Requirements to Start a Home-Based Business
There was someone on the chat room that asked if she would start a home-based business, is it considered a “job” and does she have to pay taxes…
By the time I saw her message, she was gone. But I took the time to type this up, so here goes…
No it is not considered a job (meaning you will not get a W-2,) but when you start a home-based business, you are required to file taxes as a business, track your expenses, obtain the necessary business licensing and tax numbers. Another nicety of having a business in the US is that you must pay TWICE the Social Security. If you have not made over $600 you do not pay taxes on that, but you are required to file. If you are tracking your expenses as you should be, you should have some substantial QUALIFIED deductions. That means that those expenses reduce your TAXABLE INCOME.
People are under the mistaken impression that when they start a home-based business such as Internet Marketing, or any time you make money (like eBay, auctions, taking surveys for cash, member to member cash systems, etc), their home-based business is exempt from taxes since it is “On the Internet”. Your home-based business is subject to the exact same rules that a brick and mortar business must consider.
I found that same naivete when I started out as a real estate investor. I was part of a very large real estate investor’s organization that would draw 1000 people a month to their meetings. We had many national speakers, and I would see many newbies who saw an infomercial and they were going to by a book or a DIY course and “make their fortunes” flipping real estate.
This is how I got my consulting practice started – informing these folks about the business requirements, how to build a business plan and Pro Forma statement. How to work with a banker, broker, or investors to obtain funding, tax guidelines, and basic business principles, regulations, and how to research these things so they did not end up in trouble.
I would rent out a country club banquet hall, charge them $11 for lunch, and I would conduct free seminars and workshops. Some of them became long-term clients. I also introduced them to my mortgage broker, who was able to work with investors once we developed the business plan so these folks could get the necessary funding to get their business started.
I recommend anyone who does not understand the requirements to start and operate a home-based business look up the Small Business Administration website, the IRS website (IRS.GOV), state government department of state for business filing and treasury department for state sales and use tax requirements, local municipality offices, zoning board, licensing bureau, and local tax administration. Also stop by at H&R Block of other seasonal tax filing organizations.
I have always say you should identify your team:
- Accountant – the accountant will tell you the filing requirements, what you should be tracking.
- Consultant – will tell you HOW to do what the accountant told you to do. A small business consultant will guide you about creating your business organization, licensing, zoning, sales tax, business plan, Pro Forma, how to work with bankers or mortgage brokers.
- Lawyer – contracts, real estate settlement, LLC formation.
When first starting out, get them under retainer. It is better to understand the requirements FIRST rather suffer the consequences later.
Rich Moyer – CEO and Principal Consultant (retired)