Complete Guide to Launching Your First Side Business

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Sure you could probably start a side business in a few hours. But if you want to make it a sustainable source of income, you need to do some extra work.

The U.S. federal government views any earnings you bring in from your gig as taxable income, even when it’s on top of your full-time job.

So when you’re starting a side business, it’s important to treat it like a real company. You’ve got to follow the appropriate local and federal laws as well as guidelines when you’re setting it up.

Taking the proper precautions early on can save you a lot of headaches later on. Most importantly, it can prevent you from receiving a massive tax bill or penalty come tax season.

How to start a side business in 8 steps

If you plan on becoming a Shipt shopper or working with another established company, the good news is the business has already done a lot of the work for you.

The company has already taken care of the logistics of insurance and permits, and you’re considered an independent contractor. All of that groundwork makes it easier on you when you’re filing your taxes later on.

However, if you want to go it alone and start a side business on your own, a lot more work is involved on your end.

Whether you plan on dog-sitting or dream of launching a career as a freelance writer, by starting your side gig you are essentially becoming a business owner.

Even if it only makes a fraction of the money you make at your full-time job, you are still subject to laws and taxes governing small businesses.

Here are eight steps you may need to take when launching a side business, depending on your state and county.

1. Decide if you need an Employer Identification Number (EIN)

Most side hustles do not need an EIN. At least, not at first. However, that can change as your business grows and if you decide to hire staff.

For example, if you start a business cleaning houses, you might start out as your sole employee. In that situation, you do not need an EIN at all.

But, if your business expands beyond what you can manage on your own and you decide to hire help, then you will need to open an EIN to file taxes appropriately. It’s also important for identifying what you pay your employees or contractors.

One other caveat. If you’re working as a contractor for your side business and you don’t want to use your social security number on W-9 forms, then getting an EIN number is a smart idea. You can use that on your paperwork instead.

2. File the appropriate business licenses and permits

To run a side business legally, there are licenses and permits you need. Some companies, like those that sell liquor or firearms, require a federal license and permit.

But according to the U.S. Small Business Administration, it’s not just liquor and arms dealers that need to worry about permits. On their site, they state that nearly every business needs some form of permit or license to operate.

Rules vary from state to state and depend on what kind of business you run. For example, in some areas, you need a permit to run a business out of your home. Even if you are just working at your computer.

Here are some of the most common licenses and permits.

Home business license

Most states and counties require a home business license if you do any work from home.

It provides revenue to the local government and notifies authorities about your activities. Most home licenses cost between $25 and $50.

Occupational permit

Depending on what your business is, you may need an industry-specific permit.

For example, if you intend to sell baked goods, you’ll need a food processing and safety permit. Salons, daycare facilities, dog-sitters, and more all need occupational permits.

Doing Business As (DBA)

If you are doing business under a name other than your own, your city or state will require you to file a DBA application, which usually has a fee.

To find out what licenses and permits your particular business needs, visit the U.S. Small Business Administration site and click on the appropriate state.

3. Select a business structure

Most freelancers and side hustlers start out as sole proprietors. And when starting a side business, that’s usually a smart option.

But over time, your needs may change. You may eventually want to consider switching to either a limited liability corporation or incorporating the business. Here’s a breakdown of your options.

Sole proprietorships

Under a sole proprietorship, one person is in business for themself.

It’s pretty much the easiest type of business structure to take on. You don’t have to file any extra paperwork, and there are no legal formalities when you want to change up your business.

However, as a sole proprietor, you are completely responsible for any debts you take on due to your business dealings.

For example, if you get into a dispute with a client and he sues you, because you are a sole proprietor, your personal assets are fair game in a suit.

When you want to expand, raising capital can be difficult, too. There’s only one share of the business–yours–so there’s nothing to portion out to investors.

So if you intend to grow your business beyond a one-person operation, you may want to look at other options early on.

Limited Liability Corporation (LLC)

An LLC is one of the newest business structures, but it’s becoming increasingly popular.

Essentially, an LLC protects your personal assets from business debts. Earnings and losses are reflected on your personal income tax returns. Therefore, LLCs have fewer paperwork requirements than other structures.

Many freelancers, especially freelance writers or designers, opt for an LLC to protect themselves in case of lawsuits.

How the government taxes LLCs differs from state to state. So if you have clients located throughout the country, the different taxation rates can make managing your business finances more complicated.

Forming an LLC can also be more expensive since you often need to hire a lawyer or legal service to do it for you. And some states require that an LLC have at least two or more partners.

Incorporate

If you plan to grow your business into a multi-person, full-time operation with shareholders and investors, incorporating your business may be for you. New businesses can incorporate as either a C class or S class company.

The government taxes C corporations twice. First on its profits, then on the distributions given to shareholder. By contrast, S corporations are taxed just once. However, they cannot offer stock options.

4. How to file as a sole proprietor, LLC, or incorporate

Filing your business structure can cost anywhere from $200-$1,000, depending on your state’s fees.

And depending on how complex your state’s laws are, it may be a good idea to hire a lawyer to handle it for you since the system can be difficult to navigate on your own.

Fun fact: legal services like LegalZoom can help you file appropriately for far less than it would cost hiring a private attorney.

5. Get insurance

While many side gigs can be started without a lot of upfront investment, one of the things you should consider before going too far into developing your business is insurance for your side hustle.

Whether you are a dog-sitter, driver, cleaner, or computer repair-person, insurance can go a long way to protect you in the case of an accident or mistake. While you may think that sounds like overkill, accidents happen all the time.

Imagine if you bake gourmet cookies and a child has an allergic reaction. Or you’re walking a dog for a client and the dog bites another dog.

Or better still, if you’re a writer and your laptop is stolen, your clients’ data could be compromised. You could end up in court and liable for thousands of dollars in damages.

Insurance is an essential safeguard for both you and your side business. Trust me.

But insurance for a side gig doesn’t have to wreck your budget. You can get a policy for $300-500 a year. If you’re not sure where to start looking for one, talk with an independent insurance provider about your needs and to get a quote.

6. Develop a system for tracking expenses and profits

Managing taxes and income can be difficult. If you want to make your life (and your accountant’s) much simpler, you should come up with a system for tracking your expenses, profits and managing receipts ASAP.

Start by doing the following.

Open a business bank account

While the IRS doesn’t require you to have a business bank account if you have a side business or freelance, it can make things much easier for you.

With a business bank account, you can just look at your bank statements and get a complete snapshot of all of the income that came in and all of the expenses you paid.

Those statements are invaluable and will make preparing your taxes a more streamlined process.

Open a business credit card

Similarly, opening a business credit card to use for expenses related to your side business can be a huge help.

If you use your personal card, it can be easy for expenses to get lost and for you to lose out on important deductions. Having a designated card just for your business costs will make managing your finances much easier.

Keep receipts

You should always keep copies of your receipts to help you during tax season when you file your returns.

And, those receipts can also help protect you in the case of an audit. However, managing a bunch of loose receipts can be burdensome and take up a lot of space.

The good news is there are receipt-management systems that are affordable to help you organize and electronically store your receipts. Wave, NeatReceipt, and Shoeboxed are just a few options you can use to manage your records.

7. Figure out how you will handle taxes

One of the most overlooked parts of running a side business is paying taxes on your side income.

But remember, all of your gig earnings are taxable. And it’s important to plan ahead so you don’t get hit with a surprise tax bill in April.

As a side hustler or freelancer, you have two options for managing your taxes: submitting estimated or quarterly taxes, or adjusting your W-2 withholdings.

Estimated taxes

If you have a full-time employer, they withhold federal and state taxes for you.

But with a side gig, setting aside money for taxes is entirely up to you. And if you don’t pay enough taxes throughout the year, you can get hit with a hefty underpayment penalty.

If you expect to owe more than $1,000 in taxes for the year due to your side gig, then you need to file estimated taxes. To figure out what you owe, estimate what you think you’ll make for the year. Then, send in four payments throughout the year.

To prepare for those regular payments, set aside 20 to 30 percent of everything you earn and put it in a tax savings account that you touch only when making tax payments. That way, you don’t have to scramble to come up with the money for your tax bill.

If this sounds complicated–and it is–you may want to hire a tax professional. Alternatively, you can use TurboTax Self-Employed software to manage quarterly taxes.

Adjust W-2 Withholdings

If estimated taxes sound like way too much work and you have a full-time job, you can skip quarterly payments and just adjust your W-2 withholdings.

Calculate how much you owe in taxes for your side gig, divide that number by the number of paychecks you get in the year, and set up a meeting with your human resources department.

You can fill out a new W-2 where you withhold extra amounts of your income for federal and state taxes, eliminating the need for estimated taxes.

While you’ll see less money in your core paycheck, it will save you the time and stress of managing quarterly taxes and setting aside money in a separate tax account.

8. Launch your side business

While getting your side business off the ground the right way may be more time consuming than you originally thought, it’s well worth the effort.

Doing your research and filing the appropriate paperwork ensures your business will succeed in the long run and allows you to focus on growing its earning potential.

With your business making money, find out how much your side gig can help you save on your student loans with our prepayment calculator below. Moonlighting just a few hours a week can make a huge difference.

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.899% APR to 8.179% APR (with AutoPay). Variable rates from 2.570% APR to 6.980% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. SoFi rate ranges are current as of September 14, 2018 and are subject to change without notice. See APR examples and terms. Lowest variable rate of 2.570% APR assumes the current index rate derived from the 1-month LIBOR of 2.08% plus 0.740% margin minus 0.25% AutoPay discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.57%-8.17% (2.57%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Estimated average savings amount is based on 14,659 Education Refinance Loan customers who saved on loans between August 1, 2017 and July 31, 2018. The calculation is derived by averaging monthly savings across Education Refinance Loan customers whose payment amounts decreased after refinancing, calculated by taking the monthly payment prior to refinancing minus the monthly payment after refinancing. We excluded monthly savings from customers that exceeded $4,375 and were lower than $20 to minimize risk of data error skewing the savings amounts. Savings will vary based on interest rates, balances and remaining repayment term of loans to be refinanced. Borrower’s overall repayment amount may be higher than the loans they are refinancing even if monthly payments are lower.

2.57% – 6.98%3Undergrad
& Graduate
Visit SoFi
2.47% – 5.87%1Undergrad
& Graduate
Visit Earnest
2.47% – 8.03%4Undergrad
& Graduate
Visit Lendkey
2.80% – 6.22%2Undergrad
& Graduate
Visit Laurel Road
2.48% – 6.25%5Undergrad
& Graduate
Visit CommonBond
2.57% – 8.17%6Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.