“I just got my first paying side gig! Now what? Am I a business? What do I have to file? How does all this work?”
If you are active in the world of social and creative media, you may find yourself with an unexpected offer to accept advertising, do some consulting work, or speak for pay. If you don’t have a business of your own, or are new to starting businesses, you’re probably at a loss for some of the details of what you need to do. So let’s work them out, keeping everything as simple as possible.
How do I ‘become’ a business?
You set up a structure. If the business is just you, or will be just you for a while before expanding, then a sole proprietorship is probably best. There’s nothing you need to do in advance, nothing special to file until tax time, and you can now deduct many new expenses. You can always change structures later, in case you grow. In the USA, a sole proprietorship just means you add two new pages to your annual tax return. That would be a Schedule C to show your income and expenses, and a Schedule SE to figure your self-employment tax.
You also need to establish your start date. This can be the point when you actively started trying to get clients, or the point when you agreed to your first paid gig if it was a total surprise. From that point forward, any expense that qualifies is deductible.
Some small business situations call for a different business structure, and that’s explained in When NOT to be a sole proprietorship.
What qualifies as deductible? Any reasonable and necessary expenses related to your business. So any money spent to connect with clients or potential clients, to do your work, or to get necessary equipment to run the business. For example, you can deduct:
- web hosting, web design, domain names, etc.
- the business percent of your cell phone, including data plan
- part or all of your home internet service, based on how much you use it for business
- business cards or any other business promo items
- computer equipment
- software used in the business
- paper, ink cartridges, and office supplies
- ipod, etc. (if it’s related to your line of business, like podcasting)
- camera, etc. (once again, if it’s reasonable)
- contract labor or subcontractors
- professional fees, like legal or accounting
- meals and entertainment with clients if you discuss business before, during or after
- conference registrations
- mileage driven for business
- tolls and parking fees for business trips
- other business travel expenses, including motel and airfare
Miles are deducted on a flat rate, currently 50.5 cents per mile. That flat rate includes fuel and vehicle repairs, so you don’t need to track those separately. (No need to save gas receipts!) Each January 1, record your current odometer reading, so you can figure your total miles driven. Mileage as a whole is a complex topic. Commuting isn’t covered, but driving to a meeting with a collaborator or to a client’s site is. You might want to read more info on mileage expenses.
The whole point is that you probably have enough qualifying expenses to offset your income, so you won’t owe any self employment tax.
Make a business folder, accordion file, box, what have you, for receipts and records.
- original receipts are best
- note the business purpose right on the receipt
- on meals and entertainment, note who was with you
- if you are missing some receipts, go online, and print out replacements from the vendor or your credit card
- track expenses by category on a spreadsheet
For a bit more about expense tracking, read Simplified accounting for side businesses.
Your calendar is an important business record. It helps support where you were and when and who with, and that’s important to establishing what is deductible. So keep it complete, and be sure to print out a copy at the end of the month and put it with your other records.
- note client meetings and meals
- note all business travel, including miles driven
Banking As a sole proprietor, there is no requirement that you have a separate bank account. It’s much better from a record-keeping perspective, but not required. The bank account will still use your social security number, but you can put your business name on it.
Licenses Now, don’t tell anyone I told you this, but it’s pretty unlikely that you need to file any business licenses if you are just consulting, speaking, writing, podcasting, etc. If you aren’t selling any taxable services and aren’t having walk-in business traffic, you might not even be required to file anything. Some jurisdictions may require a general business license or DBA (doing business as) filing. Ask around with others in your area, because this varies significantly from place to place.
When you work on your own, you’ll find yourself signing frequent contracts. Most times, you’ll have to start with what the client provides, but don’t sign blindly. Now is a good time to line up a legal adviser who can quickly read and respond to any contracts you receive. If you’ll be providing contracts for your clients to sign, ask some other independent pros in your field for a copy of theirs. That will be the best starting point.
Any business includes some liability. I recommend you read Insurance and the Home Based Business for an introduction.
That should get you started. It’s inevitable that you’ll have questions! Feel free to post them here, and Maesz (who contributed a bunch to this article) and I will put together some follow up articles on the next most important topics.
[Updated] Comments and follow ups are now online at Next questions from starting your first business.
- RuralOmniLocal: Why local businesses resist selling online - November 29, 2016
- Resources for Service Businesses - November 28, 2016
- RuralOmniLocal: Selling virtual products in a bricks-and-mortar store - November 21, 2016
- RuralOmniLocal: How a local business can sell online - November 14, 2016
- RuralOmniLocal: the advantage for small town retailers - November 7, 2016
- 3 actions to start a local business - October 24, 2016
- What restaurant franchises and chains work in small towns? - October 17, 2016
- Your customers want you to change the world - October 10, 2016
- Making evening hours profitable for small town retail stores - September 26, 2016
- Getting past the quote stage - September 19, 2016