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:
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.
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.
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: