Also Read: Ai Side Hustles that Make Over $10k
Starting a side hustle can be a thrilling way to bring in extra money while working on a passion project. It is just a passion project, I wish the tax authorities would believe that. Thus it is important to ensure that your side hustle is legally covered to avoid any potential pitfalls that could threaten your achievements. In this article we will guide you through from choosing the right business structure , obtaining necessary permits, understanding tax obligations to protecting intellectual property in a bid to helping you build a solid foundation for your entrepreneurial journey.
Register Your Business
The first step in making sure your business is legally protected is to register your business. Consult legal practitioners to learn more about the registration process in your area .Registering your business also demonstrates professionalism and adds credibility to your business.
Obtain Necessary Permits and Licenses
Most business small or big usually require permits or licenses to operate legally. It is important that you find out about the legal requirements before you start operating. The health department may have to come and assess your place of business before they can declare you fit to operate.
Separate Personal and Business Finances
With any business it important that you separate personal and business finances. The separation will make it easy to asses your progress as well help in the tax filling process.
Understand Tax Obligations
Every legally registered business pays tax to the government. Thus it is important you make sure that your business is meeting all the tax obligations as expected.
Protect Your Intellectual Property
If your business creates original content, it is important that you consult with legal professionals to lean more about protecting your intellectual property. This could include copyrights, logos or patents for your creations.
Use Contracts and Agreements
Any professional relationship should be governed by a contract, whether it is family, friends, contractors or suppliers. Make it a point to lay out the terms, rules and regulations of the transaction. This will not only protect your business but also nature the relationship that you have with your business associates.
Stay Updated on Legal Changes
Business laws and regulations are always changing, thus it important that you stay updates on any legal updates and changes. Join the necessary communities and forums to keep pulse of any legal requirements changes.
Tax Implications of Running a Side Hustle
When running a business it important that you understand the tax implications in order to make sure you and your business are legally complying. Below are some of the key points on the tax implications of running a business:
Self-Employment Taxes
Running a business means you are self employed thus you required to pay self employment tax even if you have a job and pays another tax. The Current self employment tax is around 15% of your net business income.
Estimated Tax Payments
Traditional employees do not need to pay taxes as that is done for them , while for self employed individuals are required to make those payments on a quarterly basis. Estimated tax payments are made based on your projected income and self-employment tax liability. If by any means you fail to meet this, severe penalties may be imposed on you.
Business Expenses
When running a business you have a the luxury to deduct certain expenses from your taxable income. Deductible expenses, include anything ordinary and necessary for your business. For example mortgages, advertising costs, medical expenses , and depreciation.
Home Office Deduction
The home office deduction applies if you use a portion of your home for your side business . This means you are eligible to deduct a part of your home related expenses such as rent and utilities. To qualify the space must be used regularly and exclusively for your business activities.
Tax Filing
All self employed individuals are expected to file an annual tax return using Form 1040 and Schedule C (Profit or Loss from Business). Schedule C is used to report your business income and deductible expenses. Make sure you accurately report and claim all necessary deductions to minimize tax liability.
Recordkeeping
It is important that you keep track of all the business activities from income to expenses and also keep the records. This could mean sales receipts, invoices, deposit slips, and canceled checks. Good record keeping also helps incase of an audit.
Seek Professional Advice
The tax law is a dynamic field that is subject to sudden changes and requires one to keep pulse of all these changes. Thus it can be helpful to work with a tax professional , someone will keep you updated and helps with all the necessary information and changes.
Side Business vs Full Time Job Tax Filling
Filling for a fulltime job and filling for a side job are tow different things. Below are some of the major distinctions:
- Income Reporting
If you have a full time job you will have your income taxes done for you automatically and receive a W-2 form at the end of the year. Where as side business owners are supposed to report business income separately, using a 1099 form. - Self-Employment Taxes
Unlike employees who have Social Security and Medicare taxes withheld from their paychecks, self-employed individuals are expected to pay the employer and employee portions of these taxes. This mean you have to pay self-employment tax, which currently 15.3% of your net business income. - Estimated Tax Payments
Side business owners are expected to make estimated tax payments on quarterly basis through out the year. Failure to make these payments will result in severe penalties. - Deductions and Expenses
Both side business owners and full time employees are eligible to claim deductions although these may differ. As a side business owner, you can deduct business-related expenses that are ordinary and necessary for your line of work. This includes expenses such as supplies, advertising costs, professional fees, and business-related travel expenses. Keep in mind that some deductions, like the home office deduction, are specific to self-employed individuals. - Different Tax Forms
When filing taxes for a full-time job, employees usually use Form W-2 and file their taxes using Form 1040. While, a side business owner, you are expected to report your business income and expenses on Schedule C (Profit or Loss from Business) in addition to your regular tax forms. Schedule C is used to calculate your net business income or loss, which is then reported on your Form 1040. - Recordkeeping
Side business owners are required to keep track of all the business activities and the necessary records for that for the purpose of taxes and auditing. On the Other hand a full job does not require you keep any records, taxes are deducted automatically.
Given these differences, it is important for side business owners to stay organized, keep accurate records, and potentially seek professional tax advice to ensure they are fulfilling their tax obligations correctly. By understanding the distinctions between filing for a side business and a full-time job, you can navigate the tax landscape more effectively and maximize your deductions while remaining compliant with tax laws.
Bottom Line
Having your side hustle legally covered is important if you looking to achieve log term success. You cannot do everything by yourself, I get that people are always looking for ways to save money but this is not one of them. It is imperative that you work with a professional to avoid any legal issues that may wipe out your hard work. As a side business owner, do you know how to legally protect yourself and your business?
