How to start a business or become self-employed

How to start a business or become self-employed

Types of Self Employment

People who work for themselves go by many different names. Most prefer the general terms “independent worker” and “self employed.”

However, self employed individuals go by names that provide more insight into the type of self employment they’re involved in.

Let’s take a closer look at some different types of self employment.

Freelancers

A freelancer is someone who provides services to clients with no expectation of ongoing work. Many freelancers work with multiple clients at a time. Common examples include freelance writers, designers, and photographers. With nearly two-thirds of freelancers finding work online checking out remote job sites where you can find this type of work easily should be your first port of call.

Independent Contractors

Independent contractors provide services under the terms of a written or verbal contract. These contracts can be project-based or time-based. 

Some independent contractors work full-time for one company and resemble an employee. However, as an independent contractor, they’re responsible for paying their own Social Security and Medicare taxes.

Common examples include realtors, web developers, and project managers.

Small Business Owners

The term small business owner is broad and can apply to any small business that sells products or services. Generally speaking, most small business owners work to develop a sustainable business with systems and processes.

Common examples include owners of mom-and-pop stores, independent cafes, and ecommerce businesses.

Side Hustlers

This type of self employment refers to people who earn money working for themselves while also being employed by others full-time or part-time.

For example, a journalist employed by a newspaper might also write freelance articles for other publications. Or a full-time employee could work 10 hours a week doing something they love like getting a photography business up and running.

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How Do You Show Proof of Income If You Are Self-Employed?

Proof of income may be required in a variety of instances, such as in filing taxes, obtaining a mortgage or other loan, or purchasing health insurance. Ways to show proof of income if you are self-employed include tax returns, Form 1099, bank statements (both personal and of the business account), audited profit and loss statements, and official invoices.

How to Defer Tax Payments from Tax Credits

As mentioned above, you could defer (delay paying) 50% of the Social Security part of your self-employment tax due, beginning March 27, 2020, through December 31, 2020. The deferral amount was based on your net earnings for the year.

Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

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Being Self-Employed and Self-Employment Taxes

Whatever you call yourself, if you are self-employed, an independent contractor, or a sole proprietor, a partner in a partnership, or an LLC member, you must pay self-employment taxes (Social Security and Medicare).

Self-employed individuals pay self-employment tax each year if their net earnings from self-employment are $400 or more. The tax is 15.3% (12.4% for Social Security and 2.9% for Medicare) on their annual net income from the business. Higher-income business owners pay an additional 2.9% on Medicare tax, but the Social Security portion is capped each year. The self-employment tax is calculated and added to the person’s tax return as a liability.

Since you are not an employee, no Social Security/Medicare taxes are withheld from your wages. You may need to pay quarterly estimated taxes on self-employment tax and estimated income tax to avoid penalties.

How to become a sole trader

If you choose to become a sole trader, you are self-employed and you do not have a business partner. This means you are personally responsible for the business. So, if the business fails, your personal assets can be used to repay any loans to your creditors.

To legally become a sole trader, you must register as self-employed with Revenue. Once you have registered, you pay income tax as a self-employed person, rather than through the PAYE system (which is used for employees).

As a self-employed sole trader, you become eligible for certain tax reliefs. Read more in ‘Paying tax as a self-employed person’ below.

You do not have to use a business name. But, if you choose to use a business name, you must register your business name with the Companies Registration Office (CRO) – read more below.

Understanding Self-Employment

Although the precise definition of self-employment varies among the U.S. Bureau of Labor Statistics (BLS), the Internal Revenue Service (IRS), and private research firms, those who are self-employed include independent contractors, sole proprietors of businesses, and individuals engaged in partnerships.

A self-employed person refers to any person who earns their living from any independent pursuit of economic activity, as opposed to earning a living working for a company or another individual (an employer). A freelancer or an independent contractor who performs all of their work for a single client may still be a self-employed person.

A self-employed person is not often the same thing as being a business owner. The owner of a business, for instance, may hire employees and essentially become the boss—an employee-owner who operates and manages the business.

Alternatively, a business owner has an ownership stake but may not be involved in the day-to-day operations of the company. In contrast, a person who is self-employed both owns the business and is also the primary or sole operator. The taxation rules that apply to those who are self-employed differ from the employee or a business owner.

Step #6: Determine if you’re required to file

For taxpayers who only have W-2 income, if their earnings for the year were less than the standard deduction ($12,400 for 2021), they don’t have to file a tax return at all. Self-employed individuals, on the other hand, get the short end of the stick. If you have net earnings of $400 or more, you’re required to file a tax return.  The IRS does this in order to collect your self-employment tax. You won’t owe income tax if your earnings are that low, but you might still owe self-employment tax. 

The Downside of Self Employment

It would be unfair to say that there are only advantages to self employment. There are some disadvantages to it also. 

For instance you need to find clients, and work on your sales abilities so you can generate profit, and pay the rent. 

You also need to be a jack of all trades also. From marketing, sales, project management, client management, customer service, payroll, invoicing, and so much more, self employment forces you out of your comfort zone, and into learning new things every day.

Finally you might work alone most of the time, so you may not have a good support system in place, like if you were working within a team of people. This can lead to mental health issues, that you need to nip in the bud as soon as possible. Signing up for mindfulness classes, attended events for people in similar situations, and maintaining a good physical and social calendar can help to ensure your mental health doesn’t suffer when you become self employed.  

Step #4: Estimate how much you owe

Now you just have to figure out how much to pay. If this is your first year going solo, be prepared for a much higher tax bill than normal thanks to that 15.3% self-employment tax. 

Unfortunately, paying self-employment tax isn’t the only thing that makes tax season harder on freelancers. One of the silver linings of W-2 work is fewer surprises when it’s time to pay. 

Income and FICA taxes are automatically withheld by the employer and remitted to the IRS at the time they’re accrued. Self-employed folks, on the other hand, have a harder time automating their tax bill. 

Calculating your freelance tax bill 

Remember that work I made you do in steps 2 and 3? Now you get to use it! To estimate your SE tax, you need to find your net income. This is your income after subtracting business expenses. For example, let’s say you earn $10,000 in gross income and have $5,000 in business expenses. Your net income would be $5,000. You’ll owe SE tax on this $5,000, not the full $10,000. So your SE tax would be $765 ($5,000 x 15.3%). If you’d like to use a shortcut here, Keeper Tax offers a free 1099 tax calculator that can do this calculation for you. Simply input your information: 

And voila! An accurate estimate of what you’ll owe for your self-employment tax, federal income taxes, and state income taxes

How Do I Make My Quarterly Payments?

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals PDF, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040 or 1040-SR. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.

Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.

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Self-employment income and Marketplace savings

When you fill out a Health Insurance Marketplace® application, you’ll have to estimate your net self-employment income. Marketplace savings are based on your estimated net income for the year you’re getting coverage, not last year’s income.

When you’re self-employed, it can be hard to estimate your income for the coming months or year. Learn how to estimate your income if you’re self-employed.

The 7-Step Path To Self-Employment

Here is what to expect and how to go from employee to self-employed:

1: Personal evaluation:

Begin by taking stock of yourself and your situation. What skills do you have that are transferable and what industries do you know best?

Consider too:

  • Whether you might want to sell a service or a product
  • How much money you are willing to risk
  • What do you love doing so much that you would like to do it every day

Your answers to these sorts of questions will help you focus and pick a business. If you don’t know what sort of business you want to start, here are a few tricks of the trade:

  • Drive down the street and notice what businesses catch your eye
  • Go to trade shows
  • Google an industry of interest and see the many sorts of businesses are out there

What you are looking for is something that would be interesting to you, which utilizes your skills, that is not too expensive, and which has potential for growth. Make a list and narrow your choices down.

2: Analyze the business:

Once you have some idea of a business that fits your goals and lifestyle, the next step is to analyze your idea. Who will be your customers? Who will be your competition?

3: Make it legal:

There are several ways to form a business:

  • It could be a sole proprietorship
  • It could be a partnership
  • It could be a limited liability company (LLC)
  • Or it could be a corporation.

Generally speaking, the latter two options are preferable because they limit your personal liability and create a business that is separate and apart from you. You will also need to get the proper business licenses and permits from your city, county, and/or state. Start with your city business office and see what they recommend. You should also check out your insurance options, and find a good accountant and lawyer to be on your team.

4: Draft a business plan:

If you will be seeking outside financing from friends, relatives, investors, or a bank, a business plan is a necessity. But even if you are going to self-finance the venture, drafting a business plan will help you figure out

  • How much money you will need
  • What roadblocks to be on the lookout for
  • How long it should take before becoming profitable

It is like a pilot’s flight plan – a business plan helps you figure out how you are going to get from here to there.

5: Get financed:

Most small businesses begin with money from savings, credit cards, personal loans, help from family, friends, and do on. You should also check out Small Business Administration (SBA) guaranteed loans. These loans, administered by banks, offer great terms. (Steve’s book, Get Your Business Funded, Creative Ways to Get the Money You Need lists 25 different sources for start-up funding.)

6: Set up shop:

This is the fun stuff:

  • Find a location
  • Negotiate the lease
  • Decorate
  • Get phone lines and the Internet installed
  • Throw a “Grand Opening” party

7: Trial and error:

It will take awhile to figure out what works and what does not. Make a mistake and learn from it. Follow your business plan, but be flexible. Advertise and market, and then do it some more. You have to let people know you are out there.

Take advantage of modern apps and tools that help small business owners

As you cans see, starting a business today is easier than ever before -and a lot of businesses exist to help other small businesses. As an entrepreneur, you can take advantage of these to use as leverage to get more stuff done and focus on the things that matter most to you.

PDFelement is fantastic, affordable alternative to Adobe Acrobat!  It’s an all-in-one PDF editor which enables you to read, edit, convert, OCR and sign PDF from Windows and Mac.Whether you’re looking to edit PDF files or digitize your business, it is the best tool for the job.

Freshbooks is a great tool for invoicing and expense services, and it helps you remove a lot of headache and logistic work that’s usually involved in this.

MailChimp is simple, intuitive and great for running your email marketing. It has templates that you can use and easily populate with your branding.

CandyBar makes it easy for small businesses to run loyalty programs without paper cards or downloaded apps – as a small business owner, you can solicit feedback from your customers and share those reviews on your social media platforms.

It’s possible to get carried away with trying out all sorts of new tools – so at the end of the day, remember to focus on the fundamentals.

Most of all, have fun. Becoming self-employed is one of the great experiences in life!

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