Content of the material
- What Does Self-Employed Mean?
- IRS Definition
- Benefits for Self-Employed People
- Types of Businesses Owners Who Are Self-Employed
- Home Office Deduction
- How Do You Show Proof of Income If You Are Self-Employed?
- Achieving work-life balance
- How Do I File My Annual Return?
- 4. Execute contracts and invoices
- Summary: Becoming Self Employed
- Self-employment income and Marketplace savings
- 2. Get covered
- Understanding Self-Employment
- Selling goods or services
- Advantages of Self Employment
- The 7-Step Path To Self-Employment
- 1: Personal evaluation:
- 2: Analyze the business:
- 3: Make it legal:
- 4: Draft a business plan:
- 5: Get financed:
- 6: Set up shop:
- 7: Trial and error:
- Take advantage of modern apps and tools that help small business owners
What Does Self-Employed Mean?
Self-employed people earn a living by working for themselves, not as employees of someone else or as owners (shareholders) of a corporation. But there are various definitions of "self-employed" that vary slightly.
The IRS says that someone is self-employed if they meet one of these conditions:
- Someone who carries on a trade or business as a sole proprietor or independent contractor,
- A member of a partnership that carries on a trade or business, or
- Someone who is otherwise in business for themselves, including part-time business.
This definition would also include members (owners) of a limited liability company (LLC), because they are usually taxed as sole proprietors (single-member LLCs) or partners in a partnership (multiple-member LLCs).
Benefits for Self-Employed People
For the purpose of the CARES Act (2020) and the Families First Coronavirus Response Act (2020), "self-employed" refers to an individual who "regularly carries on any trade or business," which is a broad definition. (Note that it doesn't say "full-time," so it could include part-time businesses.)
For example, the definition for the Paycheck Protection Program includes a requirement that the worker operate “under a sole proprietorship or as an independent contractor” or as an “eligible self-employed individual.”
Types of Businesses Owners Who Are Self-Employed
Being self-employed means running your own business, but that business can be set up in a variety of ways. These business types are owned by self-employed business owners:
Sole proprietorship businesses have only one owner.
Partners in a partnership share in the ownership of a business. They manage the business and share in its profits and losses.
Owners (members) of limited liability companies (LLCs) are also self-employed. The owner of a one-owner LLC runs the business in the same way as a sole proprietor, but with liability protection. The owners of a multiple-owner LLC run their business in the same way as partners in a partnership.
S corporation owners are not considered self-employed in the same way that partners in a partnership are. They do not have to pay self-employment tax on their share of the corporation’s income. S corporation owners receive a distributive share of the company’s income, just as partners in a partnership. If the S corporation’s owner also works in the business as an employee, they are paid a salary for that work.
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.
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.
Achieving work-life balance
When you work for yourself, it’s easy to take on too many responsibilities and gigs. Without even realizing it, you can end up working more hours than you did at your full-time job.
Make sure you’re taking weekends off (for the most part) and setting reasonable limits for the hours you work each week.
Work-life balance is crucial if you want to be self-employed. Take on only the projects that excite you, and don’t accept every offer you’re given. You know what you deserve, and if a client isn’t willing to give you that, find another.
Additionally, don’t work entirely from home. Your home is supposed to be your haven, and if you spend every second of work in your living room or at your kitchen table, it might soon become a place you associate with stress and labor.
Instead, drive to a coffee shop or co-working space to get your work done. That way, you’ll also be able to focus better without thinking about all the chores you need to do or the shows you want to watch.
The most important thing is to find a balance that works for you. Transitioning from a full-time gig to self-employment can be terrifying, but it’s worth it to be able to craft the career and lifestyle you want.
How Do I File My Annual Return?
To file your annual tax return, you will need to use Schedule CPDF to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C InstructionsPDF may be helpful in filling out this form.
In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040 or 1040-SR ), Self-Employment TaxPDF. Use the income or loss calculated on Schedule C to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The InstructionsPDF for Schedule SE may be helpful in filing out the form.
4. Execute contracts and invoices
Most clients are honorable and can be trusted to make good on verbal contracts. Some are not. You are well-advised to set up structures that accommodate both. A simple contract that spells out the nature and scope of the job, the deadlines and payment terms can help avoid misunderstandings and enforce your rights, when necessary.
It’s also not a bad idea to put in cancellation clauses that protect you if a client changes their mind about a job halfway through.
Keep your contract terms, including when payments are due, clear. And send invoices on a predictable schedule to help you and your clients budget.
Summary: Becoming Self Employed
Self employment is the process of earning money from your own endeavors, instead of being employed by someone else.
Self employed individuals go by different names, such as freelancers, independent contractors, and small business owners.
There are tons of advantages to self employment, too. Many people enjoy being self employed because they can be their own boss, have a flexible schedule, and work from home.
All in all, employment isn’t for everyone. If you’re one of these people, you might agree with businessman and speaker Farrah Gray, who said, “Build your own dreams, or someone else will hire you to build theirs.”
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.
2. Get covered
If you can’t piggyback on a traditionally employed spouse’s health plan, you’ll need to buy health coverage. Yes, it’s expensive. But it’s less expensive than trying to pay an unexpected hospital bill by yourself.
Losing health insurance as a result of a job loss is generally a “qualifying event” that allows you to buy coverage through state and federal health exchanges at any time of the year. (Normally, you must wait for open enrollment periods.) And, if your family income is below certain levels, your health insurance premiums are discounted.
Business From acting to photography, 7 side hustles to channel your creative side If you prefer to earn money through creative pursuits, there are plenty of websites that can connect you with acting, photography, fashion and other gigs.
Notably, a company called Stride Health can help streamline the search process. Stride uses artificial intelligence to match workers with affordable insurance coverage in their states. It also provides information about the discounts you can receive through the Affordable Care Act.
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.
Selling goods or services
You could be classed as a trader if you sell goods or services. If you’re trading, you’re self-employed.
You’re likely to be trading if you:
- sell regularly to make a profit
- make items to sell for profit
- sell items on a regular basis, either online, at car boot sales or through classified adverts
- earn commission from selling goods for other people
- are paid for a service you provide
If you only occasionally sell items or rent out property (for example through auction websites or short-term rental apps), check if you need to tell HMRC about this income.
Contact HMRC for advice if you’re not sure whether you’re trading.
Advantages of Self Employment
Why be self employed?
According to the study by Upwork and the Freelancers Union, most full-time freelancers prefer to be self employed because it allows them to have a more flexible lifestyle.
Additionally, the self employed want to:
- Be their own boss
- Work from the location of their choosing
- Choose the projects they work on
- Have a schedule that enables them to pursue their personal goals.
- Be in control of their financial future
- Have independence from factors such as office dynamics
- Be free to pursue work they’re passionate about or find meaningful
- Have the ability to pivot their skills and projects when it suits
- Spend more time with family
Self employment also opens up opportunities for individuals who would prefer not to work for a traditional employer due to personal circumstances, such as a disability, the need to take care of a loved one, or being a single parent.
But isn’t self employment insecure and unpredictable?
You can think of freelancing as volatile and risky, or as flexible and opportunity-rich,” said Sara Horowitz, author of The Freelancer’s Bible. “Doesn’t having multiple sources of income and multiple money-making skills sound less risky than putting all your eggs in one employer’s basket? Freelancing lets you shift gears when the world does.”
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?
- 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
- 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!