Side projects grow quietly. One month it's a few sales to friends, and a year later it's a real business. Along the way, you cross tax lines that are easy to miss. Here are the milestones that matter, in roughly the order most people hit them.
Your first $400 of profit
Once your net earnings from self-employment reach $400 for the year, you generally need to file a return and pay self-employment tax, even if you otherwise wouldn't need to file. All income counts, whether or not you receive a tax form for it.
Proving it's a business, not a hobby
If you're running it to make a profit, keeping records, and working at it regularly, you can deduct business expenses. If the IRS sees it as a hobby, the income is still taxable but the expenses generally aren't deductible. Treating it like a business from day one helps.
Opening a separate account
A dedicated bank account and card for the business make bookkeeping simpler, keep deductions clean, and make your records far more credible if they're ever reviewed.
Your first tax forms from platforms
Payment apps and marketplaces send a Form 1099-K once you pass $20,000 in payments and 200 transactions in a year. Clients who pay you $2,000 or more for services generally send a 1099-NEC. Below those levels, you won't get a form, but the income is still taxable.
Owing $1,000 or more
When you expect to owe $1,000 or more for the year, the IRS expects quarterly estimated payments. Missing them can mean penalties, even if you pay everything when you file.
Selling taxable products
Many states, including California, require a seller's permit before you sell taxable goods. Your city or county may also require a business license.
Forming an LLC
An LLC can separate your personal assets from business liabilities, though it doesn't change your federal taxes on its own. California LLCs generally owe an $800 annual tax, so weigh the protection against the cost.
Paying someone else
Collect a W-9 from every contractor before you pay them, and file a 1099-NEC for anyone you pay $2,000 or more in a year. Hiring an employee brings payroll, withholding, and state registrations.
Profit that keeps climbing
As profit grows, two things become worth a look: a retirement plan for the self-employed, which can shelter part of your income, and whether an S corporation election makes sense. Both depend on your numbers, so run them before deciding.
We'd open the separate account and save receipts starting with the very first sale. It costs nothing, and it makes every milestone after it easier.