“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.
Records
Make a business folder, accordion file, box, what have you, for receipts and records.
Receipts:
- 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.
Calendar
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.
Contracts
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.
Insurance
Any business includes some liability. I recommend you read Insurance and the Home Based Business for an introduction.
What else?
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.
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Becky started Small Biz Survival in 2006 to share rural business and community building stories and ideas with other small town business people. She and her husband have a small cattle ranch and are lifelong entrepreneurs. Becky is an international speaker on small business and rural topics.
Excellent! I like it…..a LOT.
Thank you! Glad to have all the input you gave to improve it.
Great post. Thanks Becky. Fun meeting you at SXSW too!
Thanks, Jonny! Hope it helps someone with getting started. You and Scott were great fun to meet.
I did not know all the details involved in starting a small business, sideline or otherwise. Thanks for your insights, Becky, and I’ve taken the liberty of commenting on your piece in my blog for the Innovators-Network.org in hopes that some of my readers will visit your blog and read the piece for themselves. I look forward to reading more such pieces in the future!
Thanks, Oopala. I’m glad you spread some awareness.
Congratulations, Becky. You got ‘Lifehacked.”
Thank you, Rex. This is a new world record for one-day traffic for us. :)
Thank you for mentioning the fact that a new business owner needs to find someone to review contracts. The recommendation is 100%
accurate – and lawyers are typically the ones chosen… yet many have neither the skills nor the ability to do what you most heartily suggested (quickness).
There are consultants such as myself out in the world,
contract negotiators who do NOTHING but write, read, review and negotiate contracts. Some of us have the law degree, too (such as myself) – but the really important piece is that everything I do in my job deals with contracts.
Anyways, I just wanted to offer an alternative of where folks can go to get the kind of help you recommended.
Thanks, Jeff. Always glad to hear about alternatives and choices for small biz owners.
This is probably a stupid question but what if you already have a personal computer and software that were purchased before the business was setup but will be used in the new business?
Is it possible to retrospectively “charge” the business for these?
The previously personal items of equipment that are converted to business use can be depreciated from the date of conversion. The basis for depreciation is the dreaded Fair Market Value of the item on the date of conversion. Then, the business percentage is applied to the FMV and depreciation (on computers 3 years) commences. However, there is no Section 179 available for converted property.
FMV of used software would probably render too small a value to gain much in the way of depreciation, but the process would be similar. Once, again, no Section 179 for converted property.
Great post. However, I’m still not sure how to be able to distinguish that you are self employed without getting business license and register your business, especially in CA. You could choose to be blogger and would that qualified to be self-employed???
As far as the IRS is concerned, if you decide you are in business, then you are in business. For a sole proprietorship, you report it to the IRS only at the end of the tax year. The IRS has no requirement to have filed or registered the business locally. You do have to operate your business with an intent to make a profit. So as a blogger you would also need to accept advertising or sell written works for pay, for example. (We can get Maesz to talk more about that, if you want.)
I do not know about the California licensing and registration requirements.
In Oklahoma, there is no state-wide requirement for licensing or registration of most consulting and independent self-employed. That leaves it up to the cities, and most small towns here don’t require it.
If anyone is not sure about your own local rules, I would check in with a Small Business Development Center.
Thanks, this is really useful. I recently started a new business in the UK and I was told that I could only claim for meals and entertainment with clients if it involved an overnight stay?! I think I’ll have to look this one up futher! John – Wisebills
If I want to start a small business importing jewelry and accessories from India and China and do it as a sole proprietor what about import taxes or duty on my year end info?
I don’t know about the import taxes, but we’ll try to find out.
Thank you, my friend said jewelry has very little duty on it but I am not even sure how to go about importing. For example I have the people over there but how to I get from ther to my front door step. What are the correct steps? Any help would be so appreciated. FYI,I am doing all of this as a wholesaler so there is no sales tax but I know I will have duty.
“As a sole proprietor, there is no requirement that you have a separate bank account.” I think it is always best to have a separate business account. At the end of the year you can print out statements from your business account and you have no need to go through each charge to figure out if it was personal or business expense.
I agree. It’s much better from a record-keeping perspective, but not absolutely required.
This is a great resource especially for people who are just starting out. It is hard to create a business from the ground up if you don’t know where to begin and even more if you don’t have the right requirements. This article helps beginner business owners to start heading to the right direction.