What Do I Need To Know About Being Self-Employed?
- Self-employment is often viewed as the best route to freedom and flexibility.
- Being self-employed means you work for yourself rather than for a traditional employer.
- There are several pros and cons to consider before taking the leap.
Being your own boss means controlling your schedule, workload, and income. So, it makes sense that many people have self-employment on their list of career goals.
In a 2021 survey conducted by Freshbooks, 40% of traditionally employed American workers admitted that they plan to transition to self-employment within the next two years. Half of them said that being self-employed is their top goal in life.
Self-employment seems like the best route to freedom and flexibility, but there’s also some complexity in forging your own path. From burnout to taxes, here’s what you should know before taking the leap.
What is Self-Employed?
For starters, what does self-employed mean? According to the Internal Revenue Service (IRS), somebody is considered self-employed if any of the following apply:
You conduct a trade or business as a sole proprietor or independent contractor.- You’re a member of a partnership that carries on a trade or business.
- You are in business for yourself for any other reason (including a part-time business or a gig worker).
Put simply, self-employment means that you work for yourself rather than under a traditional employment relationship.
Types of Self-Employment
Self-employment is a broad term that describes anybody who works for themselves, but a lot can fall under that umbrella. Here are a few terms you’ll frequently hear people use to describe their approach to self-employment:
Business Owner:
These self-employed people operate their own businesses with an established business entity, such as a limited liability company (LLC), corporation, or a partnership.
Entrepreneur:
Entrepreneurs might also have established business structures. However, most people use this term when they’re offering a new and innovative product or service.
Freelancer:
This term best fits someone who enters into a client relationship to provide their skills and knowledge. Some freelancers work with a single client at a time, while others maintain several commitments.
Gig Worker:
Technically speaking, a gig worker is the same thing as a freelancer — it involves doing short-term work for clients. But, as the freelance and gig economy grows, this term is most frequently used to describe independent contractors who work through various online platforms, like Uber, DoorDash, and Instacart.
Independent Contractor:
This is another broader term that’s synonymous with self-employment. An independent contractor works for themselves and has complete control over the services they provide to clients.
If you’re feeling overwhelmed, keep in mind that there aren’t hard or fast rules here — and there’s plenty of overlap. For example, a freelancer is an independent contractor. But, they might also establish an LLC. That means they could correctly refer to themselves as self-employed, an independent contractor, a freelancer, or a business owner.
Pros and Cons of Being Self-Employed
Think you want to be your own boss? There are plenty of advantages. But, much like with anything else, there are a few drawbacks to consider too.
Pros
- Flexibility: You have full control over your schedule, workload, and work environment.
- Variety: Full control over your work means you can pivot and experiment with new things to grow your career.
- Fulfillment: Creating your career can be even more meaningful and rewarding than a traditional job.
- Higher Earnings: Once you get established, you can earn a higher income than you did when you worked in a traditional role.
Cons
- Burnout: Although you’ll control your schedule, many self-employed people work long hours (including evenings, weekends, and holidays). This schedule can lead to exhaustion and burnout.
- Accountability: Being self-employed means you need to be a self-starter. If you’re unable to motivate yourself, you may find it challenging to be your own boss.
- Benefits: One of the most significant disadvantages is that you won’t have benefits traditionally given with full-time jobs. This includes things like paid time off, health insurance, and retirement savings. You can pay for those things yourself, but it’s a higher cost and a bigger hassle.
- Taxes: You’ll also need to pay your own taxes, as an employer won’t take them out of your paycheck. Don’t worry — we’ll cover these in detail below.
How Do Taxes Work If I’m Self-Employed?
Taxes are one of the biggest hangups for people who are considering self-employment. It’s true that they add some complexity, but they shouldn’t be what stops you from pursuing this path.
Speaking very generally, here’s how freelance taxes work: You are responsible for paying your income tax. When you work in a traditional job, your employer takes that tax out of your paycheck for you. But, since you no longer have a “regular” employer, you’ll need to do that yourself.When you’re self-employed, you’re also responsible for paying what’s called a self-employment tax. This tax covers Social Security and Medicare taxes which, again, a traditional employer would take out of your paycheck.
Every quarter, you’ll submit your estimated tax payments to cover your income tax and self-employment tax. You’ll use Form 1040-ES to determine how much tax you should pay. You can also look for a self-employment tax calculator online if you’d prefer.
At tax time, you’ll also complete an annual return and report your income or losses from being self-employed on a Schedule C form.
This can all feel a little daunting (especially when tackling it for the first time), so it can help to find an accountant with experience working with self-employed people. It’ll come at a cost, but it’s well worth it for the peace of mind.
Keys to Success While Self-Employed
Once you’ve decided to make the leap to self-employment, you face the next challenge: figuring out how to succeed at it. Check out these tips to help you thrive as your own boss.
Build a Financial Cushion
Before you even make the jump, do your best to set aside some savings. It can take some time before you start earning a reliable income, and that cushion will give you some much-needed reassurance. Plus, you might need it if you have some startup costs.
Set Goals
Accountability can be one of the biggest challenges of self-employment. Combat that by setting goals. Whether it’s landing a certain client, achieving a specific income level, or launching your website, those goals will keep you on track.
Get Comfortable Marketing Yourself
When you’re self-employed, you have to wear many hats — including sales and marketing. Opportunities won’t just fall into your lap, so you need to get out there, build relationships, and promote yourself. The more you do it, the more comfortable and confident you’ll become.
Delegate
Speaking of wearing a lot of hats, there might be some things you don’t feel comfortable handling yourself. Whether it’s managing your accounting, building your website, or crafting client contracts, recognize what skills you don’t have and assign those to the experts.
Find a Mentor
Self-employment can feel intimidating, so it’s helpful to have an experienced mentor you can turn to for advice and encouragement. If there’s a business owner you admire, ask if they’d be willing to be a resource as you get up and running.
Frequently Asked Questions About Being Self-Employed
How do I avoid paying tax when self-employed?
You can’t. If your self-employed earnings are over the threshold (which is only $400), then you need to pay taxes. Failing to do so can result in fines, penalties, and administrative headaches.
Is being self-employed the same thing as owning a business?
The two terms are often used interchangeably, which isn’t always incorrect. Somebody who owns a business is self-employed. However, somebody who is self-employed doesn’t always own a business. To be considered a business owner, you must establish a formal business entity or structure (like an LLC, corporation, or partnership) with your state.
How can a self-employed person avoid burnout?
Burnout is common among self-employed individuals, with 42% of small business owners in a 2022 Capital One survey admitting they’ve experienced burnout in the past month. Setting and maintaining healthy boundaries is one of the best ways to avoid spreading yourself too thin. That could mean setting firm work hours, clearly communicating your expectations to your clients and customers, and scheduling breaks and time off when you can recharge.