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.
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.
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.
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.
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.
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.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.15%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|1.99% – 6.84%3||Undergrad & Graduate|
|1.91% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.53%5||Undergrad & Graduate|
|2.15% – 4.42%6||Undergrad & Graduate|
|1.89% – 5.90%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.00% – 5.63%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 Important Disclosures for Earnest.
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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for LendKey.
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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are 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.
7 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.