I’ve been fully self-employed since 2008, starting from a side business that was around in some form since 2004. Over that decade, I’ve learned quite a lot about the financial and practical realities of self-employment.
When I first made the leap to full-time self employment, it was scary. It felt like the number of things I needed to do was overwhelming.
What I found over time was that some of the stuff was important – and some of it wasn’t. Here are the six things that I’m really glad I did during the first stages of self-employment. You should do most of these even if you’re self-employed on a part-time basis or in your spare time.
Start your corporate structure as early as possible
If you’re just earning a few hundred dollars a year from self-employment, this probably isn’t necessary. You can file that extra income on your income taxes easily and not really worry about it.
However, if you’re engaging in a lot of projects on your own, you should consider setting up a corporate structure of some sort. For an individual working on their own, this basically means that you’re legally separating the business’s assets and income from your own so that if legal issues arise, you can clearly show a dividing line between the two.
For people who are self-employed, an LLC is probably the easiest choice. It allows you to keep assets for the business separate from your personal assets and, if you’re the only partner, filing taxes is really easy (you can do it in TurboTax without a hitch).
It’s not too hard to do it on your own, but if you want to be walked through this process step-by-step, LegalZoom offers a very nice process that makes it really simple and explains everything you need to do.
Start a tax account immediately
Even if you’ve decided that you don’t need to set up a corporation yet, you should still start a separate savings account for taxes right now. Don’t hesitate. Don’t skip a beat. Do it now.
Every dollar that you personally bring in, put $0.50 into that tax account. Yes, half of it. That might seem like overkill, but you’re going to be incredibly glad that you did it at the end of the year.
Keep track of every dollar you bring in and how much of it you added to your tax account. Then, when you’ve finalized your taxes for that year, calculate how much of your tax savings is left over. You can pull that much back out of your tax account and into your checking account. I consider that my “tax refund” each year.
Make IRS Form 1040-ES your friend
If you’re self-employed, the IRS “encourages” you to file estimated taxes each quarter. If you fail to do so, you’ll be hit with a penalty at the end of the year – not an overwhelming one, but one that stings pretty good.
IRS Form 1040-ES makes it easy to take care of this. It includes a worksheet that will help you figure out how much to pay. Just set up an alert on your calendar to submit a payment each quarter.
If you’re unsure as to what to pay, just make sure that you pay a total amount equal to what you paid last year in taxes on income earned through self-employment.
You should also find out whether you’re required to file similar things in your state.
Have a “work schedule” and stick to it
It is incredibly easy to get lost in the freedom that self-employment gives you. On a given day, I might be tempted to put aside my professional responsibilities and do household tasks or work on other projects or even do purely fun things (like surf the web or play a computer game).
You can’t do that and expect to be successful while self-employed. More than ever, your actual work effort directly relates to your income.
For me, the best tool for success was to set up a strict work schedule each day. I allow myself some breaks for other things – lunch, household chores, and a large break when my children get home from school – but when I need to work, I work. I bear down and focus solely on my professional responsibilities – the other things can wait.
Have a dedicated work space, too
In our home, we converted the smallest bedroom into an office where I work each day. When I am sitting at that desk, work is the order of business, almost without exception.
Because that place is so heavily tied to “work” in my mind, I know that when I go in there, I’m there to get things done. I’ve minimized my distractions in there which enables me to get down to business and fall into a “flow state” with work as efficiently as possible.
Without such a dedicated work space, I would not be able to keep up with my professional responsibilities, period.
Don’t burn your bridges
If you’re transitioning to self-employment from another career path, never burn your bridges, no matter how tempting it is. You might be upset with the events of your previous career, but you cannot let them cloud your choices.
You should walk away from your previous position as neatly as possible, leaving behind all necessary documentation and contact information, and you should try to establish as many continuing relationships as you can with your former co-workers. It’s even worthwhile to keep up on the changes in your field, if possible. You never know when things might change and guide you back in that direction.
Self-employment is scary, but these six steps make it a lot less so. My journey into self-employment would have been a disaster without these moves.