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.
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1 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 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% 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 July 31, 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 7/31/2020. 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.
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2 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 September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 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 September 10, 2020.
5 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 0.16% effective August 10, 2020.