licensing. If you’re caught selling food without the proper license, you’ll be shut down, and the regulatory authorities will likely monitor your social media posts to make sure you don’t violate the law again.

5. Some services require insurance

While you can get away with helping friends and family with just about anything, offering certain services to the public requires you to be bonded or insured no matter what you charge. In some states, you can’t post ads for your services without listing your contractor license number. This applies to electricians, plumbers, roofers, and general contractors. Violating these rules can result in fines and being shut down.

Compliance isn’t optional

Although there are plenty of ways to earn side money, don’t skip compliance. The risks of trying to fly under the radar far outweigh the hassle of following the rules.