TL/DR Version
Self-employment is a path to independence where individuals run their own businesses. It offers flexibility and autonomy, but also responsibilities like maintaining financial reports, filing annual tax returns, paying estimated tax and sourcing your own benefits. From freelancing to starting a small business, operating as a successful solopreneur requires discipline, planning, adapting to challenges and knowing when to tag in the professionals.
Self-Employment Definition
Self-employment is a career path where individuals work for themselves, running their own businesses or providing services independently. Unlike traditional employment, individuals aren’t tied to an employer, giving them flexibility and control over their work and life.
Self-Employment FAQs
How Does Self-Employment Work?
Being self-employed is both exciting and demanding. It requires business owners to manage various aspects of their business, from client acquisition to financial management.
Here’s how it generally works:
- Identify your skills and passions: Being self-employed starts with recognizing your talents, skills, and interests. Whether you are a writer, designer, consultant, or tradesperson, embracing your expertise lays the foundation for your entrepreneurial journey.
- Choose your business structure: Depending on the nature of your work and your growth aspirations, you can choose a suitable business structure. Each structure has its legal, tax, and liability implications, so research and consult with professionals to make an informed decision.
- Market your services or business: Effective marketing is essential to attract clients or customers to your business. Building a strong online presence through a website, social media, and networking platforms helps showcase your offerings and reach a broader audience.
- Client acquisition and relationship management: For freelancers and consultants, acquiring clients is vital. Building a positive reputation, delivering exceptional service, and maintaining strong client relationships are key to sustaining and growing your business.
- Financial management: As a self-employed individual, you must handle financial aspects, including tracking income and expenses, budgeting, invoicing, and managing taxes. Consider using accounting software to streamline financial tasks.
- Time management and finding balance: Balancing work and personal life is essential in self-employment. Efficient time management and setting boundaries help you avoid burnout and maintain productivity.
Types of Self-Employment
There are various types, each representing a different approach to working independently and running a business:
- Freelancing: Freelancers workers offer their services to clients on a project basis. They typically work in creative fields like writing, graphic design, web development, photography, and marketing. Freelancers often have multiple clients and enjoy the flexibility of choosing projects that align with their expertise and interests.
- Consulting: Consultants are experts who provide specialized advice and expertise to businesses or individuals. They often have extensive knowledge in a particular industry or field, and they offer solutions to improve their clients’ operations, strategies, and performance.
- Sole Proprietor: A sole proprietorship is a simple and common form of self-employment where an individual operates a business without creating a separate legal entity. It is the simplest and most common business structure and the owner assumes full responsibility for all aspects of the business, including debts and liabilities.
- Small Business Ownership: Some individuals choose to start and manage small businesses (like S Corps!) that offer products or services to a specific target market. Small business owners have full control over their enterprises and may have employees to help run the operations.
Tax implications of Self-Employment
Unlike traditional employees who have taxes withheld from their paychecks, self-employed individuals are required to handle their own income tax obligations.
You are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, commonly referred to as self-employment tax. This means contributing 15.3% of your self-employment income to these programs.
You must report your self-employment income on your personal or business tax return and pay federal income tax based on taxable income. Consider state and local taxes, as each jurisdiction may have its own tax rates and rules.
You’ll also need to calculate and submit quarterly estimated taxes. Estimated taxes are due quarterly, usually on April 15th, June 15th, September 15th and January 15th.
To calculate the estimated taxes, you’ll need to project your taxable income and tax liability. Payments can be submitted through various methods, such as online options, electronic funds withdrawal, or traditional checks with the Electronic Federal Tax Payment System (EFTPS). It’s crucial to anticipate the changes in your income taxes and filing obligations. Find out more about self-employment taxes here.
Advantages of Self-Employment
The United States solopreneur community is a $23 billion-dollar market and growing — here’s why:
Flexibility: You have control over your schedule, allowing you to balance work and personal life effectively. It enables you to set your work hours and choose where you work.
Independence: Self-employed individuals make their decisions, shaping their business according to their vision. You have the freedom to pursue projects that align with your interests and values.
Unlimited earning potential: Your efforts directly impact your income, giving you the opportunity to earn more. Unlike a fixed salary, self-employment allows you to grow your earnings as your business expands.
Passion-driven work: Pursue what you love, turning your passion into a profitable venture. Being self-employed lets you focus on projects that ignite your creativity and enthusiasm.
Personal growth: Self-employment challenges you to learn new skills, helping you grow both professionally and personally. The experience of managing a business broadens your knowledge and abilities.
How to Succeed being Self-Employed
Being self-employed comes with its rewards, but succeeding requires dedication and effective strategies. Here are a few pro-tips:
- Find your niche by identifying your strengths and passions, and focus on a specific area where you can excel. Specializing helps you stand out in a competitive market.
- Build a strong brand that communicates your expertise and reliability to potential clients. A strong brand fosters trust and attracts more opportunities.
- Set clear goals, defining both short-term and long-term objectives, and outline how you plan to achieve them. Goal setting provides direction and motivation for your entrepreneurial journey.
- Network and market yourself by building relationships with potential clients and industry peers through networking events, social media, and online platforms. Effective marketing increases your visibility and attracts clients.
- Deliver exceptional service. Ensuring your work or product exceeds expectations, leading to positive reviews and word-of-mouth referrals. Satisfied customers become loyal clients and advocates for your business.
- Use productivity tools and services to manage your time, projects, and finances efficiently. Staying organized helps you meet deadlines and avoid costly mistakes.
- Be intentional about improvement. Invest in your skills and knowledge, staying up-to-date with industry trends and advancements. Continuous learning enhances your value and competitiveness.
- Manage your finances wisely by keeping track of income and expenses, maintaining an emergency fund, and planning for taxes and retirement.
Don’t be afraid to seek a support system or consult a professional to help you succeed!
Does Collective Offer Self-Employment Support?
Collective is revolutionizing the way solopreneurs work as the first bookkeeping, payroll, tax and accounting solution designed exclusively for Businesses-of-One.
We combine technology and a team of trusted advisors to give our members the freedom to focus on what they do best: being their own boss. From business formation, bookkeeping, payroll and taxes, to a thriving community – all in one place – running a business can be as seamless as taking a full-time job. And we’re here to make that your reality.
By leveraging Collective’s support, you can offload the complexities of financial management and focus on your business, not your paperwork. Learn more about how Collective can help here.
Other Self-Employment FAQs
What’s the difference between freelancing and being an independent contractor?
Freelancers work on short-term assignments or projects and typically offer creative or specialized services. They often have more flexibility in choosing the projects they work on. Freelancers may work with multiple clients simultaneously and payment is usually project-based or on an hourly basis.
Independent contractors can work on short-term or long-term contracts and typically provide services that may or may not involve creativity, such as consulting or construction work.They may have varying degrees of flexibility depending on the contract terms and payment can be on a project basis, hourly, or even salary-based, depending on the contract.
Do I need to file and pay taxes if I work independently?
Yes, however the type of annual tax return you file for your business activity will depend on the business entity structure (sole proprietor, single-member LLC, S Corp). Independent professionals are responsible for paying taxes, including income tax, self-employment tax (Social Security and Medicare tax), and state and local taxes depending on their location and business structure.
What are estimated quarterly taxes, and do I need to pay them?
Estimated quarterly taxes are periodic tax payments based on your projected income. Independent workers are usually required to pay them to meet their tax obligations.
What about health insurance and retirement benefits?
Common employer-provider benefits are available to independent workers, however they must arrange their own health insurance and retirement policies and payments.
Can I hire employees if I run a small business?
Yes, however this transition involves additional legal and financial responsibilities, such as payroll taxes and compliance with labor laws and investing in payroll and accounting softwares.
Can anyone become self-employed?
Yes, self-employment is open to anyone with a skill, talent, or idea that can be turned into a business.
What are the challenges of being a self-employed person?
Inconsistent income, managing taxes and accounting, handling client relationships, and dealing with administrative tasks. Independent professionals often need to wear multiple hats, acting as the business owner, marketer, and service provider.
Can self-employed individuals qualify for loans or mortgages?
Yes, self-employed people can qualify for loans or mortgages, but the process may be different from traditional employees. Lenders typically evaluate income stability, tax returns, and business financials to assess creditworthiness.
Self-Employment glossary
Bookkeeping: The process of recording, organizing, and tracking financial transactions in a business.
Brand: A unique identity, image, or reputation that distinguishes a business or individual from competitors.
Business Expenses: Costs incurred in running a business, which can be deducted from the business’s income to reduce taxable profits.
Business Profits: The financial gains a company earns after deducting expenses from its revenue. Also referred to as business income
Business Plan: A written document outlining a business’s goals, target market, strategies, and financial projections.
Business Structure: The legal and organizational framework under which a business operates. Common business structures include sole proprietorship, partnership, limited liability company (LLC), and corporation.
Client Acquisition: The process of attracting and converting potential clients into paying customers.
Consultant: An expert who provides specialized advice and solutions to businesses or individuals.
Continuing Education: Pursuing additional learning opportunities to improve knowledge and skills in a particular field.
Entrepreneurship: The act of creating and managing a business, often involving innovation and the intention to scale and grow the company.
Freelancer: A self-employed individual who provides services to clients on a project or contract basis.
Income Tax: A tax imposed on an individual’s earnings, including income generated from self-employment.
Limited Liability Company (LLC): A legal entity that offers limited liability protection for its owners (members) while providing flexibility in management and taxation.
Marketing: Activities aimed at promoting products, services, or the business itself to attract and retain customers.
Networking: Building and maintaining professional relationships to expand one’s business contacts and opportunities.
Partnership: A business structure where two or more individuals share ownership, responsibilities, and profits or losses.
Productivity Tools: Software and applications designed to enhance efficiency and organization in managing tasks and projects.
Retirement Plan: A financial strategy to save and invest money to provide income during retirement years.
Self-Employment Tax: A tax that self-employed individuals pay to cover Social Security and Medicare contributions, similar to payroll taxes for traditional employees.
Sole Proprietors: An individual that operates a business as the sole owner without a business structure. Sole proprietors assume full liability for the company’s debts and obligations.
Time Management: Strategies and techniques used to prioritize tasks and efficiently allocate time.
Marissa Achanzar is part of the sales team at Collective and doubles as a content writer based in Roseville, California. After a successful seven-year-stint in public accounting, Marissa decided to pivot and put her tax compliance and client engagement experience to use by creating practical, people-first educational content.
Marissa is also the founder of Something Good Co., a non-profit that supports foster and at-risk youth in the Sacramento region. In her spare time, she enjoys exercise, trying out new recipes, dabbling on piano or guitar and won’t say no to a good TV/movie marathon. You can find her on LinkedIn or contact her at [email protected]