Be Sure You Want to Be Self-Employed

 PeopleImages / Getty Images
PeopleImages / Getty Images

Not everyone is suited to be their own boss. Before you make this leap, ask yourself two important questions:

Does self-employment suit your life circumstances?

If you are fortunate enough to have (or be able to get) well-paid, secure employment with benefits and reasonable job satisfaction, it may not make sense to become self-employed, no matter how great your desire to become an entrepreneur

Organizing vacations, making major purchases, and planning retirement are much easier (and less stressful) when you have a steady paycheck and regular working hours, particularly if you have dependents. 

Thoroughly examine your lifestyle, financial situation, and future retirement goals—and discuss them with your family—before making the jump to self-employment.

Is your personality suited to self-employment?

Being your own boss has many advantages, but it also means all the responsibility for the success of your business (including income) rests on your shoulders. If your personality is such that dealing with the uncertainties of self-employment is likely to cause you a great deal of stress and anxiety, then being an entrepreneur is probably not for you. 


Picking a Business Name

If you are considering launching an independent business, you may want to consider giving it a proper, official-sounding name. This is mostly applicable for freelancers or those starting business from the ground up, whereas gig workers on gig apps will be fine without registering a proper business name. 

For example, if you’re a freelance designer, you can get creative and start branding yourself with a business name. While many independent contractors use their name plus the service they’re providing — such as John Smith Landscaping or Joan Smith Designs — there are some benefits to having a business name that doesn’t include your own. 

Not only will you look more professional by building a brand for yourself, but contracts signed under a non-registered business name are harder to enforce and could cause potential legal trouble down the road. Banks may also be unwilling to open a business account unless they are given proof that the business has been properly registered.

Be Sure Youre Ready Before You Expand

 Mike Hone / Getty Images
Mike Hone / Getty Images

Many successful contracting businesses reach a point where further expansion would require hiring additional people to handle the increased workload. For example, a self-employed IT contractor may have to decide whether to bid on a contract that requires a multi-person team to complete or to pass on the opportunity.

Hiring (or contracting) additional personnel is a difficult decision, and many self-employed contractors prefer to remain solo for a number of reasons:

  • The more specialized your business, the more difficult it may be to find qualified people.
  • Advertising, vetting resumes, and interviewing is very time-consuming. Once you make your hires, training, supervision, and related paperwork will require more of your time on an ongoing basis. Paperwork is particularly problematic with hiring employees rather than contractors, as payroll requires tax (and other) deductions and increases your accounting overhead.
  • Unless additional personnel generates more income than the cost of their employment, your profits will not increase.
  • The reputation of your business may suffer if whoever you hire does not perform at the expected level.

Many contractors find it easier (and less stressful) to stay small, keep their workload within manageable limits, and maintain a positive cash flow by controlling business costs.

On the other hand, if your ambition is to build a larger business and you have the time and energy to put into expansion then, by all means, take the plunge. 

Tips for Independent Contractors 

You’re a partner, not an employee

Not all businesses are accustomed to working with independent contractors, and some may push the boundaries of your arrangement. 

Don’t be afraid to push back if your customer makes requests beyond the scope of your agreement. They’re not your employer, and your time is valuable. Your clients can’t afford to provide free services, and neither can you. 

Watch out for taxes

As a sole proprietor, you alone are required to make tax payments and ensure your own business remains in compliance. In addition, Medicare, payroll tax, workers’ compensation, healthcare costs, and employee benefits all fall on you as the business owner. 

The easiest way to navigate all of these tax obligations is to hire a qualified tax professional. It might cost a few hundred or even a few thousand dollars, depending on the complexity of your situation. However, this is simply a cost of doing business that you don’t want to skimp on.

You can also check out my Freelance Tax Guide for more information.

Plan ahead

As a freelance worker, it might take several months for your business income to hit your bank account. That’s why it’s essential to plan ahead and set aside money to cover your business and life expenses.

It’s also important to carefully track your income and expenses. I typically recommend opening a separate bank account specifically for your side hustle to make accounting easy. Look into companies like Lili and Novo that specialize in banking for freelancers and small businesses.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.

How to choose a name for your business

Your business will need a name.

Think carefully about it, because your business’s name will help frame how the world sees it. Imagine how it will sound when spoken, how it will look in emails or on signs, and what it might mean when others hear it.

Choose a name that you are completely comfortable with. It could be simply your own name, or your own name with an identifier at the end (e.g., Hailey Payton Research), or a name that does not identify you at all.

How to begin

Your name will also depend to some extent on what type of business structure you choose — sole proprietorship, partnership, C corporation, S corporation, or limited liability corporation.

Choosing a business structure may require the help of an advisor, as there are intricacies and advantages to each one that are not always apparent on the surface.

Before settling on a name, make sure it doesn’t already exist. Check all registered and unregistered trademark names. Use these resources:

  • Your state filing office if your business is a corporation, LLC, or limited partnership. This is usually called the Secretary of State’s office.

  • A simple Internet search

  • Your county clerk

  • Thomas Register

  • The U.S. Patent and Trademark Office database

If a name similar to your desired name is already in use, it may still be usable. However, your business itself would have to be substantially different from the existing one, such as in location or the service it offers.

Register your business name

Not all business names need to be registered. If you use your full name as part of your business name, you won’t need to register it. For example, Carolyn Smith Medical Writing would not need to be registered. But if your business does not use your full name, you must register it as a fictitious (or “assumed”) name. The more well-known term in most states is DBA, or “doing business as.” You can the name registered at a county clerk’s office or a state-level office.

There are advantages to using a registered name. For one, you may have trouble opening up a bank account without one. Also, you have greater legal power with one, including stronger ability to enforce contracts. Third, it makes it easier for the public to contact you (and file a complaint or lawsuit, too).

To begin the process, contact your county clerk.

Step 3) Obtain a Contractor’s License

You’ll also need to obtain any required licenses for your industry. For example, let’s say you live in Florida and you want to become a general contractor. You’ll need to pass the Florida exam for a contractor’s license to perform your duties. 

A contractor’s license has many benefits, including demonstrating your expertise to prospective clients. However, the exam can be pretty challenging. Contact the Contractor Training Center for resources on passing the exam with flying colors. 

Understanding Independent Contractors

Doctors, dentists, veterinarians, lawyers, and many other professionals who provide independent services are classified as independent contractors by the Internal Revenue Service (IRS).

However, the category also includes contractors, subcontractors, writers, software designers, auctioneers, actors, musicians, and many others who provide independent services to the general public. Independent contractors have become increasingly prevalent in the rise of what has been dubbed the “gig economy.”

Independent contractors must keep track of their earnings and include every payment received from clients. Clients are legally obliged to issue 1099-MISC forms to their contractors if the amount they paid warrants that expense. If an independent contractor earns more than $599 from a single-payer, that payer is required to issue the contractor a 1099 form detailing their earnings for the year.

Independent contractors must decide how much freedom they need versus how much risk they are willing to assume.

How Do You Become an Independent Contractor?

You can become an independent contractor by working for yourself. Many freelancers in a gig-centric economy transition are independent contractors who work on a contractual basis to provide goods or services. Independent contractors may have a registered legal business name, earned any necessary certifications or licenses, and pay their estimated taxes quarterly to the IRS.

2. Find another independent contractor to be your mentor

Check our 7 tips to shine above other contractors and how to run a successful contracting business during the pandemic.

On top of this, you might already know several independent contractors who can help you get set up. If not, it’s time to ask around. Make a post on your social media accounts or talk to your friends and family. And no, this isn’t weird. People love to talk about their expertise, and many will be glad to help you if you reach out and ask.

Single out one or two contacts who have successfully been contracting for several years. Ask if you can take them out for coffee or a beer. If they’re busy, even a 10-minute phone call can be valuable. Pick their brain about the unexpected challenges they faced when they started.

Also, talk about their overall experiences. What would they do differently in hindsight? What opportunities did they jump on – or miss? A simple meeting over coffee can save you years of learning and thousands of dollars in mistakes. These can be some of the most meaningful business insights you’ll ever receive.

Close the loop and build relationships with your mentorsFollow up every few months with the people you talk to. If you take a mentor’s advice and it positively impacts your business, tell them.

They will appreciate your feedback – and this is the key to building a strong network. Relationships are give and take – so make sure you give back as well. Even if you’re just telling them about how they’ve helped you.

Pros of becoming an independent contractor

Becoming an independent contractor is a great way to grow your business without the constraints of traditional employment. Here are some benefits that a career as an independent contractor can offer.

Be your own boss

As an independent contractor, you can define all aspects of your business. You decide who you work with and who you work for. The people who pay you are your clients, not employers. As a result, you can complete your work as you see fit to some extent.

Earn more income

Independent contractors can set their own prices for their services. If you put a high value on your services and market yourself correctly, it is possible to earn more as an independent contractor than as an employee.

Deduct benefits

As an independent contractor, your contributions to health insurance and a retirement plan are tax-deductible, lowering your overall tax bill.

Related: How To Set Retirement Goals: Steps and Tips

5 tactics to find clients as an independent contractor

Growing a solid client base is essential for job security and avoiding gaps in your income when a project or contract ends. In an ideal world, you want to be turning down work because your schedule is too full.

1. Dedicate time out of your week to marketing your service and seeking new clients

The amount of time you devote to promoting your services and identifying new potential clients depends on the volume and type of work you want to do. However, a simple approach is to set aside a few hours per week to:

  • Obtain testimonials
  • Follow-up with referrals
  • Update a business website, or blog
  • Develop a prospecting list
  • Send out cold emails and pitches to prospective clients
  • Be active on social media

2. Create a profile on websites like Upwork and Fiverr

While we recommend all contractors eventually develop a polished and professional website, you shouldn’t let this hold you back from getting started. While you’re still setting up as a contractor, take advantage of websites like Upwork and Fiverr. These platforms act as a marketplace to help contractors find projects, communicate with clients, and get paid. While the pay might not be that high, and you will need to give a cut to the service provider, these platforms are still a good way for connecting with clients and building your portfolio.

3. Use competing freelancers as a ballpark for your pricing

Knowing your position in the market, your direct competitors, and your perceived value will help you price your services competitively without impacting your margins.Contractors often set pricing for each client depending on the scope of the request. While prices may vary, it’s essential to have a base rate. A base rate ensures you earn enough money on each contract to cover your basic expenses and related business costs. When setting a base rate, account for:

  • Desired annual wage
  • Internet costs
  • Marketing costs
  • Office supplies
  • Rent
  • Utilities
  • Taxes
  • Any other administrative expenses

As you gain experience and build your portfolio, raise your base rate accordingly.

4. Carve out a niche to attract higher-paying clients

It’s a good idea to refine your service offerings gradually. The most successful businesses typically provide specific services.Most contractors start their career as generalists because they haven’t yet discovered their niche, and that’s perfectly fine. However, as you gain more experience, you may see a pattern emerge or find that you lean toward a particular type of project or client. That’s working within a niche. A niche helps establish credibility and sets you apart from your competitors. Clients are typically happy to pay a higher price for a service that speaks directly to their unique problem instead of a cheaper service that provides a somewhat applicable solution. For instance, a freelance copywriter earns $29.59 per hour on average in the US. In comparison, a freelance medical copywriter makes $39 per hour on average in the US.

5. Build and leverage your network

Building a network of contractors in your field will provide you with a group of trusted industry peers to call on if you need any insights, inspiration, or assistance with a problem or query. Contractors with strong networks also benefit from referrals to new roles and projects to help you generate a steady flow of work.

10. Keep your reputation golden

Whether you have one contract or several, you’ll want to build those relationships for the long term. Regardless of the industry, it’s easier to get repeat customers than to establish new ones. Keep this in mind.

Also, as an independent contractor, your brand is your reputation. Therefore, your best practices should include:

  • Be known for your openness, honesty, and integrity
  • Avoid office chat and stay focused on getting the job done
  • Don’t compete against employees and peers – partner with them and provide support
  • Under promise and over deliver every time
  • Accept responsibility when warranted
  • Treat every contract customer as if they are your sole employer

There you have it.

Getting set up as an independent contractor requires asking yourself some hard questions, networking with other contractors, and handling important administrative tasks. You may have a few bumps in the road as you get started, but with consistent effort, you can also discover new-found freedom and opportunities to grow personally and professionally.

We hope these tips will help you on your journey. For more great advice on how to get started as a self-employed business, be sure to join our Subscriber Success Community.

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