Make sure to take the correct legal precautions
From selling your favorite skin care line to your social
media connections to building a website for a former client, today’s technology
allows us to easily bring in extra income with casual side projects. However at
what point does it become a viable business.
The IRS states, an activity is considered a business if it has made profit, and we are supposed to report all income to the IRS – the tax authorities of course want their cut. This includes the side job, barter exchanges, awards, prizes and gambling proceedings.
If you earn less than $600 from your side business it can be reported as miscellaneous income. However, anything over requires a 1099 or w-2.
So with this in mind – now it’s up to you to make sure everything is legitimate.
There are additional benefits to making your side business legal, other than the goal of bringing in a substantial amount of extra income…tax benefits! By collecting receipts of expenses related to your side gig you will lower your tax bill!
Common deductible expenses related to your side gig include:
- Business location, rent, etc.
- Business mileage: car, airfare, etc.
- Dues and subscriptions paid to business related organizations
- Necessary tools and equipment
- Education and classes
(Please refer to IRS for exact list of deductible expenses.)
For example, if you earn $10,000 in one year from your side business, and your deductible expenses total $3,000, you would owe taxes only on $7,000. $10,000 – $3,000 = $7,000 taxable income. Not too bad!
So now let’s get into the administrative aspects of setting up your new business. Here are 4 administrative aspects to protecting your business.
- Form an LLC or Incorporate
Forming an LLC or corporation for your side business will protect your personal assets, such as your savings and personal property, from any liabilities of the company. Each business structure has its own advantages and disadvantages depending on your specific circumstances, but the LLC protects your personal assets, with a minimum of paperwork and legal red tape.
- Register a Fictitious Business Name or DBA A DBA, also known as a “doing business as” and “fictitious name,” allows you to run a company under a name that is not your legal name. For example, if you’ve got a sole proprietorship/general partnership, you’ll need a DBA if you’re using a name for your business that’s different from your own name. For an LLC or Corporation, a DBA must be filed to conduct business using a name that’s different than the official Corporation or LLC name you filed.
- Get a Federal Tax ID Number
To distinguish your business as a separate legal entity, you’ll need to obtain a Federal Tax Identification Number, also referred to as an Employer Identification Number (EIN). The tax ID number is issued by the IRS and is similar to your personal social security number. It basically allows the IRS to track your company’s transactions. If you’re a sole proprietor, you’re not required to get a Tax ID number, but it’s still good practice as you won’t have to provide your personal social security number for business matters.
- Obtain the Necessary Business Permits and Licenses Depending on your business type and physical location, you may be required to have one or more business licenses and/or permits from the state, local, or even federal level. These licenses can include: A general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses.
As your side project brings in more income your legal obligations also become greater. Getting your legitimate ducks in a row from the beginning will help you avoid any bumps in the road. And who knows maybe your business will morph into a full time career!
Innovative Lease Services, Inc. provides commercial financing to business across the US. Programs include; equipment financing, working capital loans, merchant services and cash advances.
For startup funding information visit us at www.ilslease.com, or call us at 800-438-1470.
Written by Angela Faringhy, Innovative Lease Services, Inc.