The usual 9-5 is increasingly becoming a subsidiary career choice for thousands of entrepreneurs every year. A new report from the Global Entrepreneurship Monitor (GEM), sponsored by Babson College and Baruch College, finds that 27 million working-age Americans (nearly 14 percent) are starting or running new businesses. That’s a record high for this study, now in its 16th year. Whether their adding to their income or feeding their passion, those “side hustles” are starting to feel like the “real deal” and people are recognizing their entrepreneurial potential. If this sounds like you, here’s are the next steps to turning your side hustle into a real business.
Choose a business type
As long as you’re the only owner of the business, you can operate as a sole proprietor, which is the simplest form of business entity.
“For most people that works just fine,” said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co.
To establish a sole proprietorship you don’t even need to register with the federal government other than filing to get a tax ID and for the appropriate licenses and permits.
However many experts advise forming a limited liability corporation, or LLC, which would give you some liability protection as well as tax advantages. That requires you to register with any state where you conduct business.
Additionally, if anyone else shares ownership with you, the business must be organized as an LLC, partnership or corporation.
Tip off the tax man
Even if you aren’t making any money — which many business owners don’t as first — “don’t think you can ignore the taxes,” Steffen said.
When it comes to income taxes, what you will have to pay varies by state but in every case you must report your business income and losses on Schedule C of your federal tax return.
To assure that taxes aren’t completely siphoning your income, make sure you keep track of your expenses. For example, even with income as little as $1,000, you can still deduct expenses like mileage or other travel costs, cell phone use and your home office to offset what your business brings in, Steffen said.
If you don’t have any expenses, make a tax-deductible contribution to a Simplified Employee Pension account, or SEP IRA, Steffen advised. Those who are self-employed can contribute up to 25% of their net earnings or a maximum contribution of up to $56,000 in 2019.
In addition, one of the new perks of the Tax Cuts and Jobs Act is the introduction of the qualified business income deduction, which went into effect last year. Anyone who files Schedule C for profit or loss from a business might qualify.
This tax break allows owners of “pass-through” entities, including sole proprietorships, S-corporations and partnerships, to deduct up to 20% of their qualified business income (although figuring out exactly who qualifies has been thorny).
Open a business account
When starting a business, it’s important to keep your business funds separate from your personal funds. Just like with any checking and savings account, the rates and fees vary from bank to bank, so shop around before settling on a place to stash your cash. (The average interest rate on a savings account is a mere 0.17%, but top-yielding savings account are now as high as 2%.)
Once you are set up to accept or spend money as your business, the sky’s the limit. But before taking off, it might make sense to speak with a tax professional who can help you on your way. Find a good accountant who can not only keep your books in order, but can also help you with financing or even business consulting. This will be vital to helping your new business grow!