Running a side business can be a great tool for gaining financial freedom and career flexibility.
There are over 12.4 million part-timers in the U.S., and 74% are highly satisfied with their independent part-time gigs, according to MBO Partners’ annual State of Independence in America report. Side business owners cite the extra income, pursuing a passion, gaining skills to advance a career, and exploring a new opportunity as the main benefits to pursuing additional work.
There are many advantages to owning a side business, but there are many possible risks as well. A solid financial plan can help you leverage your business owner benefits while limiting your potential losses.
Below are five areas to consider as a side business owner to create a comprehensive personal financial plan:
Know the “Why” for Your Side Business
As with any venture that takes considerable commitment, it’s a wise idea to know exactly why you are putting in the effort. Is it to bring additional money home? Or is it to pursue a passion or build career skills? Each of these motivations will influence how to build your business, and help you avoid making a mistake that will turn your side business into a curse rather than a blessing. You want your side business to help you reach your financial and life goals, not be a hindrance to pursuing the things you care about.
Manage Your Variable Income
The extra cash flow of a side business can be a great way to build wealth if you pay down debt or invest for the future. But handling variable income isn’t easy, especially if you grow dependent on your extra income to pay your monthly bills. If you know which expenses are necessary and which can be put off to later, it’s easier to keep a positive monthly cash flow. Also, a large emergency fund can make managing variable income easier.
Get Straight with the IRS
If you make more than $400 in yearly profits, you’ll need to file a tax return for your business with the IRS. If you expect to pay at least $1000 in taxes from your side business, you’ll have to file estimated quarterly payments.
While your tax return as a side business owner will be more complicated than that of the average salaried employee, you also have more opportunities to save. You can deduct your business expenses directly from your business profits — something an employee isn’t able to do. But this bonus isn’t unlimited; if you consistently have more losses than profits, the IRS will revoke your business privileges by classifying your activities as a hobby.
Mitigating the Risk of a Side Business
As a business owner, you’re exposed to more risks than a regular employee. A visiting client could get hurt. A different client could sue. Even if your business is small, the potential loss is large. That’s why insurance for your side business is an important part of managing your finances as a side business owner.
An endorsement to an existing homeowner’s policy can be a low-cost way to get covered. As your business grows and your risk increases, you may need a home-based business insurance policy or a business owner’s policy.
Saving for Retirement from Your Side Business
A side business is an excellent opportunity to save for retirement. If you have side income, you can contribute to a solo 401(k) or SEP IRA. If you have a retirement plan through your employer, it’s highly likely you can contribute to both plans to tuck extra away, though the exact details depend on what type of retirement plans you have. If you have a 401(k) plan at work, it’s possible to max out your $18,000 employee contribution, and then match 25% of your side business income (20% for self-employed before self-employed tax deduction is included) up to $53,000 in a SEP IRA.