Things to Consider in Self Employment

By Chris Blank

If you're considering making a transition from the 9-to-5 world to becoming self-employed, you may wonder what considerations you should make. You may very well need to secure financing to make your business a reality. You will also need to consider factors such as how you'll handle your taxes and secure insurance -- and even how you'll structure your new business.

Business Structure

If you're working solo, the easiest business structure to form is a sole proprietorship. Many states require little or no paperwork for sole proprietorships, although you may have to file "doing business as," or DBA paperwork if you conduct business under a name other than your legal name. The Internal Revenue also allows sole proprietors to file tax returns using personal Social Security numbers, although some sole proprietors choose to obtain an employer identification number, or EIN. You can also structure your business as a single-person limited liability company, or LLC, to shield your personal assets from legal and financial liability related to the transactions of your business. Forming an LLC requires that you register your business with the secretary of state or similar state department. Incorporating your business involves more formalities than operating an LLC, but it too requires registering your business with the secretary of state.

Tax Issues

As an employee, you have payroll taxes deducted from your paycheck to cover your portion of Social Security and Medicare; your company covers the rest. When you become self-employed, you are responsible for the entire amount of your Social Security and Medicare contributions. The IRS may also require you to make quarterly estimated income tax payments, depending on your income and prior year tax obligation. You will also need to file Schedule C along with Form 1040 to document your business-related expenses. You will no longer receive W-2 forms to document your earnings; customers and clients may or may not issue a Form 1099. If you have employess or use contract workers, you will need to issue W-2 forms or a Form 1099 to them. One big benefit to owning your own business is that you are often able to avail yourself to more expense tax deductions than you would be as an employee.

Ready to start your LLC? Start an LLC Online Now

Business Finances

Once you've secured financing, or if you're bootstrapping your business without loans or credit from a bank, you'll need to keep track of the money your company generates. To open a separate bank account for your business, most banks will want to see the paperwork you've filed with the state, such as DBA applications for sole proprietorships or articles of organization for LLCs. You may need an EIN, even if you're operating as a sole proprietorship. If you hire employees or contract workers, you may also want to obtain software to record the financial aspects of your business transactions. Keeping accurate accounting is crucial in order to insure compliance with the IRS and state and local regulations as well.

Insurance and Retirement

As a self-employed worker, you are responsible for your own health and life insurance. If the nature of your business requires it, you will also need to obtain liability or malpractice insurance. If you purchase expensive operating equipment, it's wise to insure it against loss or theft. If you hire workers, you may need to obtain workman’s compensation coverage. The IRS allows self-employed workers to establish Individual Retirement Accounts. Depending on your income and other personal factors, you may establish a conventional IRA, a Roth IRA or both. A conventional IRA is funded with pre-tax dollars, that is, income that you deduct from your adjusted gross income, or AGI. You cannot deduct funds for a Roth IRA from your AGI; however, most distributions you receive from a Roth IRA are tax-free. You may also want to look into a solo 401 (k) account or Simplified Employee Pension account, both of which are retirement saving plans for the self-employed.

Ready to start your LLC? Start an LLC Online Now
How to Open a Sole Proprietorship

References

Resources

Related articles

What Do You Need to File as a Sole Proprietor?

For entrepreneurs who want to operate a business without a legal entity, they can do so and operate as a sole proprietor. An advantage to operating as a sole proprietor is that you can start your business operations immediately rather than having to go through the process and expense of creating a corporation or a limited liability company. However, sole proprietors are personally liable for all debts and obligations of their business, unlike business entities.

What Is the Most Important Benefit of Sole Proprietorships?

The most common small business entity is a sole proprietorship because it is extremely easy and inexpensive to create. A sole proprietorship essentially occurs when you go into business for yourself. While a major drawback to owning a sole proprietorship is the fact that the owner has unlimited personal liability, there are many benefits. Depending on your business and personal preferences, being a sole proprietor may be your best option as the ease with which you can create and manage a sole proprietorship is an extremely important benefit.

How to Fill Out a W9 for a Sole Proprietor

If you own and operate a business and choose to run it as a sole proprietorship rather than creating a separate taxpaying entity for it, such as a corporation, the IRS will consider you to be self-employed. As a result, you will report all income you earn as a sole proprietor on your personal tax return – regardless of whether or not you were required to furnish your clients with W-9 forms.

LLCs, Corporations, Patents, Attorney Help

Related articles

Sole Proprietorships With Independent Contractors

Running your business as a sole proprietorship with the assistance of independent contractors rather than employees has ...

Do LLC Companies Need an EIN Number?

An Employer Identification Number, or EIN, is a string of digits assigned to business entities by the IRS. An EIN ...

Classifying Payments to Yourself in a Sole Proprietorship

Running a business as a sole proprietorship rather than a formal legal entity, such as a corporation, can greatly ...

Sole Proprietorship Business Deductions

Despite the fact that a sole proprietorship isn’t treated as being a separate and distinct entity from its owner, the ...

Browse by category
Ready to Begin? GET STARTED