15 ms·

Ask HN: How do you handle the business structure and taxes of side projects?

260 points by misthop 10y ago

For those of you with income generating side projects, have you incorporated? Do you pay quarterly taxes? Do you list it as other, unreported income on your returns?

PaulHoule 10y ago
I have not incorporated. It is expensive to incorporate in Delaware and to do it anywhere else is a big paperwork headache. (You'll need a board of directors, annual meetings, etc.) If you are making less than $20,000 a year it is probably not worth it, if you are making a lot more it probably is. As for taxes, the penalties are not particularly punitive if you screw up and you have years to manage the situation before anything critical happens. In particular, if you go one year without making quarterly tax payments you will probably walk away with no penality.
- jeffmould 10y ago
  First, IANAL and/or CPA. However, incorporating in DE is fairly straightforward, and compared to other states is inexpensive. You can incorporate for as little as $89 filing fee. Of course, if you are not located in DE you will need a registered agent, so that is an extra $50 a year. As for board of directors, annual meetings, etc... no matter where you incorporate you will technically need these, even in DE. But it is nothing complex. As a single founder and sole shareholder, you simply elect yourself to the board and write up/record minutes. Max amount of time 30 minutes. You will have to also pay an annual fee for your corporation which is based on assets and total shares. Another simple filing. These requirements are fairly standard across the board in any state. Delaware is probably one of the least expensive out of all from what I understand. You can also do an LLC which reduces the paperwork and also provides similar protections, while helping with taxes. Annual filing fees can be a little higher, but you can avoid double taxation. It is best to discuss with an attorney/accountant on the proper structure based on your tax requirements though as each is taxed differently. Finally, advising that penalties are minor so don't worry about it, is probably the worse advice you can give someone. As someone who missed a quarterly tax payment on a corporation several years ago, I can tell you the headache of getting the penalty reduced far outweighed the cost. While the penalty was not much, it was still costly and ended up costing more in legal/accounting fees to correct the matter.
  - benp84 10y ago
    Don't forget the DE annual report fee ($50) and the DE annual franchise tax ($175 - $180,000, depending on share count). Plus the registered agent ($50) I pay $275/year. [https://www.delawareinc.com/delaware-franchise-tax/ https://www.delawareinc.com/delaware-franchise-tax/] The bigger cost for me is the C-Corp tax returns, average cost $806/year, but I suppose that applies to C-Corps everywhere. [https://www.irs.com/articles/tax-preparation-costs-and-fees https://www.irs.com/articles/tax-preparation-costs-and-fees]
    - jeffmould 10y ago
      Yeah, the franchise tax is going to depend on assets and total shares. So varies by company. You can reduce by only issuing something like 100 shares at first if it is only you. As for C-Corp, again IANAL or accountant, but I would never recommend a single founder go the C-Corp route. You are better off going as an LLC or taking the S-Corp election to take advantage of the tax benefits. Much simpler, and significantly cheaper, to do your annual returns.
jayess 10y ago
99% of the time there's no reason to incorporate in Delaware for your side project. Just form an LLC in your state and it'll be considered a "disregarded entity" on your tax return and you'll report the income/expenses on schedule C of your 1040. If you're making more than a few grand (net) then you might consider having your LLC taxed as a corporation and enjoy the 15% tax treatment. If Trump gets his way, corporate taxes might finally be reduced and you'll get even more favorable tax treatment. However, if your intent is to enjoy the income but you expect a narrow net income or loss (lots of expenses can be attributed to your business), then stick with a single-member, disregarded entity, LLC.
up_and_up 10y ago
> 1. Have you incorporated? No I operate as a sole proprietor. > 2. Do you pay quarterly taxes? Nope, I pay the penalty since my income and ability to shelter it vary from year to year. The penalty is something like 3% on the total taxes you owe. Not too bad given the flexibility holding your money provides. Maybe I can load up a i401K that year or need to save for some big purchase which is more valuable then just giving the IRS the money. > 3. Do you list it as other, unreported income on your returns? I file a Schedule C I do it all using TaxAct. Super easy and cheap. Helped me to understand taxes as well.
- no_protocol 10y ago
  Can you share "how many zeroes" are in the income level of your sole proprietorship? Also, would love to hear what accounting processes any small businesses like this are using.
  - up_and_up 10y ago
    Its a 4 zeros business. Decent side income from freelancing. Monthly invoicing using Freshbooks. End of year accounting using TaxAct. If things got any bigger or I went at it fulltime I would prob setup an LLC. But keeping taxes simple at this point is preferable since its just me. I have owned plenty of LLC's previously.
- pbnjay 10y ago
  FYI if your income varies throughout the year you can reduce the penalty (if it's worth the extra time to you). E.g. In the past I've gotten large checks in December which would have triggered penalty but I used Form 1120 Schedule AI and owed no penalty: https://www.irs.gov/pub/irs-pdf/f2210.pdf https://www.irs.gov/pub/irs-pdf/f2210.pdf
ohstopitu 10y ago
As someone based outside the US (Canada), would it be advisable to incorporate in Delaware? If not, how would I go about the income from my side projects?
- mmastrac 10y ago
  Unless you plan on stepping foot in the US to do a lot of physical work, or plan on holding US real estate, use a Canadian corporation. I've been dealing with world-wide customers for ~10 years and have never incorporated in the US. You should speak to an accountant before making any decisions, however.
  - PerfectElement 10y ago
    I've been doing the same for a while. SaaS with most customers in the US, but the corporation is in Canada. The only hassle is that 10% of credit card charges fail because banks may block international transactions. So we have to tell clients to call their banks, etc. Not perfect, but better than dealing with cross-border taxes.
- a3camero 10y ago
  If you're just starting off you probably don't want to deal with the hassle of dealing with the US and Canadian government. Cross-border tax issues are expensive to deal with and complicated. Many Canadian businesses sell to the US without incorporating there.
cdnsteve 10y ago
Unless you need the liability protection or have very high income, the overhead in Canada of having a corp is very costly. Hiring an accountant to file corp taxes is usually over $1500 a year alone, then you need payroll, etc. Then you're also paying double tax on that income with a corp. Corp receives income and pays corp tax, pays employee (you) you pay income tax. If you have a small side project with low risk then I recommend sole proprietor for sure. In any case, soon as you start generating income you need to track income/expenses, register your business, register for HST and setup a separate bank account. I think TD here charges $25/mo just for that privilege. So yeah, sometimes a fun side project loses its excitement when your stuck doing paperwork and start adding up the expenses, it's not worth it.
- mmastrac 10y ago
  > paying double tax That's absolutely not true. In Canada, payroll is deducted as an expense against your corporation's earnings. The money left over in the corporation is taxed at corporate rates, but those are quite low for small businesses. Also, more expenses are deductible as a corporation which balance out the much higher costs of accounting. And the corporation is one of the few ways of legally splitting income with a spouse in Canada. For the rest of your comment, I agree that it's not ideal for someone starting out. I think that the bar for starting a personal corp is around $20k/year in side income. I'm not an accountant, but I have been dealing with corporate taxes with one as a small business owner for ten years.
  - cdnsteve 10y ago
    Corporate earnings are taxed. Your income is also taxed. That's double tax in my mind.
    - kspaans 10y ago
      No, double-tax is when you pay both federal and provincial income tax on the same income. Or when you pay corporate income tax on profits and then pay dividend taxes after that. EDIT: though as a3camero pointed out, you get tax credits for this later case in Canada, so it's rare to get double-taxed in that case.
joshuaheard 10y ago
Lawyer and entrpreneur here. There are 2 main reasons to incorporate: liability protection and ease of administration. You don't say what your side project is, but you have to ask your self whether you need liability protection, that is what are the chances someone is going to sue you for damages. If you feel you need liability protection, then you should form an entity. I recommend an LLC in most cases. It is a pass-through entity for taxes which means you pay taxes on your individual return (though it still must file a business tax return). Also buy insurance. The other reason is ease of administration. A legal entity will have some form of controlling document. In an LLC, it is the Operating Agreement. This spells out the rights and duties of the principals in the business. It also allows for common ownership of the business assets. As principals come and go, the LLC continues on. Finally, if you get big and you bring on investors, they will want to see a legal entity for their protection. The drawbacks of forming an LLC are the time and effort of drafting and filing all the proper incorporating documents, paying the filing fees (in California $800 per year), and the extra tax forms. This is a complicated topic and I have given a high level view. There are lots of resources on the internet and in bookstores on this topic. Nolo.com would be a good place to start.
- a3camero 10y ago
  Canadian lawyer and entrepreneur here. The Canadian equivalent is a Federal corporation ($200 filing fee + $20/yr). The government's online step-by-step system does most of the work for you, but doesn't touch the share issuance part. You'll need to do that yourself but there are lots of resources available online for how to issue shares to yourself. The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. If you have employment income + your side project involves a lot of ongoing losses then it may be a good idea to use a partnership or sole proprietorship for tax reasons. Talk to your lawyer/accountant. There are fewer lawsuits here so you may decide a sole proprietorship (unincorporated business) is fine. Each province has some equivalent of a "Master Business License" that allows you to use a name other than your own for business purposes (so you can cash cheques, etc.). To conclude (for Canada): generally startups go with a corporation. Side projects might be a corporation, a partnership or a sole proprietorship.
brentm 10y ago
If you're in the US I would consider forming an LLC in your home state and use that as a catch all entity for your projects. If any of the projects take off you can spin that project off into a different entity type (if you want). LLCs are mostly painless to create & file taxes for.
- gst 10y ago
  Would there by any advantage of a Delaware-based LLC (vs. home-state based LLC, e.g., in California) if it's just for liability protection?
  - dublinben 10y ago
    It is much easier and less expensive to incorporate in Delaware. You're looking at $50/yr for a Registered Agent and ~$89 for your incorporation fee.
  - conductr 10y ago
    I had this conversation with an attorney friend recently. Apparently most states have similar corporate laws, the difference is that Delaware has a huge history of legal precedent. If you found yourself in a legal battle, for any reason, you could probably defend yourself in a more easy and predictable manner in Delaware.
  - TaylorGood 10y ago
    People will tell you CA still makes you pay the $800 as a CA resident with an out-of-state LLC. That is, if the FTC discovers you are operating in California. A different friend has had 3 out-of-state LLC's over the last 6 years without CA discovering the fact mentioned above.
atwebb 10y ago
>have you incorporated? My state LLC >Do you pay quarterly taxes? Absolutely, mail a check with the coupon based on income earned. >Do you list it as other, unreported income on your returns? Schedule C and income from business, you pay Self-Employment Tax, SEPs are nice to push off the income to retirement and see a tax benefit if it's supplementary. I also carry worker's comp and liability insurance, pricey, annoying to setup and deal with but worth it from my perspective.
- no_protocol 10y ago
  > I also carry worker's comp and liability insurance Would love to hear ballpark figures on this stuff. I know it can easily be apples to oranges, but I don't even have a rough idea where it would be.
  - atwebb 10y ago
    Sure, worker's comp is around $400 a year, the tech liability is <$2k. Honestly, the hardest part was the analysis paralysis of "Gee what do I do, I'm sure it's weird and complicated". Just called a local place, they are the agent and got me a policy, similar to healthcare prior to the exchanges or having a State Farm rep.
    - sean_patel 10y ago
      Hi, do you have any recommendations for a 'tech liability insurance' company? I was told by my accountant that I need 1 too, and since I am in CA, she advised me the same thing in these threads, i.e. Don't waste 800$ in single member LLC, just get Liability Insurance
  - sean_patel 10y ago
    Hi, do you have any recommendations for a 'tech liability insurance' company? I was told by my accountant that I need 1 too, and since I am in CA, she advised me the same thing in these threads, i.e. Don't waste 800$ in single member LLC, just get Liability Insurance
brownedge 10y ago
Does anyone have experience with incorporating a UK Ltd for such a use case?
- phillc73 10y ago
  Yes. Unless you intend to spend a lot on equipment upfront, don't register for VAT. You don't have to unless the company's income hits a certain threshold (I forget exactly how much now). Just be careful about any VAT you think you might save (offsetting purchases against collections). The burden of quarterly returns is a pain. Also, while the UK is still in the EU, consider starting a Limited company in another country with a different corporate tax structure. Perhaps somewhere like Ireland, Latvia or Malta might suit your requirements better.
  - brownedge 10y ago
    > consider starting a Limited company in another country with a different corporate tax structure. Thanks and could you elaborate on this please.
    - phillc73 10y ago
      The UK currently has a corporate tax rate of 20%. Ireland is a 12.5% on trading income, Malta is 35% but reducable to 5% in some circumstances, Lithuania is also 5% for small companies, Estonia is 0% on undistributed profits.[1] Some research for a decent advisor in one of the countries you might consider and then ask them for advice. I found finding advice like this in the UK either difficult to obtain from a regular accountant, or the advisors I found were targetting the very wealthy. Ultimately I talked to three different people in the countries above and went with one of them to setup the Limited company for a small business. [1] https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe
      - wfn 10y ago
        Note re. LT, to form a Limited liability company in UK you don't need to have any shareholder capital; you do need the latter for forming an Ltd in Lithuania ("UAB"). There are other corporation types available but if you want limited liability in LT, you'll need to put in 2500 EUR.
jstanley 10y ago
I run several side projects[1], with varying degrees of profitably. I haven't incorporated any of them, I see that as an unnecessary hassle. I'm in England, and (as far as I'm aware) quarterly taxes aren't a thing here. Until this year the income was negligible enough not to bother paying taxes, but this year I've been keeping track of finances with ledger[2] and I intend to pay taxes as "self-employed" for the first time at the end of this tax year. And to make sure I'm going in the right direction (not going to run out of money) I add up my net worth, split by category (bank account, peer-to-peer lending, stocks and shares, Bitcoin) at the start of every month and keep track of it in a big text file. [1] currently focusing on SMS Privacy, read my Indie Hackers interview at https://www.indiehackers.com/businesses/sms-privacy https://www.indiehackers.com/businesses/sms-privacy [2] http://www.ledger-cli.org/ http://www.ledger-cli.org/
- addedlovely 10y ago
  Quarterly tax returns are a thing if you pay VAT. Technically you should of been declaring that self employed income regardless of its total, it's not separate from your main income, in terms of tax liability - I believe it's combined with your main income.
  - hellofunk 10y ago
    Many file VAT only once per year, depending on various factors. Quarterly is not necessarily the default option.
  - jstanley 10y ago
    You're right, it is combined with your main income for tax threshold purposes, but I don't think HMRC would begrudge me a couple of hundred quid. It would probably cost them more than that to pursue it, or to even calculate the amount.
- blibble 10y ago
  "filing fees" (confirmation statements) for UK limited companies are around £13/year (<$20) shocking to see it's $800 in California
mosburger 10y ago
I incorporated w/ a basic LLC pass-through back when I started freelancing just for the liability protection. I don't freelance (much) lately, but I've kept the LLC going in the meantime and run my very small side projects as part of that LLC. If you decide to do a side project w/ an LLC you might want to read up on "piercing the corporate veil" and be sure to keep your project's income and expenses separate from any personal stuff. I personally have a completely separate bank account, again from my freelancing days, and keep the two things separated paying myself w/ distributions occasionally. I'm no lawyer or accountant so I don't know if this is "enough," but I figure it can't hurt.
jv22222 10y ago
I recommend that you do not form a company until you have validated the project. I wrote a blog about it that explains why: https://blog.nugget.one/2016/08/19/dont-form-a-company/ https://blog.nugget.one/2016/08/19/dont-form-a-company/
- tedmiston 10y ago
  > However, in the event your project is not working, this gives you a great back-out clause. Simply refund everyone that you captured money from and close the Stripe account or use it for your next test project. Seems like an interesting loophole, but don't you have time limits associated with refunds?
  - jv22222 10y ago
    Nope, not that I have seen.
edoceo 10y ago
Entrepreneur here, on my fourth company. Lawyer and Accountant. Budget about $10k/yr Start as LLC then move to C-Corp as it grows and takes investment money. Accountant files quarterly federal and state taxes. My wages are taken out on W2. When smaller the project is an LLC. Accountant still files paper but under $100k only annual. Just take the money out as distribution. Tax implications from either route. Encourage you to find a trusted advisor on those matters
- floathub 10y ago
  Just to clarify one point; when a member of the LLC, you'll be taking "guaranteed payments" or allocations rather than W2 income (and paying quarterly estimated personal taxes out of that). You only do W2 income once it's a C-Corp. Not a lawyer or an accountant, so use salt with the paragraph above. (edited to clarify that post above is correct, but possibly ambiguous)
  - intrasight 10y ago
    S-Corp also, since IRS will take a dim view of not paying payroll taxes. My accountant said use a rule of thumb of having at least 70% of pay be as W2.
simonebrunozzi 10y ago
I have been using Stripe Atlas for about 6-7 months now, for a small side project that I spend part of my weekends on. I have to say that Atlas might be one of the easiest, and least expensive, ways to deal with the incorporation and the rest.
- tedmiston 10y ago
  Last I checked, Atlas pushed a C corp and did not allow formation of LLCs.
- aantix 10y ago
  Is it just for those who live outside the U.S.? Trying to figure out the easiest, cheapest way to setup an L.L.C.
  - flybayer 10y ago
    I've heard good things about incorporating LLC online with http://www.legalzoom.com/ http://www.legalzoom.com/
  - patio11 10y ago
    Atlas works for folks in the US as well, but we don't support LLCs yet. You can register an LLC by yourself with the state of Nevada or Wyoming for a trivial amount of money. There exist hundreds of companies which will assist with form preparation (of which LegalZoom is probably best) but both states now have a web app which produces an adequate cookie cutter LLC for software professionals with very simple needs. Nevada is more convenient and modestly more expensive IIRC; Wyoming is more privacy-conscious. I own 2 Nevada LLCs; as a consequence of this, my address is trivially available on the Internet. If that gives you pause, Wyoming a good option.
lcall 10y ago
I'm finding that the book by Entrepreneur magazine called _Start Your Own Business: the only startup book you'll ever need_ is very helpful (no connection with me). EDIT: specifically, in the index entry for "business structures" and the chapter on taxes. I also bought a few "personal MBA" books, & on marketing etc, but this seemed clearly the best one to start with; those others I think I'll come back to, later.
analog31 10y ago
I make a small electronic gadget, non computer related. I've got an LLC for basic liability protection. PayPal is my business system. All sales come in through PP, and I use the PP credit card for my purchases. All documents are electronic. At tax time, I download the entire year's transactions into a spreadsheet, add things up, and enter the totals into a Schedule C. Rather than filing quarterly taxes, I've simply bumped up the amount of withholding from my regular day job.
- tedmiston 10y ago
  > Rather than filing quarterly taxes, I've simply bumped up the amount of withholding from my regular day job. So you overpay on the ~25% self-employment tax and balance everything out when you file your taxes?
  - analog31 10y ago
    Yes. My target is to put in enough so my refund / payment is as close to zero as practical, without the risk of having to pay a penalty. I've been able to nail it reasonably well, all things considered.
dicroce 10y ago
Personally speaking, enough of my side projects never made a dime that I decided a while back to wait until I made $1 before incorporation. This has saved me quite a bit of hassle.
- prawn 10y ago
  Agreed. I have an incorporated entity for my general business/freelancing, but keep side-projects informal until they get any serious traction.
chrisgoman 10y ago
You mentioned "projects" (plural) and the way I have it setup is pretty similar to those recommending an LLC (or S-Corp) in CA. While the annual cost of $800 minimum tax plus maybe another $500 in administrative fees (accountants, legal, etc.) is real money spent, you can make it back in tax deductions and potential liability. If you have a structure in place (another entity that is not you personally), it is much easier to deduct expenses (less red flags) IF you make an attempt to actually generate income -- the government cannot stop you from being a bad business person :) If you are in a 50% tax bracket, this could easily be offset by $3000 in expenses such as hosting fees, domain names, costco membership, cell phone, even your car lease. If you are renting, you can possibly deduct some portion (~20%) of your rent (do not do this if you own a house). Get a separate bank account + debit card, a separate credit card (maybe a business one with rewards) and pay everything using that entity. You will end up making "owner contribution" from your personal bank account to your business account every month. The extra wrinkle if you have multiple projects is that you can further separate your different projects into "DBA"s (Doing Business As) which costs an extra $100/yr (County Clerk Recorder, Publish in Magazine, separate bank account, credit card, domain name) 100% owned by your LLC (or S-Corp). If you shut down a DBA, it will cost maybe another $50. You will need a DBA to open a bank account under that name. While this may look like overkill, this keeps everything clean and if your side project does take off, you will have some history with the business. On a day-to-day basis, what I usually end up doing is setting aside a day to deal with all these entities. Most bills are on each "company" credit card and I call all the credit card companies to align the closing date. For example, all my credit cards close around the 22nd or 23rd of every month. On the 12th of every month, I pull up each account and pay them all using one screen of online billpay if you have all your business accounts tied together using your SSN. Note: I have other companies that are their own entity as they are generating income & have other partners. The setup here is specifically just for my side projects.
- brazzledazzle 10y ago
  If I recall correctly there are strict limitations on counting your car, cell phone and rent as business expenses and they require extensive amounts of documentation. I don't know how much they enforce these days since everyone and their brother is hustling a pyramid scheme business but I would research it first. Getting audited without reliable mileage logs, phone records in your favor and a measurable separation between your personal living space and your work area (like a door) could result in being stuck with a tax bill for back taxes.
kkoomi 10y ago
If you start an iOS app under your own name, then decide to form an LLC after validating your idea, do your reviews and rankings get reset?
- rezashirazian 10y ago
  No, this is a rather common occurrence and the transition on the App Store is surprisingly smooth.
caspg 10y ago
For those from EU, which country within EU is the best to incorporate? Estonia with their online residency seems interesting.
moeamaya 10y ago
If you're based in California, we wrote detailed steps when we incorporated earlier this year: https://dixonandmoe.com/writing/how-to-form-an-llc-in-california/ https://dixonandmoe.com/writing/how-to-form-an-llc-in-califo... The $800/year is indeed painful but it's cost of doing business (and maintaining continuity).
walterbell 10y ago
Has anyone outside the US looked into the tax implications of Stripe Atlas? These articles urge caution: http://tech.eu/features/9060/stripe-atlas-european-startups/ http://tech.eu/features/9060/stripe-atlas-european-startups/ https://flagtheory.com/stripe-atlas/ https://flagtheory.com/stripe-atlas/
patio11 10y ago
Obligatory disclaimers: not a lawyer, not an accountant, am employed by Stripe to write about these sorts of topics, writing here only in my personal capacity, none of the following is advice but rather just a pointer for your future Google searches and talks w/ qualified professionals: I ran my businesses for the first ~6 years as unincorporated sole proprietorships. The exact mechanisms of doing this are different based on where you are (both at a national and local level). Japan and the US are fairly similar: a sole proprietorship exists as soon as you say it does. (In Japan, you should probably walk down to the local tax office and file a form announcing your intention to file 青色申告 next year if you plan on making more than $30k revenue. They'll know which form to file and you are capable of doing it write if you can read Japanese.) Some US localities will want you to file for an assumed name / "doing business as" (DBA) with your local county clerk or have a city business license -- you can usually find out about that with some quick Googling. I filed a one-page form with Lake County, IL saying that I was doing business as Kalzumeus Software (several years before I had that LLC) and then had to pay ~$50 or so to put an ad in the newspaper for a few weeks saying "Heads up Kalzumeus Software is actually Patrick." You pay taxes on the profits of the business, not on the revenue of the business, which is a crucially important distinction that many HNers do not know when they start and which many do not properly operationalize even if they know it. I cannot underline this enough: no software entrepreneur I've ever met had a good handle on this when starting. If you sell $10k of software and think "Hmm my profits are maybe $9.5k -- the only expense was a DigitalOcean server" I think your profits are ~$0 after you spend a few hours with an accountant walking through credit card receipts. They're going to walk you through things like e.g. depreciation, apportioning business and personal use of your Internet/cell phone, conferences, business entertaining, (potentially!) home office use [+], etc etc. (A thing your accountant will probably tell you, in the US, is that if you want to decrease your tax burden for 2016 buying a Macbook for the business You should ordinarily be listing income from a side business as business income, at least in the US and Japan, and not as any other type of income. This is both a) correct and b) gives you the ability to deduct expenses, which is not possible on all types of income reported on e.g. one's 1040 or 青色申告. The US has you pay quarterly estimated taxes. There are safe harbors which are likely to cover you in the first year of running your side project. https://www.irs.gov/publications/p17/ch04.html#en_US_2015_publink100032385 https://www.irs.gov/publications/p17/ch04.html#en_US_2015_pu... The calculation of these can occasionally be complicated; this is a great "ask an accountant" question because this is their bread-and-butter and that particularly calculation is something that most accountants would do for free, on spec, as part of soliciting your business for next year. The penalties for not paying estimated tax in a timely manner are very small -- many entrepreneurs of my acquaintance treat timely tax payment as a small discount to the "real" tax bill and elect to simplify their lives by paying taxes once a year rather than by calculating quarterly. The chief reason to put a side project in an LLC is to reduce the risk of liability of the side project flowing to you. Most side projects have vanishingly little liability. Ask me for a citation some other time, but even software development freelancing is low-risk -- my insurance company calculates than ~0.5% of freelancers/consultants get sued in any given year. Downside: when they do get sued, win or lose, that averages $40k in costs. If you're doing something where you have non-trivial liability or if the prospect of $40k+ vanishing just makes you unable to sleep at night, incorporate and get an general liability / E&O policy. (Costs $1k or so per year as a floor; mine as a comparable is $3k and has the words "patient health information" and "HIPAA" on it, which contribute expense and underwriting fun times.) If you have additional questions about this sort of thing, I'm writing about it this week (in my employed capacity) and would love to hear what you're thinking about. [+] Home offices are historically a contentious deduction in the US, but one of the reasons you have an accountant is so that they tell you consequential things about the difference between the regs as written and the regs as customarily applied like "You don't have an office? Oh, in Japan, we just deduct 40% of your rent then. Substantiation requirement? Ah you Americans are such kidders. There's the law on the books which is $CALCULATION but the tax agency basically feels like you don't screw them too much on being aggressive and they won't screw you too much on bringing out a tape measure to your kitchen.")
shakna 10y ago
Not incorporated, I operate as a sole trader. As I'm an Aussie, I register an ABN (being a sole trader is free) and ensure I pay/charge GST. I'm only required to file taxes if the business is earning in excess of $10,000 annually. So most projects that go nowhere don't put any onnus on me to be hyper vigilant.

260 points by misthop 10y ago

For those of you with income generating side projects, have you incorporated? Do you pay quarterly taxes? Do you list it as other, unreported income on your returns?

PaulHoule 10y ago

I have not incorporated. It is expensive to incorporate in Delaware and to do it anywhere else is a big paperwork headache. (You'll need a board of directors, annual meetings, etc.) If you are making less than $20,000 a year it is probably not worth it, if you are making a lot more it probably is. As for taxes, the penalties are not particularly punitive if you screw up and you have years to manage the situation before anything critical happens. In particular, if you go one year without making quarterly tax payments you will probably walk away with no penality.

jeffmould 10y ago
First, IANAL and/or CPA. However, incorporating in DE is fairly straightforward, and compared to other states is inexpensive. You can incorporate for as little as $89 filing fee. Of course, if you are not located in DE you will need a registered agent, so that is an extra $50 a year. As for board of directors, annual meetings, etc... no matter where you incorporate you will technically need these, even in DE. But it is nothing complex. As a single founder and sole shareholder, you simply elect yourself to the board and write up/record minutes. Max amount of time 30 minutes. You will have to also pay an annual fee for your corporation which is based on assets and total shares. Another simple filing. These requirements are fairly standard across the board in any state. Delaware is probably one of the least expensive out of all from what I understand. You can also do an LLC which reduces the paperwork and also provides similar protections, while helping with taxes. Annual filing fees can be a little higher, but you can avoid double taxation. It is best to discuss with an attorney/accountant on the proper structure based on your tax requirements though as each is taxed differently. Finally, advising that penalties are minor so don't worry about it, is probably the worse advice you can give someone. As someone who missed a quarterly tax payment on a corporation several years ago, I can tell you the headache of getting the penalty reduced far outweighed the cost. While the penalty was not much, it was still costly and ended up costing more in legal/accounting fees to correct the matter.
- benp84 10y ago
  Don't forget the DE annual report fee ($50) and the DE annual franchise tax ($175 - $180,000, depending on share count). Plus the registered agent ($50) I pay $275/year. [https://www.delawareinc.com/delaware-franchise-tax/ https://www.delawareinc.com/delaware-franchise-tax/] The bigger cost for me is the C-Corp tax returns, average cost $806/year, but I suppose that applies to C-Corps everywhere. [https://www.irs.com/articles/tax-preparation-costs-and-fees https://www.irs.com/articles/tax-preparation-costs-and-fees]
  - jeffmould 10y ago
    Yeah, the franchise tax is going to depend on assets and total shares. So varies by company. You can reduce by only issuing something like 100 shares at first if it is only you. As for C-Corp, again IANAL or accountant, but I would never recommend a single founder go the C-Corp route. You are better off going as an LLC or taking the S-Corp election to take advantage of the tax benefits. Much simpler, and significantly cheaper, to do your annual returns.

jayess 10y ago

99% of the time there's no reason to incorporate in Delaware for your side project. Just form an LLC in your state and it'll be considered a "disregarded entity" on your tax return and you'll report the income/expenses on schedule C of your 1040. If you're making more than a few grand (net) then you might consider having your LLC taxed as a corporation and enjoy the 15% tax treatment. If Trump gets his way, corporate taxes might finally be reduced and you'll get even more favorable tax treatment. However, if your intent is to enjoy the income but you expect a narrow net income or loss (lots of expenses can be attributed to your business), then stick with a single-member, disregarded entity, LLC.

up_and_up 10y ago

> 1. Have you incorporated? No I operate as a sole proprietor. > 2. Do you pay quarterly taxes? Nope, I pay the penalty since my income and ability to shelter it vary from year to year. The penalty is something like 3% on the total taxes you owe. Not too bad given the flexibility holding your money provides. Maybe I can load up a i401K that year or need to save for some big purchase which is more valuable then just giving the IRS the money. > 3. Do you list it as other, unreported income on your returns? I file a Schedule C I do it all using TaxAct. Super easy and cheap. Helped me to understand taxes as well.

no_protocol 10y ago
Can you share "how many zeroes" are in the income level of your sole proprietorship? Also, would love to hear what accounting processes any small businesses like this are using.
- up_and_up 10y ago
  Its a 4 zeros business. Decent side income from freelancing. Monthly invoicing using Freshbooks. End of year accounting using TaxAct. If things got any bigger or I went at it fulltime I would prob setup an LLC. But keeping taxes simple at this point is preferable since its just me. I have owned plenty of LLC's previously.
pbnjay 10y ago
FYI if your income varies throughout the year you can reduce the penalty (if it's worth the extra time to you). E.g. In the past I've gotten large checks in December which would have triggered penalty but I used Form 1120 Schedule AI and owed no penalty: https://www.irs.gov/pub/irs-pdf/f2210.pdf https://www.irs.gov/pub/irs-pdf/f2210.pdf

ohstopitu 10y ago

As someone based outside the US (Canada), would it be advisable to incorporate in Delaware? If not, how would I go about the income from my side projects?

mmastrac 10y ago
Unless you plan on stepping foot in the US to do a lot of physical work, or plan on holding US real estate, use a Canadian corporation. I've been dealing with world-wide customers for ~10 years and have never incorporated in the US. You should speak to an accountant before making any decisions, however.
- PerfectElement 10y ago
  I've been doing the same for a while. SaaS with most customers in the US, but the corporation is in Canada. The only hassle is that 10% of credit card charges fail because banks may block international transactions. So we have to tell clients to call their banks, etc. Not perfect, but better than dealing with cross-border taxes.
a3camero 10y ago
If you're just starting off you probably don't want to deal with the hassle of dealing with the US and Canadian government. Cross-border tax issues are expensive to deal with and complicated. Many Canadian businesses sell to the US without incorporating there.

cdnsteve 10y ago

Unless you need the liability protection or have very high income, the overhead in Canada of having a corp is very costly. Hiring an accountant to file corp taxes is usually over $1500 a year alone, then you need payroll, etc. Then you're also paying double tax on that income with a corp. Corp receives income and pays corp tax, pays employee (you) you pay income tax. If you have a small side project with low risk then I recommend sole proprietor for sure. In any case, soon as you start generating income you need to track income/expenses, register your business, register for HST and setup a separate bank account. I think TD here charges $25/mo just for that privilege. So yeah, sometimes a fun side project loses its excitement when your stuck doing paperwork and start adding up the expenses, it's not worth it.

mmastrac 10y ago
> paying double tax That's absolutely not true. In Canada, payroll is deducted as an expense against your corporation's earnings. The money left over in the corporation is taxed at corporate rates, but those are quite low for small businesses. Also, more expenses are deductible as a corporation which balance out the much higher costs of accounting. And the corporation is one of the few ways of legally splitting income with a spouse in Canada. For the rest of your comment, I agree that it's not ideal for someone starting out. I think that the bar for starting a personal corp is around $20k/year in side income. I'm not an accountant, but I have been dealing with corporate taxes with one as a small business owner for ten years.
- cdnsteve 10y ago
  Corporate earnings are taxed. Your income is also taxed. That's double tax in my mind.
  - kspaans 10y ago
    No, double-tax is when you pay both federal and provincial income tax on the same income. Or when you pay corporate income tax on profits and then pay dividend taxes after that. EDIT: though as a3camero pointed out, you get tax credits for this later case in Canada, so it's rare to get double-taxed in that case.

joshuaheard 10y ago

Lawyer and entrpreneur here. There are 2 main reasons to incorporate: liability protection and ease of administration. You don't say what your side project is, but you have to ask your self whether you need liability protection, that is what are the chances someone is going to sue you for damages. If you feel you need liability protection, then you should form an entity. I recommend an LLC in most cases. It is a pass-through entity for taxes which means you pay taxes on your individual return (though it still must file a business tax return). Also buy insurance. The other reason is ease of administration. A legal entity will have some form of controlling document. In an LLC, it is the Operating Agreement. This spells out the rights and duties of the principals in the business. It also allows for common ownership of the business assets. As principals come and go, the LLC continues on. Finally, if you get big and you bring on investors, they will want to see a legal entity for their protection. The drawbacks of forming an LLC are the time and effort of drafting and filing all the proper incorporating documents, paying the filing fees (in California $800 per year), and the extra tax forms. This is a complicated topic and I have given a high level view. There are lots of resources on the internet and in bookstores on this topic. Nolo.com would be a good place to start.

a3camero 10y ago
Canadian lawyer and entrepreneur here. The Canadian equivalent is a Federal corporation ($200 filing fee + $20/yr). The government's online step-by-step system does most of the work for you, but doesn't touch the share issuance part. You'll need to do that yourself but there are lots of resources available online for how to issue shares to yourself. The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. If you have employment income + your side project involves a lot of ongoing losses then it may be a good idea to use a partnership or sole proprietorship for tax reasons. Talk to your lawyer/accountant. There are fewer lawsuits here so you may decide a sole proprietorship (unincorporated business) is fine. Each province has some equivalent of a "Master Business License" that allows you to use a name other than your own for business purposes (so you can cash cheques, etc.). To conclude (for Canada): generally startups go with a corporation. Side projects might be a corporation, a partnership or a sole proprietorship.

brentm 10y ago

If you're in the US I would consider forming an LLC in your home state and use that as a catch all entity for your projects. If any of the projects take off you can spin that project off into a different entity type (if you want). LLCs are mostly painless to create & file taxes for.

gst 10y ago
Would there by any advantage of a Delaware-based LLC (vs. home-state based LLC, e.g., in California) if it's just for liability protection?
- dublinben 10y ago
  It is much easier and less expensive to incorporate in Delaware. You're looking at $50/yr for a Registered Agent and ~$89 for your incorporation fee.
- conductr 10y ago
  I had this conversation with an attorney friend recently. Apparently most states have similar corporate laws, the difference is that Delaware has a huge history of legal precedent. If you found yourself in a legal battle, for any reason, you could probably defend yourself in a more easy and predictable manner in Delaware.
- TaylorGood 10y ago
  People will tell you CA still makes you pay the $800 as a CA resident with an out-of-state LLC. That is, if the FTC discovers you are operating in California. A different friend has had 3 out-of-state LLC's over the last 6 years without CA discovering the fact mentioned above.

atwebb 10y ago

>have you incorporated? My state LLC >Do you pay quarterly taxes? Absolutely, mail a check with the coupon based on income earned. >Do you list it as other, unreported income on your returns? Schedule C and income from business, you pay Self-Employment Tax, SEPs are nice to push off the income to retirement and see a tax benefit if it's supplementary. I also carry worker's comp and liability insurance, pricey, annoying to setup and deal with but worth it from my perspective.

no_protocol 10y ago
> I also carry worker's comp and liability insurance Would love to hear ballpark figures on this stuff. I know it can easily be apples to oranges, but I don't even have a rough idea where it would be.
- atwebb 10y ago
  Sure, worker's comp is around $400 a year, the tech liability is <$2k. Honestly, the hardest part was the analysis paralysis of "Gee what do I do, I'm sure it's weird and complicated". Just called a local place, they are the agent and got me a policy, similar to healthcare prior to the exchanges or having a State Farm rep.
  - sean_patel 10y ago
    Hi, do you have any recommendations for a 'tech liability insurance' company? I was told by my accountant that I need 1 too, and since I am in CA, she advised me the same thing in these threads, i.e. Don't waste 800$ in single member LLC, just get Liability Insurance
- sean_patel 10y ago
  Hi, do you have any recommendations for a 'tech liability insurance' company? I was told by my accountant that I need 1 too, and since I am in CA, she advised me the same thing in these threads, i.e. Don't waste 800$ in single member LLC, just get Liability Insurance

brownedge 10y ago

Does anyone have experience with incorporating a UK Ltd for such a use case?

phillc73 10y ago
Yes. Unless you intend to spend a lot on equipment upfront, don't register for VAT. You don't have to unless the company's income hits a certain threshold (I forget exactly how much now). Just be careful about any VAT you think you might save (offsetting purchases against collections). The burden of quarterly returns is a pain. Also, while the UK is still in the EU, consider starting a Limited company in another country with a different corporate tax structure. Perhaps somewhere like Ireland, Latvia or Malta might suit your requirements better.
- brownedge 10y ago
  > consider starting a Limited company in another country with a different corporate tax structure. Thanks and could you elaborate on this please.
  - phillc73 10y ago
    The UK currently has a corporate tax rate of 20%. Ireland is a 12.5% on trading income, Malta is 35% but reducable to 5% in some circumstances, Lithuania is also 5% for small companies, Estonia is 0% on undistributed profits.[1] Some research for a decent advisor in one of the countries you might consider and then ask them for advice. I found finding advice like this in the UK either difficult to obtain from a regular accountant, or the advisors I found were targetting the very wealthy. Ultimately I talked to three different people in the countries above and went with one of them to setup the Limited company for a small business. [1] https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe
    - wfn 10y ago
      Note re. LT, to form a Limited liability company in UK you don't need to have any shareholder capital; you do need the latter for forming an Ltd in Lithuania ("UAB"). There are other corporation types available but if you want limited liability in LT, you'll need to put in 2500 EUR.

jstanley 10y ago

I run several side projects[1], with varying degrees of profitably. I haven't incorporated any of them, I see that as an unnecessary hassle. I'm in England, and (as far as I'm aware) quarterly taxes aren't a thing here. Until this year the income was negligible enough not to bother paying taxes, but this year I've been keeping track of finances with ledger[2] and I intend to pay taxes as "self-employed" for the first time at the end of this tax year. And to make sure I'm going in the right direction (not going to run out of money) I add up my net worth, split by category (bank account, peer-to-peer lending, stocks and shares, Bitcoin) at the start of every month and keep track of it in a big text file. [1] currently focusing on SMS Privacy, read my Indie Hackers interview at https://www.indiehackers.com/businesses/sms-privacy https://www.indiehackers.com/businesses/sms-privacy [2] http://www.ledger-cli.org/ http://www.ledger-cli.org/

addedlovely 10y ago
Quarterly tax returns are a thing if you pay VAT. Technically you should of been declaring that self employed income regardless of its total, it's not separate from your main income, in terms of tax liability - I believe it's combined with your main income.
- hellofunk 10y ago
  Many file VAT only once per year, depending on various factors. Quarterly is not necessarily the default option.
- jstanley 10y ago
  You're right, it is combined with your main income for tax threshold purposes, but I don't think HMRC would begrudge me a couple of hundred quid. It would probably cost them more than that to pursue it, or to even calculate the amount.
blibble 10y ago
"filing fees" (confirmation statements) for UK limited companies are around £13/year (<$20) shocking to see it's $800 in California

mosburger 10y ago

I incorporated w/ a basic LLC pass-through back when I started freelancing just for the liability protection. I don't freelance (much) lately, but I've kept the LLC going in the meantime and run my very small side projects as part of that LLC. If you decide to do a side project w/ an LLC you might want to read up on "piercing the corporate veil" and be sure to keep your project's income and expenses separate from any personal stuff. I personally have a completely separate bank account, again from my freelancing days, and keep the two things separated paying myself w/ distributions occasionally. I'm no lawyer or accountant so I don't know if this is "enough," but I figure it can't hurt.

jv22222 10y ago

I recommend that you do not form a company until you have validated the project. I wrote a blog about it that explains why: https://blog.nugget.one/2016/08/19/dont-form-a-company/ https://blog.nugget.one/2016/08/19/dont-form-a-company/

tedmiston 10y ago
> However, in the event your project is not working, this gives you a great back-out clause. Simply refund everyone that you captured money from and close the Stripe account or use it for your next test project. Seems like an interesting loophole, but don't you have time limits associated with refunds?
- jv22222 10y ago
  Nope, not that I have seen.

edoceo 10y ago

Entrepreneur here, on my fourth company. Lawyer and Accountant. Budget about $10k/yr Start as LLC then move to C-Corp as it grows and takes investment money. Accountant files quarterly federal and state taxes. My wages are taken out on W2. When smaller the project is an LLC. Accountant still files paper but under $100k only annual. Just take the money out as distribution. Tax implications from either route. Encourage you to find a trusted advisor on those matters

floathub 10y ago
Just to clarify one point; when a member of the LLC, you'll be taking "guaranteed payments" or allocations rather than W2 income (and paying quarterly estimated personal taxes out of that). You only do W2 income once it's a C-Corp. Not a lawyer or an accountant, so use salt with the paragraph above. (edited to clarify that post above is correct, but possibly ambiguous)
- intrasight 10y ago
  S-Corp also, since IRS will take a dim view of not paying payroll taxes. My accountant said use a rule of thumb of having at least 70% of pay be as W2.

simonebrunozzi 10y ago

I have been using Stripe Atlas for about 6-7 months now, for a small side project that I spend part of my weekends on. I have to say that Atlas might be one of the easiest, and least expensive, ways to deal with the incorporation and the rest.

tedmiston 10y ago
Last I checked, Atlas pushed a C corp and did not allow formation of LLCs.
aantix 10y ago
Is it just for those who live outside the U.S.? Trying to figure out the easiest, cheapest way to setup an L.L.C.
- flybayer 10y ago
  I've heard good things about incorporating LLC online with http://www.legalzoom.com/ http://www.legalzoom.com/
- patio11 10y ago
  Atlas works for folks in the US as well, but we don't support LLCs yet. You can register an LLC by yourself with the state of Nevada or Wyoming for a trivial amount of money. There exist hundreds of companies which will assist with form preparation (of which LegalZoom is probably best) but both states now have a web app which produces an adequate cookie cutter LLC for software professionals with very simple needs. Nevada is more convenient and modestly more expensive IIRC; Wyoming is more privacy-conscious. I own 2 Nevada LLCs; as a consequence of this, my address is trivially available on the Internet. If that gives you pause, Wyoming a good option.

lcall 10y ago

I'm finding that the book by Entrepreneur magazine called _Start Your Own Business: the only startup book you'll ever need_ is very helpful (no connection with me). EDIT: specifically, in the index entry for "business structures" and the chapter on taxes. I also bought a few "personal MBA" books, & on marketing etc, but this seemed clearly the best one to start with; those others I think I'll come back to, later.

analog31 10y ago

I make a small electronic gadget, non computer related. I've got an LLC for basic liability protection. PayPal is my business system. All sales come in through PP, and I use the PP credit card for my purchases. All documents are electronic. At tax time, I download the entire year's transactions into a spreadsheet, add things up, and enter the totals into a Schedule C. Rather than filing quarterly taxes, I've simply bumped up the amount of withholding from my regular day job.

tedmiston 10y ago
> Rather than filing quarterly taxes, I've simply bumped up the amount of withholding from my regular day job. So you overpay on the ~25% self-employment tax and balance everything out when you file your taxes?
- analog31 10y ago
  Yes. My target is to put in enough so my refund / payment is as close to zero as practical, without the risk of having to pay a penalty. I've been able to nail it reasonably well, all things considered.

dicroce 10y ago

Personally speaking, enough of my side projects never made a dime that I decided a while back to wait until I made $1 before incorporation. This has saved me quite a bit of hassle.

prawn 10y ago
Agreed. I have an incorporated entity for my general business/freelancing, but keep side-projects informal until they get any serious traction.

chrisgoman 10y ago

You mentioned "projects" (plural) and the way I have it setup is pretty similar to those recommending an LLC (or S-Corp) in CA. While the annual cost of $800 minimum tax plus maybe another $500 in administrative fees (accountants, legal, etc.) is real money spent, you can make it back in tax deductions and potential liability. If you have a structure in place (another entity that is not you personally), it is much easier to deduct expenses (less red flags) IF you make an attempt to actually generate income -- the government cannot stop you from being a bad business person :) If you are in a 50% tax bracket, this could easily be offset by $3000 in expenses such as hosting fees, domain names, costco membership, cell phone, even your car lease. If you are renting, you can possibly deduct some portion (~20%) of your rent (do not do this if you own a house). Get a separate bank account + debit card, a separate credit card (maybe a business one with rewards) and pay everything using that entity. You will end up making "owner contribution" from your personal bank account to your business account every month. The extra wrinkle if you have multiple projects is that you can further separate your different projects into "DBA"s (Doing Business As) which costs an extra $100/yr (County Clerk Recorder, Publish in Magazine, separate bank account, credit card, domain name) 100% owned by your LLC (or S-Corp). If you shut down a DBA, it will cost maybe another $50. You will need a DBA to open a bank account under that name. While this may look like overkill, this keeps everything clean and if your side project does take off, you will have some history with the business. On a day-to-day basis, what I usually end up doing is setting aside a day to deal with all these entities. Most bills are on each "company" credit card and I call all the credit card companies to align the closing date. For example, all my credit cards close around the 22nd or 23rd of every month. On the 12th of every month, I pull up each account and pay them all using one screen of online billpay if you have all your business accounts tied together using your SSN. Note: I have other companies that are their own entity as they are generating income & have other partners. The setup here is specifically just for my side projects.

brazzledazzle 10y ago
If I recall correctly there are strict limitations on counting your car, cell phone and rent as business expenses and they require extensive amounts of documentation. I don't know how much they enforce these days since everyone and their brother is hustling a pyramid scheme business but I would research it first. Getting audited without reliable mileage logs, phone records in your favor and a measurable separation between your personal living space and your work area (like a door) could result in being stuck with a tax bill for back taxes.

kkoomi 10y ago

If you start an iOS app under your own name, then decide to form an LLC after validating your idea, do your reviews and rankings get reset?

rezashirazian 10y ago
No, this is a rather common occurrence and the transition on the App Store is surprisingly smooth.

caspg 10y ago

For those from EU, which country within EU is the best to incorporate? Estonia with their online residency seems interesting.

moeamaya 10y ago

If you're based in California, we wrote detailed steps when we incorporated earlier this year: https://dixonandmoe.com/writing/how-to-form-an-llc-in-california/ https://dixonandmoe.com/writing/how-to-form-an-llc-in-califo... The $800/year is indeed painful but it's cost of doing business (and maintaining continuity).

walterbell 10y ago

Has anyone outside the US looked into the tax implications of Stripe Atlas? These articles urge caution: http://tech.eu/features/9060/stripe-atlas-european-startups/ http://tech.eu/features/9060/stripe-atlas-european-startups/ https://flagtheory.com/stripe-atlas/ https://flagtheory.com/stripe-atlas/

patio11 10y ago

Obligatory disclaimers: not a lawyer, not an accountant, am employed by Stripe to write about these sorts of topics, writing here only in my personal capacity, none of the following is advice but rather just a pointer for your future Google searches and talks w/ qualified professionals: I ran my businesses for the first ~6 years as unincorporated sole proprietorships. The exact mechanisms of doing this are different based on where you are (both at a national and local level). Japan and the US are fairly similar: a sole proprietorship exists as soon as you say it does. (In Japan, you should probably walk down to the local tax office and file a form announcing your intention to file 青色申告 next year if you plan on making more than $30k revenue. They'll know which form to file and you are capable of doing it write if you can read Japanese.) Some US localities will want you to file for an assumed name / "doing business as" (DBA) with your local county clerk or have a city business license -- you can usually find out about that with some quick Googling. I filed a one-page form with Lake County, IL saying that I was doing business as Kalzumeus Software (several years before I had that LLC) and then had to pay ~$50 or so to put an ad in the newspaper for a few weeks saying "Heads up Kalzumeus Software is actually Patrick." You pay taxes on the profits of the business, not on the revenue of the business, which is a crucially important distinction that many HNers do not know when they start and which many do not properly operationalize even if they know it. I cannot underline this enough: no software entrepreneur I've ever met had a good handle on this when starting. If you sell $10k of software and think "Hmm my profits are maybe $9.5k -- the only expense was a DigitalOcean server" I think your profits are ~$0 after you spend a few hours with an accountant walking through credit card receipts. They're going to walk you through things like e.g. depreciation, apportioning business and personal use of your Internet/cell phone, conferences, business entertaining, (potentially!) home office use [+], etc etc. (A thing your accountant will probably tell you, in the US, is that if you want to decrease your tax burden for 2016 buying a Macbook for the business You should ordinarily be listing income from a side business as business income, at least in the US and Japan, and not as any other type of income. This is both a) correct and b) gives you the ability to deduct expenses, which is not possible on all types of income reported on e.g. one's 1040 or 青色申告. The US has you pay quarterly estimated taxes. There are safe harbors which are likely to cover you in the first year of running your side project. https://www.irs.gov/publications/p17/ch04.html#en_US_2015_publink100032385 https://www.irs.gov/publications/p17/ch04.html#en_US_2015_pu... The calculation of these can occasionally be complicated; this is a great "ask an accountant" question because this is their bread-and-butter and that particularly calculation is something that most accountants would do for free, on spec, as part of soliciting your business for next year. The penalties for not paying estimated tax in a timely manner are very small -- many entrepreneurs of my acquaintance treat timely tax payment as a small discount to the "real" tax bill and elect to simplify their lives by paying taxes once a year rather than by calculating quarterly. The chief reason to put a side project in an LLC is to reduce the risk of liability of the side project flowing to you. Most side projects have vanishingly little liability. Ask me for a citation some other time, but even software development freelancing is low-risk -- my insurance company calculates than ~0.5% of freelancers/consultants get sued in any given year. Downside: when they do get sued, win or lose, that averages $40k in costs. If you're doing something where you have non-trivial liability or if the prospect of $40k+ vanishing just makes you unable to sleep at night, incorporate and get an general liability / E&O policy. (Costs $1k or so per year as a floor; mine as a comparable is $3k and has the words "patient health information" and "HIPAA" on it, which contribute expense and underwriting fun times.) If you have additional questions about this sort of thing, I'm writing about it this week (in my employed capacity) and would love to hear what you're thinking about. [+] Home offices are historically a contentious deduction in the US, but one of the reasons you have an accountant is so that they tell you consequential things about the difference between the regs as written and the regs as customarily applied like "You don't have an office? Oh, in Japan, we just deduct 40% of your rent then. Substantiation requirement? Ah you Americans are such kidders. There's the law on the books which is $CALCULATION but the tax agency basically feels like you don't screw them too much on being aggressive and they won't screw you too much on bringing out a tape measure to your kitchen.")

shakna 10y ago

Not incorporated, I operate as a sole trader. As I'm an Aussie, I register an ABN (being a sole trader is free) and ensure I pay/charge GST. I'm only required to file taxes if the business is earning in excess of $10,000 annually. So most projects that go nowhere don't put any onnus on me to be hyper vigilant.