The global health crisis compelled us to reassess our priorities. With many time-consuming activities, such as getting ready for the workday and traveling to the office, falling by the wayside, individuals found themselves with the opportunity to concentrate on what truly mattered to them. As society starts to reopen, a significant number of us are reluctant to relinquish this newfound flexibility.
A report from 2021 revealed that 40% of American workers with traditional employment are contemplating shifting to self-employment within the next two years. While entrepreneurship may grant individuals additional freedom, several factors must be taken into account prior to making the leap into self-employment.
Factors to Consider Before Starting Your Own Business
While embarking on the journey of self-employment can be an exhilarating opportunity to engage in work you are passionate about, it also presents certain challenges. The first major point to address is taxes. W-2 employees work for a company that automatically deducts taxes from their salaries. In contrast, self-employed individuals have the responsibility to put aside a portion of their earnings to fulfill their tax obligations.
In addition to standard taxes, self-employed individuals must also handle self-employment taxes. When you are an employee, both you and your employer share Social Security and Medicare taxes. However, if you are self-employed, you bear the full responsibility for the entire 15.3% tax. Prior to venturing into self-employment, it’s prudent to establish an account dedicated to saving for these extra costs.
Furthermore, it’s essential to reflect on your existing employment benefits such as health insurance and retirement plans. The Bureau of Labor Statistics stated that in 2021, the average employer covered “78% of medical care premiums for single coverage plans,” which is a significant benefit. If your spouse has a job that offers a benefits plan, you may be able to join their program. If that is not an option, you will need to secure a health insurance plan specifically for self-employed individuals.
Many companies also provide retirement plans and match employee contributions, which means there is free money available to support your retirement that you will need to start contributing to yourself. Therefore, before going solo in your career, you should research the various retirement options available for self-employed individuals, including SIMPLE IRAs, SEP IRAs, and Solo 401(k)s.
Lastly, employment with a company typically brings a stability to your finances that is hard to achieve as a self-employed person. As a W-2 employee, your monthly income is predictable, making it easier to budget for personal expenses. Conversely, self-employment can lead to significant income variability as you work to establish your business. During this period, it’s crucial to prepare for potential income swings.
Steps to Take When Transitioning to Self-Employment
If you’ve assessed your financial landscape and evaluated the benefits your company offers, but you are still eager to follow your passion and work for yourself, congratulations! Taking this step can lead to an incredibly rewarding career. To ease this transition, consider the following advice:
1. Start Setting Aside Savings.
Before you take the plunge into self-employment, it is crucial to have a financial safety net to help sustain you as you establish your business. Ideally, try to have a cushion of savings that covers at least two years’ worth of essential expenses such as housing, food, transportation, and insurance. Starting a profitable self-employed career takes time, but having two years’ worth of living expenses set aside will make the transition smoother.
If you are finding it hard to accumulate savings, review your budget for recurring costs that could be eliminated, like unused subscriptions or frequent dining out. To simplify budgeting, consider using a budgeting tool such as Mint or YNAB, which can help you monitor your spending by connecting to your bank and credit accounts.
2. Develop a Business Plan.
Starting your business is akin to preparing for a marathon. While it’s possible to run without a training regimen, doing so will be more challenging and yield less favorable outcomes. Similarly, having a structured business plan is critical for your success. It’s easy to let the daily grind of self-employment consume your time, so prioritizing strategic planning is essential.
In crafting your business strategy, consider the following: What are your specific goals? What unique services or products does your business offer? Research industry trends to identify what differentiates you from the competition. Plan how you will handle business responsibilities and how you will reach your target market. Lastly, estimate the financial resources you will need to get started. For instance, a freelance writer might require only a professional website, while launching a retail store will typically involve higher initial costs.
3. Collaborate with Experts.
Handling finances as a self-employed individual can be complex. This is why seeking assistance from professionals who specialize in finance for self-employed individuals can be beneficial. Although hiring a financial adviser or business consultant might involve costs, their expertise can help you avoid common pitfalls that could lead to significant financial loss and hinder your business progress.
If you’re uncertain about whom to consult, reach out to your professional network and inquire about recommendations from other business owners. Your network is one of your most valuable resources as a self-employed entrepreneur, so invest time in expanding and nurturing these connections.
If you desire a more adaptable work environment, self-employment might be the right path for you. While it’s exhilarating to leave the routine of office life behind in pursuit of your dream job, several vital steps must be followed to successfully launch your business.
Disclosure: This material is provided for information purposes only and should not be deemed as investment, tax, legal, or accounting advice. All investment carries risks. Prior performance does not guarantee future outcomes. Diversification does not ensure profits or guarantee against losses. It is advisable to consult with your own advisors in tax, legal, and accounting matters.
