When Casual Contract Work Grows into Something More
In the “sharing economy,” there is a new trend afoot and it is flourishing. People are finding new ways to earn money; from driving for an app-based car or delivery service, to taking on freelance projects. This new economy is all about independence and flexibility. This type of work allows people to capitalize on their specialty talents and skills. You may take on some contract work to supplement your regular paycheck to navigate through unanticipated financial challenges. You might find something you have been doing as a hobby has grown into a meaningful income source. You might start renting out a part of your house and you are wondering about any tax considerations. You may be a recent retiree picking up some consulting hours from your former employer and you have some concerns about how this new income might impact your retirement planning and the tax implications.
If the work you are doing is for additional income or if it has become your main source of income, it may be time to consult with a business planning attorney.
How is the Extra Money I Earn Treated?
Many people start out doing contract work casually and without forming a business entity. If you do not form a business entity, all income flows to you, the individual. Perhaps a simple sole proprietorship, a way of formalizing your work or hobby will allow you to take advantage of being a small business owner.
What Kind of Business Should I Be?
Instead of just working as an individual, forming a business entity may provide strategic benefits worth considering. Some examples of business entities could include sole proprietorships, corporations, and limited liability companies, usually referred to as LLC’s. While each type of business entity has different requirements and benefits, they can provide strategies for:
When you operate as an individual or sole proprietor, your personal assets may be reached by your creditors. In other words, if your business is subject to a lawsuit or falls behind on its debts, you could be personally liable. Properly forming and operating a corporation or LLC can shield your personal assets from your business’s creditors.
When you work as an individual, that income is taxable as personal income. Your on the side income could bump you into a higher tax bracket, erasing some of the financial gain it was providing. Establishing a business can create opportunities through expenses, costs, and income for you to adjust your taxable income beyond that of a simple individual. You should always consult with a tax advisor when planning.
Your retirement plan may hinge on certain income limits. If you need to control how much income you receive to meet your retirement plan requirements, forming a business entity may allow you to control how much personal income you receive from your business entity.
These are just some of the reasons that it may be appropriate to consult with a business planning attorney and get some advice for your specific circumstances. While it does cost some time and money up front to form and operate a business entity such as a corporation or LLC, the protections and the peace of mind may well be worth it.
Meet with a Virginia Business Planning Attorney
Wilson Law PLC has experience helping sole proprietors choose and form a business entity based on individual circumstances and goals. Call Wilson Law PLC today at 866-603-5976 to set up a meeting or fill out our contact form and we will call you to schedule your meeting.