Around 16 million people are self-employed in the US alone. That number will likely grow significantly over the next few years as millenials opt out of traditional employment.
While many people dream about running their own business or working for themselves, it’s not a simple or easy ride. You assume many risks and responsibilities that employers handle for their workers. Just as importantly, your family typically assumes the same risks you do by default.
If you’re considering a transition in that direction, you should spend some time planning on how to be self-employed wisely and safely. In essence, you need a strategy for minimizing the risks involved with being your own boss.
Keep reading and we’ll cover a few of the essential things you must do when self-employed.
Start It as a Side Hustle
Unless sudden unemployment forces your hand, it’s often best to start self-employment as a side hustle.
Starting with a side hustle lets you avoid the full-on commitment of yourself and your family to the entrepreneurial lifestyle. Yet, it gives everyone a taste of what they can expect. You may discover that your spouse can’t stand the long hours or you can’t stand missing your kids’ events.
It also lets you test the market for your services. If you find yourself turning away clients because you can’t handle all the business, it’s a good sign. If you spend most of your time tweaking your website because you have no work, you may need a different option.
Staring with a side hustle also lets you get things like your website, business cards, and marketing collateral sorted out before you go full-time with your self-employment.
Build a Cash Reserve
Self-employment is notoriously precarious and often wanes based on the time of year. Accountants and financial consultants see a real uptick around April and the end of each financial quarter, but things often slow down in-between. Creative freelancers often watch business dry up around the holidays as clients focus on family matters.
You need a solid cash reserve to weather these kinds of ups and downs. Ideally, you build this cash reserve before you start self-employment. It gives you a financial window of opportunity to get the business rolling and still pay all your bills. After you start seeing positive cash flow from the business, add to that cash reserve.
After all, no one in an emergency situation ever thinks: “Gee, I wish I didn’t have all this extra money.”
Deal with the Insurance Issues
Most people receive several kinds of insurance coverage through their employers. When you become self-employed, you become responsible for managing all those insurance issues. While a complex topic, you should make sure you deal with at least three major areas of insurance, including:
- Health insurance
- Workers’ compensation
- Liability insurance
Health insurance is mandatory under current law. Plus, you can’t anticipate accidents, injuries, or illnesses. If you can’t get covered under a spouse’s insurance, you can get basic coverage through a state insurance exchange or the Federal insurance exchange.
Workers’ compensation insurance helps cover lost wages and medical expenses from on-the-job injuries. You can get workers’ compensation coverage for yourself if you’re self-employed. You can learn what you need to know about it here.
Different businesses face different levels of risk, but all businesses should carry some form of liability insurance. A general business liability policy covers personal injuries and property damage. A professional liability policy covers financial losses suffered by your clients from your services or if you offered poor advice.
When most people first enter self-employment, they do so as sole proprietors. That means you and the business are interchangeable for tax and legal purposes.
In fact, you’ll probably file your taxes for the business on a personal 1040 form. Although you may also need to fill out documents called schedules that cover the income, losses, or depreciation from your business.
While a common situation, it’s also one that creates some risk for you and your family. Since you are the business legally speaking, a lawsuit puts your personal assets on the table.
Incorporation offers the best way you can avoid this situation. The corporation receives payments, holds business assets, and assumes liability. While an unhappy client may sue the business into oblivion, they can’t go after your personal assets.
Most self-employed people opt for a limited liability company (LLC) or an S corporation. Both S corporations and LLCs offer a liability shield for personal assets. It’s important to know the LLC and S corporation differences to determine which one is correct for your business.
Not all states recognize S corporations or tax them in the same ways. Treatment of LLCs remains fairly uniform, which makes them a more popular choice.
Don’t Ignore Retirement
While college kids founding a startup can ignore concerns about retirement for a while, that’s not true for people in their 30s or older. Odds are good that your former employers did most of the heavy lifting when it came to IRAs or a 401k plan.
You must take responsibility for this task when you become self-employed. If you don’t already have one, set up some kind of an IRA. Most banks offer a range of IRA options to their members.
Depending on the total profit from your business, you can also establish your own 401k plan or a simplified employee pension plan. If you don’t know which option is best, consult with your accountant or business financial advisor.
Parting Thoughts on How to Be Self-Employed
If you always dreamed of it or circumstances forced you into it, self-employment comes with many challenges. You assume the risks and responsibilities that employers handle behind the scenes. Right from the beginning, you should focus on how to be self-employed in a way that minimizes your risks.
Make sure you get your finances in order in terms of a cash reserve and retirement plan. Get your insurance plans in place as soon as possible. Limit your personal liability by incorporating the business.
After you deal with those issues, you can buckle down and focus on the business of your business.
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