Being your own boss sounds ideal. But when you’re self-employed, you may also become your own office manager, bookkeeper, and marketing specialist. To set your business up for success and balance your responsibilities, you need to learn how to be self-employed.
How to be self-employed
Self-employed individuals run their own businesses and work for themselves.
Being self-employed can be stressful but also incredibly rewarding. Get your business off to a good start by following the six steps below.
1. Choose a business structure
You are self-employed if you’re a sole proprietor, independent contractor, or if your business is unincorporated. This means that if you want to be self-employed, your business structure must be one of the following:
- Sole proprietorship
- Limited liability company (LLC)
Other types of business structures do not have self-employed individuals. These structures are corporations, including partnerships and LLCs that are taxed as corporations.
Before you become self-employed, you must choose a business structure. Depending on your structure, you likely need to fill out documents and apply for a business license. And, you might need to apply for identification numbers.
2. Open a bank account
Separating your personal expenses from your business expenses is an absolute must for self-employed individuals.
According to one source, 32% of business owners don’t separate their accounts. Failing to keep personal and business expenses separate can lead to accounting, tax, and reporting issues. Not to mention, compiling expenses and income in one account can lead to overspending and disorganized accounting records.
To avoid problems in the future, open a small business bank account.
Before you open an account, do your research. Look at different banks to see what options they offer. After you determine your banking institution, gather documentation about your business (e.g., business name, licenses, etc.).
Typically, you can open your business bank account online or in person. Either way, you likely need to pay the bank a fee to open your new account.
If you’re planning on raising capital and borrowing money to grow your business, you can check with your bank about getting a business loan.
3. Set up accounting
Setting up an accounting method is essential for all business owners, regardless of whether you’re self-employed. Tracking income and expenses allows you to see your business’s financial health and organize your records.
While choosing an accounting method, you must decide between accounting software, manual bookkeeping, or hiring a bookkeeper.
Accounting software lets you record income and expenses with a few clicks of a button. Software is less time-consuming than manual accounting entries. And, using software decreases your odds of user-error and miscalculations.
Manually tracking your accounts can save you money. However, it is very tedious and stressful if you are not familiar with accounting.
Hiring a bookkeeper can be expensive. However, using a bookkeeper ensures your books are accurate. And, you don’t have to worry about handling your books yourself.
Before setting up a method, determine the pros and cons of each. Ask yourself questions like, Will I have time to add all of my entries manually? Can I afford accounting software? How much accounting knowledge do I have?
4. Create a business budget
As a self-employed individual, creating a business budget can help you stay on track and keep your finances in order. And, budgeting helps you plan for your business’s future.
To craft your small business budget, whip out a notepad and pen or start a spreadsheet on your computer. Keeping a physical document that lists your expenses and finances can help you stick to your budget.
In your budget, include sections such as revenue, expenses (e.g., fixed and variable expenses), and profits.
Regularly review your business budget, such as once per month or quarter. As your business grows, adjust your budget accordingly.
5. Pay income and withholding taxes
When you work for a business, your employer withholds payroll taxes from your wages. But when you’re self-employed, you are responsible for handling your payroll and business income taxes.
Pay estimated withholding taxes, especially if you anticipate owing $1,000 or more in income taxes. The estimated taxes go toward both your personal and business income taxes. Do not make estimated payments if you do not owe more than $1,000 in taxes.
Use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated taxes. Pay your estimated tax each year by April 15. You can also opt to pay your taxes in installments throughout the year (e.g., pay once per quarter).
Business income taxes for self-employed individuals are considered pass-through taxes. Pass-through taxation means the business income taxes pass through the business on to you. Pay your business income taxes along with your personal tax return.
Each business is also required to fill out certain forms for business income taxes, depending on your type of business structure. Be sure to fill out the correct forms for your business. Check out a breakdown of the different forms for each self-employed structure below.
- Sole proprietors and single-member LLCs: File Schedule C along with Form 1040
- Partnerships and multiple-member LLCs: File Form 1065 and distribute Schedule K-1 to each member
6. Look into tax deductions
There are many benefits to being self-employed, like being able to take tax deductions. Self-employment tax deductions help individuals reduce their tax liability.
Self-employed individuals can claim tax deductions for:
- Self-employment tax
- Home office expenses
- Health insurance premiums
- Retirement plans
Depending on your business and types of expenses, you might be able to take advantage of some deductions. To learn more about which deductions apply to you, contact the IRS or reach out to an accounting professional.
Are you self-employed and need a way to manage your books? Patriot’s online accounting software lets you easily track transactions, create invoices, and more. What are you waiting for? See our software in action by trying a self-guided demo today!
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This is not intended as legal advice; for more information, please click here.