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.
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.
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.