Quitting your day job and becoming your own boss can be very exciting. The benefits of self-employment are clear—more flexibility, getting to choose the work you want to do, and not having to answer to a supervisor, to name a few. It’s no wonder that just under ten million people in the US are currently self-employed.
However, going down the self-employment route isn’t without challenges. To get started on the right foot, we share the top five things you need to consider first.
Be Ready for Financial (In)Stability
Steady cash flow is one of the biggest challenges when you’re self-employed. While you’ll likely have the prospects to earn more than you do with your 9-to-5 job, you might struggle to get a solid income every month.
It might be a good idea to undertake a freelance job while working your day job. This will help you set aside some extra cash earnings to create a safety net. Also, freelancing will give you the opportunity to source your own customers and see if there is sufficient demand for your business.
Consider What Type of Insurance You’ll Need
The insurance cover you need to take out depends on the type of business, the industry you’re working in, and the assets you need to protect. Most small companies take out public liability insurance which protects you if a third party injures themselves on your property.
Additionally, you need to keep in mind that even if you don’t hire other workers, you should buy workers comp insurance for self employed. Such coverage can provide you with peace of mind in case you get injured at work.
If you provide professional service or advice to clients, consider getting insured for professional indemnity. The coverage protects you in case a client sues you because they aren’t satisfied with your work. Equipment insurance, product liability insurance, and travel insurance may also be required depending on the nature of your business.
Be Mindful of Taxes
Along with the freedom of self-employment comes the responsibility to pay your taxes. Whether you file as a sole proprietor, partnership, or corporation, you have to pay federal and state taxes. You’ll have to pay the self-employment tax which is a Social Security and Medicare tax. Additionally, if your net earnings from self-employment were $400 or more, you’ll have to pay income tax.
Depending on the business, you may also need to pay a sales tax, use tax, and payroll taxes. Luckily, if you’re working alone in your home, you may inquire about a home office tax deduction. Also, as self-employed, you may qualify for other deductions such as automobile expenses, reference material, travel expenses, and office supplies.
Establish Business Credit
Access to cash and credit is a business’s lifeline. Business credit will allow your company to borrow money that can be used to purchase products or services. Even if you don’t need to apply for a loan at the moment, you may want to do it at some point. Moreover, business credit can also help you obtain better terms from vendors and suppliers.
The first step is to obtain an EIN (employer identification number). Then open a business checking account to separate your business and personal expenses. This practice is useful for keeping your finances in order but also for taxes. The next step is to apply for a business card. Always use your credit line responsibly. It’s the best way to build trust and credibility and gradually raise your credit limit.
Be Aware of How Self-Employment Impact Work-Life Balance
Becoming self-employed will drastically affect your life. Being your own boss is the perfect opportunity to have control over your working hours. However, without proper management, self-employment can negatively impact your work-life balance. You might struggle to separate the work-life from the home life, especially if operating from home. This can easily lead to overworking, which would result in stress and reduced energy levels.
Moreover, you could also face another issue; it might become challenging to maintain a healthy work-life balance due to a productivity slump. Your productivity might be hampered by a lack of work schedule structure and distractions. Prepare ahead to create a clear structure of the workday or week. Also, plan to take regular breaks during the working day and have a dedicated place for relaxing.
Becoming self-employed can be your best adventure. However, being your own boss isn’t always fun; it requires a lot of responsibility and accountability. Hopefully, we gave you a better idea of the most important things to consider before leaping into self-employment and what your role will entail.