Making the Switch to Self-Employment

The thought of self-employment can be alluring – being your own boss, flexible hours, creative freedom – but in reality, the decision is much more complex. As an employee, you may take for granted the tasks that are handled by your employer, such as setting the daily schedule, collecting taxes, and providing benefits. Even office supplies, equipment, and access to clients are likely in place before an employee starts her/his position. A self-employed individual must handle all that on their own.

This is not to say that self-employment is out of reach, but being prepared to make the switch is an absolute necessity. If you are interested in taking that leap, then the following resources will help you on your way!

Federal Resources

Perhaps the most significant difference between traditional employment and self-employment is with taxes and the IRS. The ‘when’, ‘how’, and ‘why’ of taxes are very different for individuals and businesses – far too different to cover in detail here – but these tools are a great start:

State & Local Resources

Luckily, you are not on your own when it comes to planning your small business. Iowa has several Small Business Development Centers located throughout the state. The services are free and designed to help small business owners with a number of topics:

In addition to the IRS, and Iowa’s Small Business Development Centers, Iowa State University Extension and Outreach can also assist with your self-employment plan. Our Community and Economic Development Specialists have several programs focused on small businesses, and designated Human Sciences, Family Wellbeing Specialists can help with creating a household budget – note: this is step #1 in the “Starting a Business in Iowa Checklist”!

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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More on the Finances of Freelancing

business card

Freelancing has advantages and disadvantages.  Some people prefer it, while others turn to it out of necessity.  Either way, it requires financial discipline and planning in order to be successful.  Earlier this week we discussed one factor: setting your fees based on full recognition of the financial realities you’ll face.  Here is a second major consideration.

You’ll need strong financial reserves and an annually-based financial plan. Your income will be irregular. Even if you’re working steadily, with lots of “billable hours,” the payments won’t come in on a regular weekly or monthly basis.  And if your work load is sporadic, you’ll see even more irregularity in income.

 

  • This means you will need to project your income for a whole year, and figure what “salary” you can draw each month.  In months when business income is above your “salary” you will bank the extra  so that you can draw from it in months when business income is lower.  Starting out with good financial reserves will improve your financial stabiliy.
  • You will also need to project business-related expenses for the year, including quarterly payments for income and self-employment taxes.  Use IRS form 1040-ES to calculate the amount you’ll need to set aside each month and send in each quarter during the year.  For Iowa, the self-employment income tax form is also called 1040-ES.  In other states, check with your Department of Revenue.  If your business involves other annual or quarterly expenses (insurance, licensing fees, etc), be sure to plan for them as well before deciding what monthly “salary” you can draw from your business.
  • Build retirement savings into your budget.  As a free-lancer, you don’t have a pension, so your later-life financial security is in your own hands.  Don’t assume that Social Security income will be enough to live on in retirement – you’ll need your own investments too.  Tax-advantaged options are available: an IRA or Roth IRA allows you to put away $5500/year (more after age 50); a Simplified Employee Pension (SEP)  or a solo 401(k) allows much higher contributions. 

 A good business plan is essential if freelancing becomes a way of life.  Contact your local Small Business Development Center  for guidance.  ~Barb

Source: portions of this article were based on an article by Barbara O’Neill (2014). “Managing Labor Market Changes: Essential Skills for Entrepreneurs and Intrapreneurs,” Journal of Family and Consumer Sciences, 106 (2) 9-15. 

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Freelancing as a Way of Life

BusinessWoman-Q

In certain lines of business, people start out knowing they’re going to be self-employed (local plumbers and electricians, for example, or independent cosmetologists or private practice attorneys).  However, other people find themselves self-employed unexpectedly, as accountants or engineers or in other fields where they might have expected to be salaried employees.

An increasing percentage of American workers are now freelancers, piecing together their income by contracting with several different companies who need their services on a part-time or temporary basis.  Writer Helaine Olen coined the term “gig economy” to describe a situation where a worker goes from one “gig” to the next, with no regular paycheck.  

If you find yourself in a “permanent freelance” situation, whether by choice or by circumstance, you’ll face unique financial challenges which require strong financial management skills and plenty of good planning.

You’ll need to charge a higher hourly rate than you might expect.  Maybe your old job paid $50,000/year, so you decide to charge the equivalent, which is $25/hour.  If you do so, you will find yourself notably poorer than you expect, for a couple of reasons:

  • You face higher costs. As a self-employed person you pay 100% of your health and disability insurance and 100% of your social security and medicare taxes.  In addition, you need insurance related to your business.  You may also have additional costs, depending on the nature of your work.
  • You don’t get paid for every hour.  You’ll spend some of your time marketing your services to potential clients, and some of your time handling billing and collections and other administrative tasks.  In addition, when you’re sick or take time off work, you don’t have paid leave provided.  So the fees you collect from your clients need to cover some of the general time you spend  on your business as part of your “overhead costs.”
  • Without a pension, you’re responsible for your own retirement well-being, and you’ll need to draw from your current income to set aside money to create your own “pension.”

Stay tuned later this week for more key considerations for those who make freelancing a way of life.

~Barb 

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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