How to become self-employed

What does self-employment entail?

Calling the shots at work is a goal to which many aspire. Being your own boss provides the freedom to pursue your passions, set your own schedule, and do things your way. At the same time, you may be giving up a steady income and employer benefits to take on all the financial and decision-making responsibilities. Like most things in life, it’s a matter of balancing the benefits with the challenges to decide if self-employment is the right path for you.

Once you’ve decided to take the leap and become self-employed, you need to figure out how to get all the right pieces in place to get up and running. Let’s look at some of the basic starting steps.

Steps for becoming self-employed

The successful transition to becoming your own boss requires research and planning. Once you’ve figured out your interests and the skills you bring to the table, you need to consider the key elements of your business plan.

Choose a business structure

When working for yourself, you can organize your business in several ways. Each option determines which income tax* return you’ll file and comes with its own benefits and conditions. Here are some of the most common organization types:

• Freelancer — A self-employed individual who usually works alone to provide a service and may have multiple projects for different clients but is not necessarily a business owner.
• Independent contractor — A self-employed person who tends to work on specific projects for a single client.
• Sole proprietorship — A business run by an individual with no legal distinction between the business and the person. The owner is personally liable for all business debts and obligations.
• Partnership — A formal agreement in which two or more parties run a business. They share profits, losses, and management responsibilities.
• LLC (Limited Liability Company) — A business structure that differs from a sole proprietorship and partnership in that it shields the owners from personal liability for the organization’s liabilities.

Decide on a location

Where will you conduct your business? As a freelancer or independent contractor, you might decide to work at your client’s location or from a home office. Depending on the type of business, you may want to rent office space, open a physical storefront, or set up a website for online transactions.

Comply with licensing and regulatory requirements

Are permits required for your type of work? For example, do you need a food-handling license or professional certification to comply with local laws? Depending on the state* you live in and the type of business you conduct, you may need to apply for a tax ID number and register for a business license.

Financial considerations of self-employment

Self-employment means that in addition to supporting yourself and your personal needs, you’re also responsible for planning and managing the finances to sustain your business operations. Some of the factors you’ll need to consider include:

Start-up costs

Estimating your start-up costs is crucial to making a smooth transition to self-employment. You’ll want to consider one-time expenses like furniture, equipment, and inventory, as well as administrative costs like legal advice. You also need to consider ongoing costs such as rent, utilities, software subscriptions, and taxes.

Potential earnings

Calculating your potential earnings is essential to planning. Will you be able to meet your expenses and hire additional help if needed, or will you need to tap into savings while you get your business off the ground?

Manage cash flow

All businesses face fluctuations and occasional slow periods. In addition to planning for one-time start-up costs and general ongoing expenses, it’s important to ensure you have cash on hand to take care of incidentals and cover expenses during times when business is slow.

Emergency fund

When starting a business, it’s critical to have a dedicated emergency fund to serve as a buffer for unexpected expenses and any rough patches caused by delays in revenue.

Building a sustainable business

With your business plan and start-up costs considered, it’s time to think about how to make your self-employment status sustainable. Here are a few actions you can take:

Marketing your services

Define your target audience, understand their needs, and figure out how to best reach them. As a freelancer or independent contractor, you might consider joining an online marketplace where you can find work opportunities. Social media and traditional advertising are also options.

Establishing an online presence

Creating a website or online portfolio is a convenient way for potential employers to become acquainted with your work, contact you, and even conduct business with you.

Networking and collaboration opportunities

Joining a professional association is a good way to meet other professionals, tap into resources, and find job leads.

Obtaining business insurance

Insurance is an integral part of business planning as unexpected events or lags in cash flow can leave you vulnerable as a self-employed professional. Individual disability insurance can help you and your family maintain your standard of living by covering food and housing expenses should you suffer a severe illness or injury that prevents you from working. Some types of small business insurance can also help you pay all or part of your monthly loan payments.

Self-employment and personal finances

Self-employment involves handling things that might otherwise be handled by your employer. For example, federal taxes* are not withheld for you, and unlike individual federal income taxes, self-employment taxes must be calculated and paid on a quarterly basis. You’ll also have to arrange your own health insurance and provide for your retirement savings plan.

While self-employed, instead of a company sponsored 401(k) you’ll be eligible to set up an individual or solo-401(K). Health insurance is available through the Health Insurance Marketplace®. You’ll also want to consider disability insurance which can help you maintain your standard of living should a covered injury prevent you from working.

Work-life balance

When working for yourself, it can be easy to get overwhelmed by the multitude of responsibilities. Maintaining a health work-life balance is important, as it helps prevent burnout and ensures your overall well-being. Taking time for self-care and pursuing interests outside of your work are essential for staying refreshed and motivated.

Considering self-employment

Becoming self-employed is a big decision and deserves careful consideration of the pros and cons.

Pros of self-employment

Some of the benefits of self-employment include:

• Flexibility: Scheduling is up to you, allowing for more control over your work-life balance.
• Autonomy: You make the decisions including which projects to take on and how to execute them.
• Potential for higher earnings: Depending on the industry, you may be able to make more than you would working for a company.
• Tax advantages: Certain tax deductions may be available to you. Common tax breaks include deductions for home offices and vehicles used for the business. Consult with your tax and legal professionals.
• Job security: While risks are involved with striking out on your own, your livelihood is tied directly to your efforts and you’re not subject to layoffs.

Cons of self-employment

Self-employment also comes with challenges that you should be prepared to address.

• Financial instability: Self-employment often means trading a steady paycheck for the risk of an irregular income, unpredictable expenses, and lack of benefits such as health insurance and paid time off.
• Increased responsibility: Being your own boss means wearing many hats. You’ll be responsible for activities such as marketing, accounting, licensing, legal compliance, and other administrative work.
• Demands on your time: Longer hours and difficulty disengaging from work can cause strain on your personal life and even lead to burnout if not managed carefully.
• Isolation: You may miss the camaraderie of colleagues and the ability to exchange ideas and trouble shoot issues.

Self-employment can be a rewarding and challenging venture. Luckily, several resources for small businesses are available to provide support on your self-employment journey.

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*Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.