If you are one of the growing numbers of self-employed contractors and freelancers in the US, it is worth looking at a few areas of business planning. Some self-employed may not have planned on running a business, but many freelancers don’t have a choice when they are working in sectors that require they work as a contractor rather than an employee.
As a self-employed individual you are technically a sole proprietor and have similar obligations as any business owner. So, even if you are an Uber driver, freelance consultant or IT specialist, you need to think of yourself as a real, independent business, and not just a service provider.
Tax Planning – One of the primary differences from being an employee, is that you have to handle all of your own tax planning and filing. There are some real differences, and a few advantages.
Self-employment tax – As a sole proprietor you have to pay both the employer and employee shares of FICA, which adds up to a 15.3 % self-employment tax. That tax is applied to net business income before any personal deductions, but after business expenses.
Deductions – As a self-employed you are able to deduct from income many more expenses than an employee, as long as they are business related. This can end up reducing your overall tax bill depending on your income and type of business.
Estimated Tax Payments – Every business, including sole proprietors, generally must make quarterly estimated income tax payments to the IRS.
Insurance – Because you are self-employed, you don’t receive any benefits like an employee, and will have to buy your own health insurance or accident coverage.
Retirement Accounts – You have options to set up your own retirement accounts and make regular contributions, and in some cases can contribute more each year than to a regular IRA.
Bank Accounts – It is recommended to set up a separate bank account for your business, so that you don’t comingle personal and business expenses or payments.
Contracts and Invoices – Part of running a business is setting up contracts with your clients and sending regular invoices. This helps to document your income, justify expenses and protect yourself from payment issues with clients.