5 Things to Consider When Becoming Self-Employed

iQuanti: Maybe you're drawn to the idea of being your own boss, or you've been laid off and are self-employed by necessity. Regardless of your path to self-employment, it's important to consider how self-employment is different from working for someone else.

What does it mean to be self-employed?

Sometimes it's not obvious whether you're self-employed. Most self-employed people are sole proprietors and don't incorporate, so the terms of your employment determine whether you're an employee. 

Generally, if you control your own work, provide your own equipment, and work for more than one employer, you're considered an independent contractor, and your income will be reported to the IRS on a 1099 form. If an employer supervises your work, provides you with equipment and reports your income on a W-2 form, you're considered an employee.

Insurance

It's easy to overlook insurance when you don't have an HR department, but insurance is one of the most important things to consider. Most employers provide several types of insurance that a self-employed person needs to buy on their own. Health insurance, disability insurance, and life insurance are vital to protecting yourself when the unexpected happens. 

You may have to make tradeoffs that an employee wouldn't, because your premiums aren't subsidized, and individual insurance plans may be more expensive than the group plans employers offer. Should you choose a high deductible health plan to get lower premiums? Is whole life insurance worth it? Can you afford a six-month waiting period if you're disabled? 

Taxes

An employee may not have to consider taxes until the filing deadline rolls around. When you're self-employed, you're responsible for making income tax payments throughout the year. It may seem like you're getting paid a lot more than you were as an employee, but you need to set aside the money an employer would normally withhold and send to the IRS. 

In addition, self-employed workers need to pay a higher rate for Social Security and Medicare taxes, because they pay both the employee's and the employer's share of these taxes. 

The good news is that you can deduct business expenses that an employee can't. For example, if you use a portion of your home exclusively for work as a self-employed person, you can usually deduct a percentage of your housing expenses from the tax you owe. 

It's important to consult a tax professional to understand the allowable deductions, but you may be able to reduce your tax burden significantly if you're informed about business deductions.

Unpaid time off

Most employers offer paid time off, which covers holidays, sick days, and vacations. As a self-employed person, you'll need to set aside money to cover the times you may not be working.

Doing all the jobs

If you're a self-employed sole proprietor, besides doing your main job, you're usually the sales department, the office manager, the janitor, and the IT technician. You may find a whole day swallowed by unbillable tasks, from troubleshooting computer issues to ordering office supplies. The rate you charge your clients needs to account for time you spend on tasks you don't bill for.

Career growth

When you're an employee, you may take for granted any opportunities your company provides for training, professional conferences, and promotions. When you're self-employed, you're responsible for your own career growth. No matter how good you are at what you do, business requirements change, and the self-employed need to stay up-to-date and plan the next steps in their careers.