Pivoting to self-employment is a bold move with many risks and many rewards. Becoming your own boss is exciting, but it’s also important to consider the fine print when launching your new business. As the nation’s leading resource, and advocate, for the self-employed we are proud to support our country’s entrepreneurs as they make this important transition.
As a new entrepreneur, organizing your small business as an independent contractor or a formalized entity, such as an LLC or S Corp, is essential to structuring your finances, taxes, and other important foundational decisions.
Another important consideration is managing your finances, which includes creating a budget and opening a bank account for your business. For payroll and year-end tax purposes, you should make all deposits and payments from this official business bank account.
You may also want to look into all local and state small business regulations, such as a small business license, reporting requirements and other regulations that may be necessary for operating your small business in your particular area.
Getting to know the tax code
Tax benefits are available for those who are self-employed, so it’s worthwhile getting to know all the details.
The nation’s new tax code signed into law in 2017 was designed to help small businesses save money and time by making it simpler to file your annual tax return.
The majority of self-employed entrepreneurs are able to take advantage of a lower individual tax rate and a new doubled-standard deduction. However, the reduction or elimination of specific deductions, such as moving expenses or the unlimited state and local tax deductions known as SALT deductions, could impact your tax liability as well.
If you operate your business out of your home, you can also take advantage of the beneficial, standardized home office tax deduction, which gives you an automatic $1500 deduction simply by ticking a box on your 1099 form. If you are a member of the gig economy as a shared driver, you can take advantage of the business use of your automobile.
When you file your return, look for all available deductions – don’t leave anything on the table. These will help your small business to save, grow, and expand.
With benefits also comes responsibility
As a freelancer or independent contractor, you are still required to abide by all tax, financial, and reporting regulations as a self-employed entrepreneur. This includes paying a portion of your employment taxes each quarter throughout the year. This amount will depend on how much you forecast you will earn and the tax bracket you fall under.
You will also be expected to file your annual tax return on time during the April deadline regardless if you owe or quality for a refund. During that time, the balance you owe will be calculated by what you actually earned and have already paid during your quarterly estimated taxes. To ensure accuracy and save time, it is recommended you file your tax return online by the due date. If you are still not done and need more time to complete the return, file an extension.
There are resources available to help you, including NASE, the Small Business Administration,) and the Internal Revenue Service. Bookmark these webpages and return to them often for advice on a host of small business issues.
With self-employment, you are joining the ranks of a record number of Americans creating their own job. According to Everlance, the explosion of gig economy workers are part of a growing self-employed demographic, which now represent a whopping 33 percent of the economy. By the year 2020, it is expected that 42 million Americans will be self-employed or freelancers. Most important to remember — you are not alone.