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Blog Guide

Are You Right for Self-Employment?

The realities of being self-employed and how to make it work for you

Home office setup

By Stephanie Olsen

If you’re self-employed, you’re in good company. Accounting software company FreshBooks estimates that approximately 42 million Americans will be working for themselves by next year. Traditional employees are making the move to self-employment in order to take control of their lives and make career changes.

Every profession is represented by self-employed workers. The FreshBooks team explains that construction and the trades have the highest representation at nearly 20 percent, with real estate and consulting services coming in at 10 percent each. At the single digit end are creatives, IT and health and wellness.

Whatever field they’re in, and whether they’re sole proprietors, freelancers or small business owners, self-employed workers have to be disciplined and motivated in order to be successful.

Benefits of being self-employed

There are plenty of positive aspects to working for yourself, whether from your home office, at your own brick and mortar shop or from your laptop on the road. These include:

  • Being self-employed can be more profitable than being an employee. One reason for this is that companies often pay higher hourly rates to independent contractors than they do employees. This is because they don't have to pay the costs related to employees, such as vacation, health insurance, and pensions.

  • Being self-employed means you have unlimited income potential. Your salary is never capped and you can charge whatever the market will pay.

  • Being self-employed means controlling the hours and days that you work. This flexibility is rare for traditional workers. A side bonus is if you’re working part-time hours, you might be able to reduce the cost of childcare.

  • Being self-employed means you can make a difference in your part of the world. Even a very small local business contributes to the economy and creates jobs. Plus, if you are successful financially, you can hire other gig workers and self-employed people to do tasks for you.

  • Being self-employed almost always means you’ll save time and money on commuting. This is especially true if you work from home.

  • Being self-employed can also save on having to buy and maintain a business wardrobe. Some freelancers work from home in their pajamas, others at shared office space where there’s no dress code.

  • Being self-employed means you can claim tax deductions for everything from meals and travel to home office and health insurance plans.

  • Being self-employed means no lousy coworkers. You’re the boss, so you get to pick and choose your environment.

Drawbacks to being self-employed

Working for yourself has its cons, and the biggest is financial insecurity. This tends to dissipate the longer you’ve been self-employed, but it’s certainly a factor to consider when you’re just starting out.

  • Being self-employed means your income will ebb and flow, which makes it difficult to budget and can be extremely risky if you don’t have a healthy savings account.

  • Being self-employed often means you don’t make money if you don’t work.

  • Being self-employed means there are no benefits like paid vacation, paid health insurance, or retirement plans.

  • Being self-employed means that you pay business expenses first, then yourself. That’s not a hardship if you’re a bookkeeper working from your home office, but if you have an inventory-based business, it can add up.

  • Being self-employed means you pay self-employment tax. Instead of an employer paying one-half of your social security and medicare taxes, you are now responsible to pay those taxes in full.

  • Being self-employed can be isolating if you work from home.

  • Being self-employed can be very stressful. You become “the buck stops here” person; you are responsible for doing the work (or seeing that it is done properly), and you’re the one who has to continue to obtain future work, marketing yourself and your business.

Tax and legal considerations for the self-employed

According to the IRS, you are self-employed if you are a sole proprietor, an independent contractor, a member of a partnership or in business for yourself (which includes part-time businesses). If you have even one employee (other than a family member), you may be designated as a small business owner. While there are differences between an independent contractor and small business owner, the similarity is that both are self-employed. They find work or clients themselves, instead of being paid to do work given by an employer.

As a business owner, you have different tax responsibilities. The most important is that you must pay self-employment tax—which is in addition to income tax—if you earn more than $400 per year, says certified public accountant Sally Herigstad

And if you hire someone to provide services to you, make sure they’re independent contractors and not employees. According to the IRS, “you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

Do remember that you can deduct certain expenses when filing your tax return. These include your home office (and within that you’ll include a percentage of your mortgage interest or rent, insurance, utilities, repairs and depreciation), internet and phone. If you use your car for your business, your deduction will be based on mileage.

Even your retirement savings plan offers tax advantages as a business expense. Certified financial planner Stephanie Sammons thinks you should look at the solo 401(k). "The primary advantage of the solo 401(k) over the SEP IRA is that you have the benefit of funding the plan both as the employer and employee. That means, in most cases, you're going to be able to sock away much more of your earnings for retirement with a solo 401(k) and grab a bigger tax deduction as well," she explains.

Expert tips for self-employed business owners

One of the smartest things you can do when you’re just starting out in your own business is to heed the voice of experience. Here are some tips that can make your self-employment journey a little easier.

  • Keep your end-of-fiscal-year tax payment manageable by making quarterly or monthly estimated tax payments. Who knows? Maybe you’ll get a refund!

  • Take advantage of the qualified retirement savings plans allowed by the government. The contribution limits for self-employed individuals are generous, allowing for tax deferments.

  • Keeping your personal and business purchases separate makes compiling and reporting expenses easier for tax purposes. You can do this by designating one credit card for business use only (no groceries!), so all charges and payments on that account are related to business.

  • Audit your monthly paid subscriptions, advises marketing consultant Kelsey Jones. If you’ve got a lot of expenses in your business, you may forget about small monthly payments you’re making on a recurring basis, such as a scheduling tool you don’t need anymore. Even a small reduction can add up over a year.

  • Speak to your insurance agent to see if you require your home-based business to be insured. Small business expert Susan Ward says people tend to assume their homeowners insurance covers their business activities when they work from home. “Not only is this not true, but your home-based business activities can void your home insurance,” she explains.

  • Be really good at one thing. "Successful freelancers are specialists in one particular service and not generalists with a broad offering. Specializing in one service area allows freelancers to build their expertise but also understand their ideal clients. Being a specialist freelancer gives clients confidence that you are a professional in your field," says flight instructor and entrepreneur Alyce Johnson.

  • Enroll in the Health Insurance Marketplace at HealthCare.gov for coverage. You can enroll if you’re a freelancer, consultant, independent contractor or other self-employed worker who doesn’t have employees. You’ll see which tax credits and other savings you qualify for including free or low-cost coverage through Medicaid and CHIP.

Best tools for self-employed people

Tech tools for solo entrepreneurs and small business owners relieve some of the workload. A few of the most useful are listed below:

  • Zoom. If you need to hold video or audio meetings, Zoom offers a full-featured basic plan for free with unlimited meetings. Conferences with three or more participants are limited to 40 minutes, while there’s no time limit on one-to-one meetings.

  • Expensify. If you have a lot of receipts and need to track travel, meal and gas expenses for your business, this app can be very useful. Take pictures of your receipts using SmartScan, and you’ll be all set come tax season.

  • Zenkit. Manage everything using one app, switching between your favorite tools with one-click data imports including Excel spreadsheets and Trello. You can use it as a deadline reminder or to-do list, to collaborate with colleagues and clients or manage and share documents. It’s free for up to five members.

  • Focuster. Staying on top of and prioritizing tasks is crucial for self-employed success. Missing a deadline, meeting or promise to a client can cost you money and hurt your reputation. By automating your calendar with task updates and smart reminders, you can focus on the task at hand, then check what needs to be done next. There is a 14-day full feature trial, then choose between the paid basic or pro plan.

  • LastPass. The majority of hacking-related breaches are linked to compromised and weak credentials such as passwords, according to Verizon’s 2019 Data Breach Investigations Report. LastPass has a built-in generator that creates long, randomized passwords that protect against hacking. You can share them safely, and they’re available on all your devices. The personal plan is free, and includes a 30-day trial of the paid premium version.

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