Freelancing "on the side"...

[skinny monkey]

Hello all

I just need some simple business advice.

I've been doing some small freelancing jobs on the side for a (limited) company and been getting paid for it. A few hundred pounds here and there, doing it in the evening instead of watching TV, you know? It is not my day job. Now i just read that i should pay my own tax or vat or something on the money i've earned, as when the company put's in it's tax returns or when their accountant does their books, there will be a trace to the money paid to me?

quite nervous, hope someone can clear things up.

[digitaleye]

I have also just started freelancing whilst working full time. However, I have gone self employed. I don't think they will trace you back unless they have a good reason to investigate you, but I'm not too sure. You can still register as self employed whilst working, you just have to pay your tax on profits and NI contributions (around £2.50 per week). You also need to register within 3 months of starting your first job. However, if you can get away without paying the rediculous amount of tax we have to pay, then why not!

[Ted S]

You should always declare your income and pay taxes on it if you're obligated to by law (every country has different rules about minimum earnings, etc...). Depending on what you are doing and how, you may be able to add more deductions to your taxes and offset some of the earnings thus reducing your taxes.

Contrary to other advice, it's generally considered a bad idea to evade paying taxes, especially on larger sums of money. If you're working for clients who are paying you anything over a couple hundred dollars/ pounds, that's going to show up in their books and while I don't know the UK tax system, I'd be willing to bet that they (the tax collectors) get a record of who your clients have paid when they file their return. Remember, the company paying you is taking a deduction equal to that of your fees so they have to have evidence as to the payment... assuming that all sits and collects dust is an awfully big assumption.

If you're uncertain what taxes you need to pay you can likely consult local small business associations or an accountant who specializes in people with a similar situation.

[beley]

In the US, if you make over a certain amount by one company (I think it's around $600) they have to fill out a form for the IRS in order to deduct that amount as an expense. The result is that the IRS then looks for you to claim this amount on your taxes. Somebody has to pay taxes on the money!

I am not sure how it works in the UK but I'd imagine if it were over a certain amount you would be required to report it and pay taxes on it. I would suggest calling a tax professional or accountant in your area for professional advice.

[shadowbox]

Yes, you need to declare this as you will be liable to pay tax on these earnings. YOur day job will no doubt take you above your £6k personal allowance, so you will need to register yourself as self employed, pay class 2 NI each month, and each year pay class 4 NI and income tax @ at least 20% on this extra income.

Remember that if you don't pay tax, it just means people like me who declare everything end up paying more tax as someone eventually has to make up the shortfall to Revenue and Customs . This is why each year the government has to change parts of the tax system to generate more cash. In fact the most common way to get caught evading tax is by being grassed up by a disgruntled tax payer. Food for thought...

[jantheman]

I agree. Get some advice from a tax accountant and make sure you are complying with the tax laws. In most cases you should also be able to claim your expenses as a tax deduction, so it may not be as bad as you think.

Its not worth the stress hanging over you if you don't pay and when it does eventually come up with the tax department you will only end up paying all the tax, plus additional fines most likely.

[artistsneverdie]

If you're based in the UK it's worth registering as self-employed sole trader as previously mentioned in this thread, you can claim back expenses (PC's, software, petrol, lunch meetings etc...) even if it's only a part-time business it's still seen as a full-time business as long as you are getting paid income you can counter act the tax with expense right-offs. Get an Accountant too

I did this myself for a while a few years ago, working full time at a company and continuing my design business part-time in the evenings and weekends.

[AlphaDesigner]

Another thing.... make sure you keep copies of financial tansactions.

[DrQuincy]

I find it deplorable when people think because they pay tax in their regular job they are exempt from paying it on any extra work they do (I'm not saying you're one of those people). I lose nearly half my freelance profit to the government; I don't like it but it's the right thing to do If everyone was honest maybe taxes would not be so bad. It's up to you though.

Chances of getting caught. Very low but possible. Someone you work for would have to be investigated and they'd have to go in it deep enough to contact you.

Registering as self-employed is easy, you can do it over the phone and you have 3 months. Just call up the IR.

You don't need to form a ltd company, just go self-employed (costs nothing). You only need to register for VAT if you turn over 60k a year.

If you're only earning a few hundred a year you'll find you'll be able to make 0 profit anyway by claiming expenses and capital allowances for mobile, broadband, computers, etc, the only thing you'll have to pay is your Class 2 NI which is only a few quid a month. Any good accountant will do all this for you for a reasonable fee. and at least you know you're doing it the legit way and don't need to worry about getting caught.

I was a bit nervous like you but now I do my own accounts, it's really not as bad as you think and in my experience the Inland Revenue are actually quite easy to deal with.

[shadowbox]

Chances of getting caught. Very low but possible. Someone you work for would have to be investigated and they'd have to go in it deep enough to contact you.

I think you are more likely to get caught from someone informing the revenue about your tax evasion. For example, disgruntled client, neighbour, friend, random associate etc. All it takes are some loose words to someone, they get upset that they are paying your taxes for you, and one quick phone call is all it takes.

For example, let's say you get some work done by a plumber or similar with the usual 'make the cheque out to my wife' malarky that they all seem to love so much. If they stuffed up and refused to fix it, a quick phone call to Revenue & Customers would certainly have interesting consequences, especially if VAT evasion was present.

[croatiankid]

In the US, if you make over a certain amount by one company (I think it's around $600) they have to fill out a form for the IRS in order to deduct that amount as an expense. The result is that the IRS then looks for you to claim this amount on your taxes. Somebody has to pay taxes on the money!

A company I did a job for told me there'd be tax implications if I charged more than $500, so that sounds about right (I ended up charging $500).

[AlphaDesigner]

Its worth paying taxes on, you get caught your screwed for life.

[ausnets]

Remember what finally got the gangster Al Capone behind bars....tax evasion

[Acquiesce]

Sounds like you were in a similar situation now to what I was in a few years ago. Upon advice from a reliable accountant they advised not to set up as a sole trader, but as a Limited company instead. For reasons I forget now, they said it would be more beneficial to me in the long run to do it this way, both financially and in terms of security if anything went wrong.

They did give me a information pack about the difference between sole trader/Ltd, if I can find it I'll post it up.

My advice though would be to go and speak to a qualified accountant, as you might have gathered, my knowledge on this is vague to say the least (hence why I employ him to do it for me!!)

[selfhelpebooks]

I would consult the advice of a financial planner or accountant, in case.
Don't want any legal troubles!

[mike_rambo]

I also want to do this..

I would like to make some extra money and get some experience in the evenings and on the weekend by making websites.

I was wondering if you could give me some advice?

Do I need to get any insurance? - public liability? Something to protect me if someone wants to sue me or whatever?

Some say I will need to pay extra council tax to work from home and some say I wont. I'll be working from my bedroom so really its not used for business alone which i think means i dont have to pay?

Will running a business part-time affect my full time job's pay? (Will more tax be taken?)

I will get an accountant - but what exactly do i need to ask them to do for me? - just incase i pay for something i dont need.

Thanks

[shadowbox]

Some say I will need to pay extra council tax to work from home and some say I wont. I'll be working from my bedroom so really its not used for business alone which i think means i dont have to pay?

Will running a business part-time affect my full time job's pay? (Will more tax be taken?)

No, you won't pay more council tax, in fact you can claim some of your council tax as a business expense. Basically if you have say 4 rooms in your house, you can claim around 1/4 of all your utility bills as a business expense (gas, electricity, water, c tax, mortgage interest, phone line rental etc).

You'll need to register self employed. Anything you earn from this will be taxed separately to your full time job via your annual tax return.

[Buddy Bradley]

Do I need to get any insurance? - public liability? Something to protect me if someone wants to sue me or whatever?

That's not as critical as paying your taxes, but certainly worth considering.

You don't need public liability insurance - that covers people being injured through your neglect, so unless you make a website and it falls on someone you're pretty safe.

What you need is Professional Indemnity insurance. This covers you against people claiming that your services or advice cost them money; so if you build an ecommerce site that screws up payment processing and get sued, it will cover your legal expenses and up to £000m damages. You can get a decent amount of cover (several million) for between £150-300/year.

[shadowbox]

You don't need public liability insurance - that covers people being injured through your neglect, so unless you make a website and it falls on someone you're pretty safe.

Not true at all. If a client visits your place of work (your office or home) and they trip and break their neck while there, public liability would most definitely be a requirement. On the flip side, if you visit your client's premises and spill a cup of coffee on their £50k computer system and destroy it, you'd be covered for any legal action they may take against you.

[PreCoder]

Just a note, here in Australia at least you can register a business and still not pay tax (gst) if it does not take in more than $50,000 each finanical year. I know that is what I was doing with my accountant, once we started to earn over the 50k mark I than had to register the business for GST and add 10% to my prices etc.

Food for thought, as your country may have something along the same lines, though this was a little while ago so things in Australia may have changed as well, but I don't believe they have. hope it helps.

[cranial-bore]

Just a note, here in Australia at least you can register a business and still not pay tax (gst) if it does not take in more than $50,000 each finanical year.

GST and income tax are totally separate. As an Australian business you don't need to register for GST until the $75K threshold (recently increased from $50K). Once registered you need to collect the 10% GST to pass onto the Tax Office. Registering also entitles you to claim the GST you pay on business purchases, so it's worth doing even if your income is below the threshold.

Income tax is different. If you have a business that only earns $5K a year, you don't need to register for GST, but you certainly have to include that money in your taxable income. It will add to your salary, rental income, capital gains and other sources of income to determine the income tax payable.

[PreCoder]

Arhh yes I do remember that now. Needless to say I just remember my accountant talking about it, interesting to know

[rmcglinn]

If you have a business that only earns $5K a year, you don't need to register for GST, but you certainly have to include that money in your taxable income. It will add to your salary, rental income, capital gains and other sources of income to determine the income tax payable.

In Australia if you earn less than $20K a year in your business it is depending on your circumstances more likely to be considered a hobby by the ATO. The following activities are excluded from the meaning of 'enterprise':

• Activities done as an employee.
• Activities done as a private recreational pursuit or hobby.
• Activities done by an individual (other than a trustee of a charitable fund) or a partnership (all the members of which are individuals) without a reasonable expectation of profit or gain.

If you are only earning $5k or less that's more of a hobby income than a business. You can legally get away with not paying tax or registering for an ABN by supplying a Form: nat3346 "Statement by a supplier" when you next freelance to someone (ato.gov.au/content/downloads/nat3346.pdf)

Of course always get advice from an accountant but if you don't legally have to pay tax, then why should you feel obligated to do so.

Cheers
Rob

[doctorthomas]

I am a novice site-builder--first one done: dairyland84.com
[I can use some constructive criticism on that.]

But as for doing work on the side and keeping the money versus paying taxes, I know that well. I counsel entrepreneurs on how to run the business part of their endeavors–not how to write or draw or fix motor cars. I educate them on business and keeping the money they make.

The US tax code is generous (many deductions) for organized business (I suspect the same of the UK) and punitive for working stiffs (high income taxes for wage earners). If you structure your efforts as an organized business (s corp or LLC) and work on the side from home, the tax deductions are wonderful. You can use the government tax code to get back much of the taxes paid from your regular job and keep the benefit from your home efforts. No scams, no loop holes--you use the IRS tax code sections for businesses. I imagine many of the same theories (different law) apply to the UK. Generally, CPA's and non-corporate attorneys know little or nothing about application of these tax codes. So, don’t go there. This is management accounting (C corporation accounting), corporate counsel stuff. If you can afford those professionals you don’t need to work on the side. I was a board member of a corporation when I was 18.3 years old--I have seen more than 40 years of life.... (have a JD and am pursuing an MBA). Structure and planning after organizing as business rather than doing it as an individual person is the key. Repeat that before going further. Reread that, seriously.
Wish my business site (in process) was up; it will be targeted on a related niche: how to run s corporations smoothly--the preferred entity for small business.

Earn as much as you can; report it all including every single expense associated with production of the sold talent/site/item. Get into the business part of the tax code and win!! One last hint: receipts, receipts, receipts; document everything. Yes, E-V-E-R-Y-T-H-I-N-G.

I can be contacted through the above site; use my handle here. Legal questions are ignored; I am helping entrepreneurs be successful-that's fun business. If you have legal questions/problems get a lawyer right away.

[rmcglinn]

I am a novice site-builder--first one done: dairyland84.com
[I can use some constructive criticism on that.]

But as for doing work on the side and keeping the money versus paying taxes, I know that well.....

The US tax code is generous (many deductions) for organized business (I suspect the same of the UK) and punitive for working stiffs (high income taxes for wage earners). If you structure your efforts as an organized business (s corp or LLC) and work on the side from home, the tax deductions are wonderful.....

My reply relates to Australia. When I first started freelancing I started out part-time while I was still working in a full time job. I had a lot of start up costs initially so for the first year my expenses were more than my actual profit. I also grossed under 20k.

Now you can legitimately claim your expenses against your taxable income here in Australia but if you make a loss and your actual business enterprise turnover is less than 20K for the financial year the Australian Taxation Office makes you defer your loss until such time as you turnover 20k and meet their criteria of running a business. This means that you will not be allowed to offset your loss against your normal full time wage or salary income. The ATO used to allow it but too many people were using their hobbies to reduce their overall taxable income to reduce their tax liability so the ATO nipped it in the bud so that only people with a genuine business with a genuine intention of making profit were allowed to offset their losses against their other income. I'm not talking through my hat here as it actually happened to me.

If in doubt talk to a good accountant or even the ATO. The staff are quite helpful ironically enough