George Liakakis
From selling your crafts on Etsy to taking on a few clients for professional consulting, running a side business is more popular than ever. One survey from Zapier found that 40 percent of Americans had a “side hustle” of some kind in 2022. It’s a necessary way of making ends meet for many people. Whether your side business was born out of financial need or a passion for the work, turning it into your main business is a chance to be your own boss and control your own financial future.
Taking your side business full-time is a risky endeavor. Even after you’ve consulted your advisors, studied the market, studied your own financial picture and concluded that you can afford to take the risk… there’s a lot more to consider. Make sure you’re looking at the full picture when planning to grow your side business. Go into this transition understanding all the implications so you’re able to hit the ground running instead of stumbling over obstacles you didn’t see coming.
Talk to your business consultants for specific guidance—but here are just a few of the things to consider when making your side business your main business.
Be prepared for the real costs of taking your side business full-time.
Giving your side business your full focus typically means quitting another job. Logically you know that leaving an employer and striking out on your own means becoming responsible for your own benefits and taxes, but the actual costs can be a shock if you’re not prepared for them. Accounting for those expenses is going to be an important part of preparing your business budget and projecting your profits.
Some of the costs new small business owners should anticipate include:
- Health insurance premiums: As a self-employed individual, you may buy your own health insurance in the marketplace if you’re not covered by a spouse’s insurance. Consider the costs of dental, vision and other types of insurance too, or the out-of-pocket costs you’ll incur for that care if you choose a health insurance plan that covers medical only.
- Paid leave costs: Depending on where you live, you may be eligible for paid family and medical leave but will have to increase your contributions to the paid leave program once you no longer share the burden with your employer. For example, Massachusetts’ Paid Family and Medical Leave program requires employers to pay the majority of the contributions that cover PFML for their employees. Once you’re self-employed, you can opt into coverage but will be responsible for the full amount (0.63% of your wages).
- Social Security and Medicare taxes: Taking your side business full-time also means being responsible for the full amount of your Social Security and Medicare taxes (15.3%) instead of splitting the costs with an employer.
You may also need to account for losing some of the other financial benefits that your employer used to cover, like 401(k) matches, continuing education/training and even coffee and food. And without paid time off, you’ll need to plan for some lost income whenever you take sick time or vacation.
Your tax planning and tax strategy needs are going to shift.
Get clear about the tax considerations for self-employed individuals when becoming your own boss. Tax planning and tax strategy have to be part of the conversation with your advisors when your side business becomes your main business. Is this change going to affect how you and your spouse file your taxes? You may need to invest in new equipment, supplies and office space to take your side business to the next level; what’s the most tax-advantaged way to account for all those expenses? Should you change the entity structure of the business now, like moving from a sole proprietorship to an LLC? When should you think about incorporating? If you need to hire your first employee, what do you need to know about your tax responsibilities as an employer?
Your retirement planning and investment planning strategies might need adjusting too.
Any job change calls for a reassessment of your retirement and investment plans. Going into business for yourself is a big change. How you adjust your plans depends a great deal on your individual circumstances. If you’re young and have no dependents, you might elect to keep existing high-risk investments in place because you’re willing to take some chances. If you’re supporting a family, however, going into business for yourself might feel like more than enough risk, so you might adjust your portfolio to create more stability.
Going full-time with your side business is also likely to change how you allocate your retirement planning dollars. For example, a business owner who’s in their 20s and in a lower tax bracket might open a Roth IRA and make post-tax contributions. The money has decades to grow and the business owner can take tax-free distributions in retirement—a big savings opportunity if they’re successful enough to retire in a top tax bracket. But if you’re within a few decades of retirement already, your retirement advisors might suggest other strategies.
You might need to outsource some things.
Once you strike out on your own, building and growing your business will be more than a full-time job. If you wanted to put 100 hours of work into the business each week, you’d probably have no problem filling those hours. You’d also burn out quickly and never see your friends or family. Figuring out how to use your limited resources to maximum effect can be a challenging part of scaling up a side business. It requires a frank assessment of your own strengths and weaknesses, and might require you to do things differently than you did them as a side business.
What tasks must you absolutely handle yourself? What areas does it make more sense to hand off to someone with stronger skills? Maybe you handled all the accounting on your own when your side business was bringing in a few hundred dollars a month, but you dread handling business accounting going forward. The expense of hiring a CPA or accounting service could be a better use of your resources, compared to spending late nights anxiously trying to analyze financial statements on your own. Identifying the things that make sense to outsource is something your business consultants can help with.
Ready to take your side business full-time? Nervous that you’re overlooking something important, or making a big mistake? Sachetta LLC’s business consulting services help entrepreneurs build their businesses to last. Whether you’re just starting to think about making this transition, or you’ve already made your side business your main business, contact us today.
Georgios Liakakis, CPA, MSA is a Certified Public Accountant and holds a Master’s Degree in Accounting from the University of Massachusetts Lowell. He joined our team in 2016 and focuses on both business and individual taxation.