When running a side business whilst working for an employer, getting paid on time is paramount.
Plus, you need to ensure that your invoice is compliant with local taxation laws.
How can you find the right invoicing solution to complement your side work?
A side business is any form of work done on the side of a full-time job. A side business is typically freelance or project-based work, providing a supplemental income.
Side businesses are different from day jobs, where often employees work to make ends meet. They are a venture where freelancers can do what they are passionate about most to obtain additional income.
A side business is not the same as a part-time job.
Whilst part-time work still entails someone else (your employer) setting a project brief, when is the deadline and how many hours are worked on it, a side business provides more flexibility and freedom as to when you can work or how much you deserve to earn.
It’s a great option should regular employees wish to seek additional financial security, or attempt to get out of debt. Most likely though, it is to test themselves as an entrepreneur for a lifestyle change.
The work is normally completed in early mornings, evenings and weekends. Any time that does not impact their regular job hours.
When starting a side business, business owners can work as a part-time basis for a company, as a freelancer or as a contractor.
For those who are terrified of the prospect of becoming a full-time entrepreneur, and wish to add some side income as a freelancer - a side business can help with the following:
Once you have started a side business, you’ll need to keep up to date with paying your relevant income taxes. When employed, your employer will handle your taxes. Now it is up to you.
Most of us, whether veteran entrepreneurs or wannabe freelancers hail from North America and Europe where the tax systems are both antiquated and ambiguous.
Within the US, for example, there are a plethora of tax-deductible benefits that are open to those operating a side business. Still, you’ll need an accountancy degree merely to understand them all.
Conversely, in Europe, some countries like Spain charge a fixed fee of €265 per month for merely having a business even if that business makes no revenue each month.
The UK expects VAT (value-added tax) to be paid quarterly on revenue earned yet the final self-assessment for self-employed or business is done annually.
Knowing when to keep abreast of tax compliance is a headache for those already operating a side business and those wishing to start one.
Alternatively, in Estonia, the tax system is more understandable and as it is highly digitised, more transparent. It’s why many have chosen the country’s business infrastructure to establish their businesses.
This does not mean that the Estonian tax system is a haven for those searching to reduce their tax liabilities.
It is a solution where it is highly easy to manage a business online from any location in the world, pay taxes quickly, reduce bureaucratic red tape, and save the time needed to invoice and earn more money from your side business.
Freelancers are usually considered self-employed.
As self-employed individuals, there are several aspects of tax that many will need to know or will encounter at some point in their freelancer businesses.
Although this list is not exclusive, it represents the majority:
Given that this tax compliance varies from country to country, it would be too long to cover them in one such article.
One factor that applies to all freelancers running a side business is invoicing their customers or clients for their products and services.
When invoicing your clients, you’ll need to determine whether you will register as a VAT-registered business and add VAT to your invoices.
If you’re based in the EU, Switzerland, Norway or the UK, then you have likely heard of VAT (Value Added Tax). The rates vary per country to country - in Estonia, it is currently 20%.
Here are the VAT standard rates when you work as a freelancer from some of European countries:
|Country||VAT standard rate for freelancers|
VAT is added to invoices on top of the services or product offered in the invoice. As a freelancer, you don’t have to register to charge VAT unless you earn over a certain threshold in accordance with the level of said countries.
For instance, in Estonia, the threshold is €40,000 per year, so if you earn more than that, you will need to charge VAT on all your invoices. Whilst in the UK, this annual taxable threshold is £85,000.
Whilst you may not need a VAT number immediately, it has no disadvantages for your business (except charging private customers who are not VAT registered).
It even has several advantages where you can receive the VAT back on other services and transactions where you are charged VAT.
When invoicing US or Canadian based-customers, you do not ever have to add VAT added to the invoice. However, invoicing EU-based customers will depend on their following status:
*Disclaimer: If you are unsure about local taxation then always consult a tax professional for the correct advice.
VAT can be a nightmare to calculate and become very stressful, especially with all the varying rates.
So, you have invoiced your client, you have charged the appropriate fee for the service including VAT if applicable.
How do you pay yourself?
Naturally, it will depend on whether you are a self-employed freelancer or have some degree of a business structure.
A company will incur costs - from merely having one as per the example from Spain mentioned above to VAT payments (if applicable) or for accounting to keep your business tax compliant.
What’s left can be paid out as either salary or dividends.
So to withdraw it you have to do one of the following:
Every financial year a company must do an annual report. In it, a company can determine how much profit is made. These profits can be distributed to its shareholders (namely those who own the company) as a dividend.
This dividend is still subject to taxes which your company must pay for you, usually in the following month. As an individual, you do not pay this tax.
However, once you receive the dividend, as a form of income, several countries within Europe see this as taxable (not Estonia).
Meaning that this income must be stated on a personal tax return and a subsequent personal tax must be paid on it. France and Germany are two such countries where this applies.
If you require income from your side business more frequently than once a year, then you can pay yourself a monthly salary.
You will also need to calculate how much in social and income taxes you must pay to the state on top of the net salary you pay yourself.
When to pay your personal taxes will depend on where you are tax domiciled - some are monthly, others annually. Ensure you don’t miss your payment dates with the tax authorities or your company will not be compliant.
If you are registered self-employed, then you may not need to have a company, although you will still have to deal with tax compliance.
At times, starting a company does not make sense, as it begins to incur costs upfront and ultimately, the subsequent running costs each month. Factor in the need to be aware of VAT rates, social taxes and ensuring annual reports are completed can feel daunting to start a side business.
As a freelancer, you have honed your skills in a particular field over the years - which is why you wish to earn more for them as a side business. However, to become a small business owner, you need to become an expert overnight on how to manage a business.
Or do you?
Xolo has an invoicing solution that takes the hassle out of calculating invoices for your customers and clients and an even easier way to get you paid without worrying about tax compliance.
Xolo Go is a virtual company invoicing solution that means you can offer professional services to customers that are based in the European Union, Switzerland, Norway, UK, USA and Canada.
With a virtual company, you won’t own a registered company or become a business owner per se. What this also means is that you do not have the responsibilities or costs that apply when setting up a registered company.
So you don’t have to become an accountant, taxman or compliance expert when setting up a freelance side business - you can focus on servicing more customers with your expertise.
You can use Xolo Go as an invoicing solution and more:
For those starting out with a side business, Xolo Go is perfect. You can generate additional side income without the full financial and legal commitment that is required for being a sole business owner.
As you can send out invoices to your customers, Xolo Go will automatically calculate the VAT due (if applicable) for your customer or client, meaning you don’t have to worry about how much to charge.
And now using Xolo Go freelancers can now accept payments from customers based in the USA and Canada, with USD and CAD currencies now being accepted. Meaning that you now provide services to business customers in all European Union member states, plus Switzerland, UK, Norway, Canada and the United States.
When clients pay your virtual company, Xolo Go takes care of any business and taxes due.
Only if you withdraw to your personal account, will you have to calculate some personal taxes as per your country of tax residence.
For each withdrawal to your bank account, Xolo Go will charge a 5% fee on the amount - substantially less than recurring monthly registered business fees.
If you choose to keep your income within your virtual company, then you won’t pay any fees at all!
An expense-free business sounds very appealing!
Even better, you can sign up to Xolo Go in less than ten minutes and begin invoicing your clients and customers. You can watch a video of Xolo Go here:
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