Home Businesses: What You Need to Know

What Is a Home Business?

As its name suggests, a home business is one that is located within the business owner’s home. The primary office may be large or it may consist of a small closet, but as long as it is located inside the home it is a home business regardless of its size.

Home Businesses Background

A home business offers several attractive advantages, including decreased expenses from not renting an office space, flexibility and tax advantages. However, it is important to note that starting a home business does not come without its own set of unique challenges. Zoning restrictions in certain areas may prohibit or limit home-based businesses, and certain licenses and permits may be required. If you wish to take advantage of the perks associated with home businesses, you also need to familiarize yourself with applicable local and federal guidelines.

Zoning Regulations

Most cities allow home-based businesses, although a few may not and others may enforce certain restrictions. For example, your city may require that you limit your business signage, or they may have restrictions on the number of employees you can have. Prior to starting your own business at home, it is imperative to check your city or county zoning laws.

License and Permit Requirements

The licenses and permits that you will need to receive prior to opening a business at home may vary by state and business type, so it is important to look up the requirements in your state. Some common home business licenses include general business licenses, home occupation permits, sales tax permits and construction permits (should you need to make modifications to your home in order to accommodate your business). Depending on the nature of your business and the area where you live, additional permits and licenses may be required.

Homeowners’ Association Restrictions

If you live in a homeowners’ association (HOA) or other “common interest” development, your business may need to adhere to certain standards spelled out in the covenants, conditions and restrictions (CC&Rs). These standards may regulate the type of business activities you conduct and may specify if guests are allowed to visit your physical location or if they must order from you solely online.

Taxes

All businesses at home must file federal income tax returns, and any that employ one or more people must also withhold and file specific forms intended for at-home businesses with employees. Additional forms are required for home office costs and depreciation deductions. Due to the complexity of the federal tax regulations for businesses at home, it is recommended that you hire a professional tax preparer rather than attempting to file your taxes on your own. Hiring a professional may ensure that you get all the deductions for which you qualify, and it will also help give you peace of mind that your taxes have been filed legally and accurately.

In addition to federal taxes, you will also be required to file state income and withholding taxes for your home business. Many states require businesses to register with them for tax purposes. Although registration can be cumbersome, it gives businesses access to tax assistance materials that tend to be more straightforward and clear than federal tax materials. Depending on your business type, you may need to file sales, use, and excise taxes, business personal property taxes and local fees and business taxes.

Business Insurance

Most homeowners’ insurance policies do not cover losses for home-based businesses. This means that you may need to purchase additional insurance coverage if you want coverage for important things like business property, crime and theft, professional liability and personal and advertising injury. An insurance professional can help you understand what type of coverage is recommended for your home business.

Owning and operating a business out of your home can be a rewarding experience, both monetarily and emotionally. Understanding and following the regulations associated with operating a business from home can help you avoid unpleasant legal complications and give you peace of mind that you are operating within the perimeters of federal and local laws.