Self-employed part-time – what do I need to know?

Part-time self-employment is a popular option, and for good reason. Enterprises which begin as part-time before becoming full-time tend to last longer. If you want to set up your own business on a part-time basis, there is a lot that needs to be taken into consideration.

You have a good idea for your own business, but you don’t really know whether the concept will be successful. Maybe you expect a longer build-up phase, or you don’t want to give up your main career. In any of these scenarios, part-time self-employment is a good option. You remain in an employment relationship, but still start your own business on the side. In summary, these are the benefits offered by starting out your self-employed business on a part-time basis: 

Maybe you’re unsure whether or not your business idea is solid. If you start it off as a side gig, you can test out your business concept with a lower risk level. Does the business work the way you planned? Do you get enough customers? You still have the opportunity to make changes to the business model if necessary. You have time to learn and prepare for full-time self-employment.

Particularly in the early stages of self-employment, a regular income offers financial security. Depending on the desired activity, setting up a business can initially require high investments. The more you can borrow from your current income, the less dependent you are on savings and bank loans. In addition, during the start-up phase, you should expect your income to grow gradually.

It is also easier to bridge dry spells if you are only part-time self-employed. In addition, there is always the possibility that a company will fail. If you have another source of income, this setback is easier to cope with.

So, you want to be self-employed but don’t know where to start? In principle, there are no restrictions for part-time self-employment. You can work doing whatever you want (as long as you fulfil the conditions of a possible professional code), and you can earn as much as you want. In practice, however, certain rules and restrictions must be observed. These include:

• Employees should always consult with their employer before beginning a self-employed side gig
• Social security contributions need to be clarified
• Secondary income can have an impact on social benefits

Your primary occupation may affect your part-time self-employment (if you’re employed, a student, unemployed) side gig. In any case, you should make sure you are thoroughly informed on what needs to be taken into account before you begin working part-time on your side job with regards to taxation and social security.

Otherwise, the same rules apply to part-time self-employed workers as to other self-employed:

• You need to register your business with your local Secretary of State
• You also need to register as self-employed with the IRS

How you set yourself up for independent work depends strongly on what you want to do. Maybe you have an exciting business idea or you want to turn a hobby into a profession. In any case, you need to consider how much money and time you want to invest, what for, how much you want to earn in return, and how long it is likely to take you to reach your goal. In short: you need a concept for your planned part-time side job (a “business plan”).

This kind of concept, or plan, is important. You must organize your thoughts and recognize whether and under what circumstances your planned part-time work is worthwhile and what you have to do in order to achieve your goals. The plan will also help you to identify the risks you are taking with your side gig. How much capital seed do you need? Can you raise it yourself or do you need a bank loan? You may need to rent and furnish an office or workshop. The other extreme would be that in your spare time you are a web designer or copywriter on your home computer. Then you would not need any investments and you would hardly have any financial risk.

No matter how you want to set up your side gig, here are some important steps you should take to get started:

Check in advance whether you need a permit or special qualification to do your part-time self-employed work, and if so, which ones. Do you want to pursue a profession that requires a permit? There are licensing requirements for a wide variety of jobs, including:

• Property developer
• Financial services
• Driving instructor
• Debt collection agency
• Real estate agent
• Travel industry
• Translator (authorized)

These approvals are often linked to professional qualifications. Last but not least, many practicing trades are subject to the obligation to have a master craftsman certificate.

In the USA, you can be self-employed as a sole proprietor, independent contractor, partnership member or limited liability company member (if the company is not classed as a corporation). The US government prioritizes finding out whether a self-employed person truly is self-employed, as it is a common area of fraud in the economy. It is important to make sure you assess what kind of self-employed worker you are to protect yourself legally.

While it is perfectly legal to have a part-time self-employed side job, be sure to consult your work contract to ensure that your company has not expressly forbidden it. If the business area that your part-time self-employed work is in is the same as your main job, you must also make sure that there are no non-compete clauses and that you aren’t engaging in a conflict of interest. Here’s a breakdown of the ways your side gig could negatively affect your main job: 

A part-time side job may be a bad idea if it places so much strain on you that you aren’t able to fulfil the duties of your regular job – for example, if it makes you constantly tired.

Many employers include a non-compete clause in their employee contracts. This is to ensure that you do not take the information, skills and contacts you acquire at your main job elsewhere (either to a new employer, or to a self-employed side job). Some employment contracts even contain a non-competition clause beyond the employee’s departure from the company. Be sure to peruse your contract carefully before beginning any self-employed part-time work to ensure that you are legally covered.

According to case law, the restriction of secondary activities by the employer may be permissible if the employee represents the employer’s business externally – as a manager, for example. An employee’s conduct in their free time subsequently has an effect on their employer, so they must also take into account the employer’s legitimate interests here, including when taking up a secondary job.

In any case, it is advisable to inform your employer about any planned part-time self-employment activities and consult with them about it. This will help to avoid potential conflicts at a later stage.

In the US, comprehensive health insurance is often granted through your employer. If you are self-employed, then it is up to you to find and pay for your own health insurance. This can be extremely expensive, resulting in many people opting not to have health insurance – often with disastrous consequences. However, even opting out of health insurance can incur a penalty when filing your taxes. A popular option is getting an insurance plan from HealthCare.gov, a government subsidized health insurance provider. However, premiums can still reach hundreds of dollars per month, and the threshold is $48,240 – if you earn any more than this, you are ineligible for the program.

If you are offered health insurance through your main job, you can continue with that premium for as long as their offer remains open to you. Having a part-time self-employed side job should not affect health insurance offered through your main job. However, it is worth consulting with a legal health professional to make sure you are adhering to any and all state regulations within the health insurance field. Health insurance is one of the most complex institutions in the US, and consulting with a professional is the only way to ensure that you can be fully covered, both legally and medically. More information on self-employed health insurance options can be found on eHealth.

As with all forms of income, you will need to pay taxes on any money you make from your part-time self-employed job. If the main reason for your side job is to turn a profit, and the work is regular and continuous, then you qualify as self-employed for tax purposes. If you are self-employed, you can pay your taxes by filing Schedule C, or Schedule C-EZ if you earn less than $5000 per year from your side job.

If you earn more than $600 per year, you will also need to fill out a 1099-K form or 1099-MISC form which allows you to log any income made from your side job.

If you have earned money from renting property, then you will need to report this income using a Schedule E. If you owe more than $1000 in taxes, you have to file quarterly estimated tax payments. To do this, you will need to fill out Form 1040-ES. Estimated tax can be paid through the mail or online using the Electronic Federal Tax Payment System (EFTPS). This can be found on the IRS website.

Like full-time self-employed workers, those with a side job can use allowable deductions to reduce their tax bill. If you can prove that an expense is being used solely for your business, then you can deduct the cost from your tax bill. Deductions frequently expensed by part-time self-employed workers include:

• Space in your home used exclusively for business
• Car-related expenses that are exclusively related to business (mileage, gas charges for rideshare drivers)
• Tools or equipment required for the job

More information on what expenses can be deducted by a self-employed worker filing taxes can be found on the IRS website.

If you are self-employed part-time, you should also be sure to insure yourself against damage caused by your second job. The most important ones to keep in mind include:

Business liability insurance covers damage caused by your professional activity. These damages often have simple causes, but can be very serious. You might injure a customer on your business premises, or make a technical error as a craftsman – one window incorrectly installed and the house now has water damage. Major damage can also be caused with faulty software or viruses, which you could spread unwittingly via email.

If you use an office or workshop, inventory insurance will protect your inventory from various possible damages. This insurance can also be extended to include insurance against natural hazards (storm, flood, etc.), glass breakage or business interruption.

Click here for important legal disclaimers.