Start a business alongside your job: contract, tax and the moment to jump

Many founders do not start with a leap but with a step: a few evenings a week, a free Friday, a period of reduced hours. Starting a business alongside your job is not a half-hearted choice. You test your idea with paying customers while your salary covers the rent. If it works, you will know when you can make the jump. If it does not, you have lost little. It does ask for a few agreements: with your employer, with the tax office and with yourself.

Can you start a business alongside your job? Read your contract first

Before you approach a single customer, read your employment contract, the staff handbook and any collective agreement. Look for these clauses:

• Side activities: many contracts require permission for paid work outside your job, sometimes called a moonlighting clause. Ask in writing and keep the answer.
• Non-compete: a ban on working in the same field, sometimes for a period after you leave. How far courts enforce it differs by country and, in the US, by state.
• Non-solicitation: a ban on approaching your employer's clients or staff. It can apply even when the client approaches you.
• Confidentiality: price lists, client data and methods from your job stay with your employer.
• Intellectual property: some contracts give the employer what you create during your employment, sometimes even in your own time. Build on your own equipment, outside working hours.
• Conflict of interest: selling to your employer's customers or bidding against your employer is the quickest way to lose both the job and the business.

The EU sets a floor. Under Article 9 of Directive (EU) 2019/1152, an employer may neither prohibit a worker from taking up employment with other employers outside the agreed work schedule nor treat the worker adversely for doing so (source: EUR-Lex, June 2019). Member states may allow restrictions on objective grounds, such as health and safety, business confidentiality, the integrity of the public service or the avoidance of conflicts of interest (source: EUR-Lex, June 2019). The text speaks of employment with other employers; how far that protects your own business depends on how your country wrote the rule into national law.

In the US the picture differs by state. California's Attorney General, for example, states that noncompete agreements are not enforceable in California (source: State of California Department of Justice, March 2022). Elsewhere a reasonable clause may hold. If you start in the same field as your employer, have the clause reviewed before you sign your first client.

Being open usually works best. Many employers have little objection to a business that does not compete, as long as your work does not suffer.

How is side income taxed, and when must you register?

Your side profit is added to your salary, so it is often taxed at your highest rate rather than your average rate. Registration is a separate question, tied to income tax in some countries and to sales tax or VAT in others. A few examples:

Reserve tax from the first invoice. Until your accountant has real figures, put a fixed share of every payment, such as a third, into a separate account. How registration and bookkeeping work in general is covered in register your business and tax and bookkeeping.

• Register: does side income need a business registration, or only a tax return?
• Thresholds: from what profit or turnover do income tax, social contributions and VAT or sales tax start?
• Costs: which costs can you deduct, and how do you show they are business costs?
• Deadlines: when are returns due, and must you pay tax in advance?

Thresholds change, often every tax year, so check the official source before you rely on them.

Time is your scarcest resource

With a job and a business, time runs out long before money does. Choose an offer that fits the hours you actually have. A customer who expects an answer within the hour cannot be served from behind your desk at work; a product or service with a fixed delivery time can. Plan fixed blocks for the business and protect them as you would a client meeting. And watch your energy: months of evenings and weekends catch up with you.

Worked example: can the side business replace the salary?

Amira is a payroll specialist with a full-time job paying €54,000 gross a year. Alongside it she does bookkeeping for small firms: eight billable hours a week for 44 weeks a year, at €60 an hour. Her question is simple: at what rate and volume can she leave?

Fictitious Firmfocus example. Amounts per year, before income tax. The logic works in any currency.

Two things follow. Her rate is too low: at €60 she would fall about €4,000 a year short even with a full diary (1,100 x €3.64 = €4,004), so she quotes €65 to every new client. And she has about a third of the hours she needs. Finding the other 748 hours, some 17 a week, is the real test, and it is easier with a free day a week than with evenings alone. Admin, sales, holidays and quiet weeks explain why a full-time year holds far fewer billable hours than working hours. The method is explained in set your freelance rate.

When should you quit your job and go full-time?

There is no fixed moment, but these signals give you something to hold on to. The more of them hold, the smaller the risk.

1. 01

   Demand exists without your network

   Customers find you outside friends and former colleagues, and they come back.

2. 02

   Your rate covers a full income

   Fill a working week with client work at your current rate: does that replace your salary plus what your employer now pays on top?

3. 03

   You have a buffer

   Savings for the months when revenue is not yet stable, plus money set aside for tax and insurance. See pay yourself.

4. 04

   The plan is on paper

   A business plan with a cash flow forecast for your first full year as a full-time owner.

An intermediate step is to reduce your hours at your employer. The business grows gradually while you keep part of your fixed income. Raise it early, because a request for fewer hours takes time to arrange.

A small start or a larger start alongside your job

Pitfalls when you start alongside a job

• Your employer's clients: working for them, even when they ask you, can breach your contract.
• Your employer's laptop and hours: building your product on them can hand the intellectual property to your employer.
• No tax reserve: side profit on top of a salary often lands in your highest tax band.
• Promising daytime service: a promise you cannot keep from behind your desk costs you the client.
• No end date for the double life: set a date by which you decide to jump, reduce hours or stop.

Starting together with someone else? Read start with a co-founder. The other starting points are in your starting situation, and the full theme in Start a business.