How to Start a Side Business: An 8-Step Checklist From Idea to Taxes

The short answer: what a side business needs, and what it costs

If you want to know how to start a side business with the least risk, the answer is that it needs four things on day one: a customer who will pay, a way to take the money, a record of what came in and went out, and a plan for the tax. Everything else, including an LLC, can wait until the business proves itself.

That is because of how the law treats you by default. The SBA says "you're automatically considered to be a sole proprietorship if you do business activities" and don't register as another business type, and that "if you conduct business as yourself using your legal name, you won't need to register anywhere" (SBA: Choose a business structure).

Here is what the start-up items cost, using only figures an official source publishes:

If you are still deciding whether your idea is a hobby, a side hustle or a business, start with what a side hustle is and come back here.

Step 1: Prove someone will pay before you spend anything

The SBA describes market research as a way to "find customers for your business" and to "confirm and improve your business idea" (SBA: Market research and competitive analysis). It suggests answering five questions, which translate neatly to a side business:

• Demand: "Is there a desire for your product or service?" Ask five people who fit your customer profile whether they would pay, and how much.
• Market size: "How many people would be interested in your offering?" Look for active online groups, search results and competitors.
• Economic indicators: "What is the income range and employment rate?" A premium service needs customers who can afford it.
• Location: "Where do your customers live and where can your business reach?" Online work can sell nationwide; pet care or tutoring in person cannot.
• Pricing: "What do potential customers pay for these alternatives?" Write down three competitors' prices.

Checklist before Step 2:

• One sentence describing who you help and what you deliver
• At least one person has paid, pre-ordered or asked to book
• Three competitor prices written down
• A rough count of hours per week you can protect

Side business ideas that test cheaply

Services built on skills you already have are the easiest to test: tutoring, bookkeeping, proofreading, design, virtual assistance, pet sitting. Our list of side hustles from home gives startup costs and sourced pay figures for eleven of them, and where to sell used items compares selling fees.

Step 2: Choose sole proprietorship or LLC (most start as the first)

Most side businesses start as sole proprietorships because it costs nothing and requires nothing. The trade-off is liability. Here is how the SBA describes the two structures people weigh most often:

Source: SBA: Choose a business structure.

Two practical points follow. First, an LLC does not reduce self-employment tax on its own; the SBA treats LLC members as self-employed. Second, LLC costs are state-specific and can repeat every year. California's Franchise Tax Board says "every LLC that is doing business or organized in California must pay an annual tax of $800," due "even if you are not conducting business, until you cancel your LLC" (California FTB). Check your own state's Secretary of State and tax agency before you file.

When an LLC is worth a closer look: you work in clients' homes, handle valuable property, sell products that could injure someone, or sign large contracts. A local attorney or accountant can say whether the protection is worth the fees where you live.

One warning: some "work from home" programs require you to form a business before they will give you work. Arise, for example, says "we are not offering a job rather a business venture" and lists costs including a $30 background check and $100 to $350 to incorporate (Arise costs page). That is a business decision with real costs, not a job offer, and you should weigh it that way.

Step 3: Get your EIN directly from the IRS, for free

An Employer Identification Number is the business's federal tax ID. The IRS says its online tool gets you an EIN "directly from the IRS in minutes for free," that you "never have to pay a fee for an EIN," and it warns: "Beware of websites that charge for an EIN" (IRS: Get an EIN).

Because the IRS itself warns about sites that charge, type IRS.gov into your browser yourself rather than clicking an ad.

Do you need one as a sole proprietor with no employees? The IRS page lists reasons such as hiring employees, operating a partnership or corporation, and paying certain excise taxes; it does not say a solo side business must have one. Many people get one anyway because it is free and banks often ask for it. The SBA notes that sole proprietors can give a bank their Social Security number instead.

Checklist:

• Apply on IRS.gov only, in one sitting (the IRS says sessions expire after 15 minutes of inactivity)
• Save the confirmation notice as a PDF
• Never pay a third party for an EIN

Step 4: Check state licenses, local permits and home zoning

This is the step people skip, and the one most likely to surprise you. The SBA says "the licenses and permits you need from the state, county, or city will depend on your business activities" and location, and that "states tend to regulate a broader range of activities than the federal government" (SBA: Apply for licenses and permits).

Working from home does not exempt you. The SBA is explicit: "zoning ordinances can still apply even to home-based businesses," and "zoning laws are typically controlled at the local level." Some cities issue a specific home-business or home-occupation permit; others regulate signs, client visits, parking or deliveries.

Who to ask, in this order:

1. Your city or county planning or zoning office, about running a business from your address.
2. Your city or county clerk, about a general business license and registering a trade name if you will not use your legal name.
3. Your state's licensing agency, if your type of work requires a professional or occupational license.
4. Your state's tax agency, if you will sell taxable goods or services and need to collect sales tax.

Checklist:

• Written answer from the zoning office, or a note of who you spoke to and when
• Business license, if your city requires one
• Trade name registered, if you use one
• Sales tax registration, if it applies

Step 5: Open a separate account and keep records from the first dollar

Mixing business and personal money makes profit hard to see and taxes hard to file. The SBA says a business bank account offers "limited personal liability protection by keeping your business funds separate," and lists what banks commonly ask for: an EIN (or, for sole proprietors, a Social Security number), formation documents, ownership agreements and a business license (SBA: Open a business bank account).

On records, the IRS is flexible about the system and strict about the result. "You may choose any recordkeeping system suited to your business that clearly shows your income and expenses," and good records help you "identify sources of income, keep track of deductible expenses" and "support items reported on your tax returns" (IRS: Recordkeeping). As a general rule, the IRS says to keep records for 3 years, with longer periods in specific cases, such as 6 years if you fail to report income worth more than 25% of the gross income on your return (IRS: How long should I keep records?).

Checklist:

• A checking account used only for the business
• Every sale and expense logged weekly (date, amount, who, what for)
• Receipts saved as photos or PDFs in one folder
• Platform payout reports downloaded monthly

Step 6: Price for your real hours, not just your billable ones

Price for every hour you spend, not only the hours a client pays for. Messages, quotes, invoicing and finding the next customer are unbilled.

Here is the arithmetic. Say you protect 10 hours a week and 3 of them go to admin and marketing. At $30 an hour for the 7 billable hours, you earn $210 for 10 hours of work, or $21 for every hour you actually spend. Then self-employment tax and income tax come out of the profit.

Public pay data is a useful sanity check. BLS May 2025 medians for occupations that often become side businesses include $24.36 an hour for bookkeeping, accounting and auditing clerks, $30.27 for graphic designers and $36.98 for writers and authors. Those medians cover all workers, mostly employees, whose employers pay the employer-equivalent share of Social Security and Medicare tax and usually supply the equipment. A self-employed rate below the median leaves you worse off than the typical employee.

Checklist:

• Hourly target based on total hours, not billable hours
• Price list with a minimum order or minimum fee
• Payment terms in writing: deposit, due date, accepted payment methods

If you sell your time through a marketplace, its fee comes off the top as well; our guide to freelance jobs for beginners online lists the current Upwork and Fiverr cuts.

Step 7: Pay tax as you go with quarterly estimates

Nobody withholds tax from side-business income, so you do it yourself. Three IRS rules matter most.

Self-employment tax starts at $400. You owe it if "your net earnings from self-employment... were $400 or more." The rate is 15.3%: "12.4% for social security" and "2.9% for Medicare." You can "deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income" (IRS: Self-employment tax).

Quarterly payments start at $1,000. Sole proprietors "generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed," using "Form 1040-ES, Estimated Tax for Individuals." The year is split into four payment periods; Publication 505 has the dates (IRS: Estimated taxes).

The safe harbor. You generally avoid the underpayment penalty if you "paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year," whichever is smaller.

Report everything. The IRS says "whether or not you receive a Form 1099-K, you must still report any income on your tax return" (IRS: Understanding your Form 1099-K).

Checklist:

• A fixed share of every payment moved to a separate savings account for tax
• Quarterly 1040-ES payments scheduled if you expect to owe $1,000 or more
• A note to ask a tax professional about deductions in your first year

Step 8: Read your employment agreement before your first sale

If you have a day job, the biggest risk to your side business may be your employer's paperwork rather than the IRS. Many employers have rules about outside work, and some offer letters assign ownership of things you create. Read these before you take a client:

• Outside employment or moonlighting policy: some require you to disclose or get approval for paid work elsewhere.
• Conflict of interest policy: competing with your employer, or selling to its customers, is the usual problem.
• Intellectual property or invention assignment clause: check whether work you make on your own time, or with company equipment, could belong to your employer.
• Non-compete or non-solicitation terms: if you signed one, get advice before taking work that could fall under it.

Never use your employer's laptop, software, phone or working hours for the side business, and if anything is unclear, ask HR in writing and keep the reply. Knowing how to start a side business safely includes knowing what you agreed to.

Then protect yourself from the other common trap. Reported losses to business and job opportunity scams totaled $750.6 million in 2024, according to the FTC. If an "opportunity" asks you to pay for a starter kit, training or leads before you earn anything, read our work from home scams guide first. For the other paths, from remote jobs to selling, see our main guide to how to make money from home.