Running an online business can be super flexible and easier to start because start-up costs tend to be lower. However, if you have a great online business idea or even want to start freelancing on the side, don’t get the impression that you’ll be able to start and maintain your business for next to nothing.
There are still quite a few expenses to consider when you launch an online business like licenses and certifications, setting up your website, branding, inventory and office materials, etc.
On top of that, there are quite a few hidden costs that you have to consider as well as costs you might underestimate. I’m well over my first year of running an online business and here are 4 hidden costs you need to know about.
It’s a given that you’ll have to pay some administrative fees when you start your online business, but it’s easy to forget some of the key expenses you’ll have to cover.
Hidden administrative expenses I’ve had to deal with include invoicing and accounting software. You may be able to track your income and expenses and use PayPal to invoice for free in the beginning, but paying for these services as you grow your business will help you manage your finances better and get more organized.
Other expenses can include your phone, printer, office supplies, and utilities.
2. Tech Expenses
Tech expenses can be huge since you’re running your business entirely online. For starters, you’ll need a quality computer if you’re going to be working online 100% of the time. Believe it or not, when I first started blogging and freelancing, all I had was a Microsoft tablet with a keyboard attached.
Tasks were doable at the time, but after my workload increased I knew I needed to get a laptop in order to keep things afloat, I made a $700 investment and bought one brand new.
For the first few months it was fine, then it started having issues and the battery was dying out quick since I’d spend around 10 hours a day on the computer doing various things. A few weeks ago, I finally broke down and purchased a MacBook Pro when Best Buy was having a Black Friday sale.
This was a huge investment but well worth it considering I need a computer that will be able to handle all the work I need to do.
IT and technical support is another tech expense I’ve had to cover since my business is online and I’m not a tech expert. I needed help setting up my website, updating it, and backing up my content.
3. Fees, Permits, and Licensing
Depending on what industry your business falls under and what products you sell, you might need various fees and permits to be considered legal. Many entrepreneurs don’t realize this and find themselves spending thousands on something they didn’t know they needed to pay for.
Your best bet is to inquire about these expenses ahead of time and ask other business owners in your niche. You may need to work with a lawyer to copyright things and set up an LLC or S-Corp. You don’t necessarily need to form an LLC (limited liability company) when you start an online business and can just work as a sole proprietor.
However, if you plan on keeping your business for a long time, an LLC or S-Corp can help protect your personal assets and separate them from your business’ assets. In Illinois where I live, forming an LLC costs $500 just in-state fees. Other states are cheaper or possibly higher so you’ll need to check the options in your state and prepare for this expense if it’s something you think you’d want.
Finally, taxes can really put the nail in the coffin if you aren’t prepared. Taxes aren’t really a hidden expense because it’s obvious that you’ll have to pay Uncle Sam a portion of your business earnings.
However, if you don’t realistically project how much taxes you’ll have to pay, it could result in a rude awakening around the start of the year. Ideally, you’ll want to set aside anywhere from 15% – 30% of your monthly income. You can discuss your situation with your tax professional and send the IRS quarterly estimated tax payments but sometimes they will feel like a huge hit to your income so you’ll have to adjust your spending accordingly.
Why so much? When you work for yourself, you don’t have the benefit of an employer paying a portion of your taxes for you. So while you’ll have the freedom and flexibility to earn more money, you’ll need to in order to cover your bases with tax payments.
This year, I expect to pay around $15,000 in taxes for my business. I feel crazy even typing that out, but it’s the reality of being a business owner. Don’t let it blindside you.
(Here’s a free business income and expense tracker that can help you get a handle on your taxes.)
In fact, don’t let any of these expenses blindside you and try to budget for them ahead of time. The key is top save up a large enough emergency fund and business savings account before you take the leap and launch your online business.
Unexpected expenses may still pop up, but you’ll be equipped to handle them with ease.
Did any of these expenses surprise you?