Self-employment has accelerated throughout this decade, and recent events and high unemployment may force even more people to make the decision about whether to try to go back to work or seek out a different type of security by trying to make it on their own.
Surveys show that self-employed people tend to be savvier with their money compared to their full-time employee counterparts. It’s not hard to see why: you don’t get a regular paycheck complete with carefully calculated state and federal tax withholdings. So even if your money management skills aren’t stellar going into self-employment, you have to learn fast. It’s a sink-or-swim moment.
With so many people either in the gig economy or running small businesses, you no longer need to experience that steep learning curve yourself. You can enjoy the wisdom of others who have been where you are now.
Everyone’s finances are different, but these are three things you’ll encounter during your first few years of running your solo business.
Prepare for Tax Season All Year
Tax happens every single year, and in 2020, it’s due July 15. And yet, self-employed workers treat it like a surprise — a shock event that no one could have prepared for. It’s a huge problem for self-employed workers more than W-2 employees because self-employed people pay more in tax: you must shoulder both the employee and employer’s contributions to Medicare, Medicaid, and Social Security: our W-2 counterparts must only pay their half.
Being caught out during tax season can feel unavoidable, particularly if you work in an industry where cash flow is an issue. Even still, if you’re self-employed, you should treat your money like it’s tax season whether it’s April or October. A budget can go a long way towards keeping you ready to pay your taxes, and if you struggle coming up with a lump sum, consider filing quarterly to take the pressure off.
Some of the other things you might consider include discussing your filing status with your spouse (if married). In rare cases, you might benefit from filing separately. A tax professional can help you determine whether that’s the case for you.
Figure Out How Much You’re Really Earning
As a self-employed person, you should have more than one client. After all, if you only have one client and you work with them part- or full-time, then the IRS and your state may consider you to technically be employed. When you do have multiple clients, you want to keep track of what you’re billing and when to determine how much you actually have coming in. Sending detailed invoices and keeping excellent records is the best way to accomplish that.
Having a long list of clients sounds like a dream, but you also need to be able to prioritize by the value they add to your business. This is the exact same thing you’d do if you were in sales and working for someone else. So, sit down and look at your deliverables and compare them with your detailed invoices. Where are you spending your time? What’s delivering the best returns?
Once you figure out who pays what, it’s time to prioritize your billable activities. Ideally, you’ll focus on those clients and tasks who generate the most income for you. Then, you can prioritize those clients and activities before moving on to those that generate less income. Although it seems difficult at first, you should avoid focusing on activities that you can’t bill for as well as clients who tend to “scope creep” in ways that you can’t add to your invoice.
Learning to manage multiple clients demands a learning curve, even if you’re already an expert in your niche. But prioritization can make reaching the top of that curve a little bit less stressful.
Consider the Benefits of Incorporating
The Internal Revenue Service (IRS) allows American taxpayers to submit self-employment income as a freelancer without any need to register your status with the government. The decision is partly what allows the gig economy to thrive. However, if you’re self-employed on a full-time basis, you might consider stepping away from the freelancer role and forming a company.
In most states, you can become a Limited Liability Company (LLC) with a quick form. If you want to incorporate, you’ll need to do things like create a business plan and open a business bank account as part of your formation. Completing these tasks sets you up to stay in good financial shape as you grow your business.
Forming an LLC has a lot of financial benefits. First, it protects you from personal liability. If you get in a dust-up with a client or partner, they can’t touch your personal assets, like your house or your retirement accounts. You’ll also enjoy tax benefits like pass-through income. If you incorporate and have at least one eligible employee (not a family member or part owner), then you’ll also find yourself eligible for better health insurance coverage. As we all know, getting health insurance as an entrepreneur is difficult and expensive, so incorporating can take some of the stress out of this stressful process.
Being self-employed demands that you focus on your finances as much as your business. After all, strong finances are all that allows you to keep doing what you do. While everyone’s books are different, you don’t have to go it alone. There’s a whole community of self-employed people, freelancers, and small business owners out there, so don’t be afraid to learn from each other.