Dana had opportunities to go to work for others. But her mom and dad had always run their own business, in which Dana had grown up involved. And so when her mom and dad offered Dana their business to manage and run on her own, Dana jumped at the chance. She never looked back to regret her decision. Every day of her self-employment had been a challenge. She knew that she was working much harder and longer every week than her friends who worked for companies. Dana also had a lot to learn to take over the business and manage everything on her own. Yet to Dana, it had all been worth it, not especially from the income perspective but from every other standpoint.
Proprietorship
This guide has been about job success, not about running a business. See the guide Help with Your LLC for how to start and operate a new small business. But working in your own business, whether as a sole proprietor or the sole member of your own limited liability company, still constitutes a job of a sort, only one that you, rather than an employer, direct and control. Some of the above job advice, like how to improve your job knowledge, skills, and ethics, applies as much to working for yourself as it does to working for others. Other aspects of the above advice, such as how to get along with supervisors and how to treat business owners, obviously apply only to corporate employment, not self-employment. To ensure that the self-employed get fair treatment as to their own job success, this chapter addresses job-success issues peculiar to self-employment. Refer to Help with Your LLC for broader advice on starting and running your own business.
Income
Working for yourself is still working for income, provided that you are skilled enough at running your own business to earn a profit that you can treat as self-employment income. And that’s the point: you shouldn’t be working at your own job entirely for free. That’s the bane of running your own business, that you may find at year’s end that you made no money that you can treat as your own income. Running a business can create equity, meaning positive value in the business that you might realize from the business’s sale some day. But generally, working for yourself for free, selling goods to customers or services to clients at a loss or for no personal return, just isn’t a wise expenditure of your time and energy, unless you truly want to treat your self-employment as a purely charitable activity and you have the financial means to do so. So, rule one for self-employment: make it pay. Some sole proprietors adopt the rule of paying yourself first to ensure that you control other business expenses enough to earn your own income.
Taxes
Self-employed individuals generally quickly learn that they face a substantial federal income tax obligation that individuals working for corporate employers do not face. Employers generally pay the so-called employer’s share of FICA (Social Security and Medicare) taxes, currently at 7.65% of wages. But the self-employed have no employer to pay that share. So employees pay their own 7.65% share plus the employer’s 7.65% share, and so the full 15.3% constituting FICA taxes. And that’s on top of the federal, state, and local income taxes. Thus, if an employee takes home, say, 70% of earned wages, after taxes, the self-employed individual earning the same amount in wages (profits from self-employment) earns only 62.35%. That’s a much bigger bite out of income. One way or another, your household budget needs to account for that difference if you move from employment to self-employment.
Shelter
The self-employed, though, have the potential to lawfully shelter income from taxes in ways that corporate employees do not have. Don’t draw more out of the business in profits than you need for your household expenses. Instead, reinvest the excess profits in business assets that will both increase your profits in the future and build the business’s value as your long-term asset, even your retirement asset. You’ll only be able to expense some of those purchases according to the IRS 3, 5, 7, 10, 15, and 20-year depreciation tables. But other equipment purchases may be fully expensed in the year of purchase. If you work out of your home, be sure to take the cost of your home office as an expense against your self-employment income and to keep track of business mileage as another expense. Your family may also gain incidental benefits from the business, like the occasional use of business vehicles, property, or equipment. With astute accounting help and financial management, you may have a lower tax bill than you would in equivalent corporate employment.
Management
Another difference between corporate employment and self-employment is that when self-employed, you manage everything. Corporate employment divides operational and management tasks among the workforce. No one individual must do everything. Indeed, in corporate employment, you must stay in your lane or risk usurping another’s authority. By contrast, in self-employment, it’s all up to you, from the financial management all the way through operations, sales, and customer support. You are chief cook and bottle washer. Some of us relish having full charge and responsibility for everything, where every day is different, and every day brings a new challenge. Others of us do not, preferring to work in our narrow function where we can mind our own business and deploy our peculiar expertise, letting others worry about the operation’s success. Of course, only some operations, such as boutique businesses providing bespoke goods or services, make financial sense on a self-employed scale. A lawn-care service, antique store, catering service, or jewelry-making business might do well for self-employment. Manufacturing automobiles or making cell phones would not. Be sure that your self-employment dream is realistic.
Support
If you feel constantly scattered in your self-employment, as if you’re taking on too much, you may be able to do something about it. Even in self-employment, you may be able to focus your efforts where your knowledge and skills produce the greatest value. You don’t have to do everything in your self-employment, if you can find a contract service to help you out with functions that do not require your special expertise. If cleaning your store or other self-employment workplace takes too much of your time and energy from higher-value activities, then retain a custodial service. If doing the advertising or keeping the technology functioning takes too much of your time and energy, then hire services to do those functions, too. Build a support team of contractors around you so that your self-employment operation can leverage your special skills into a profitable venture.
Contracting
Another way to leverage your special skills in a self-employment role is to deploy your special skills for a larger operation, as its contractor. Maybe you are the crack technology wizard who can provide technology support for another business, as a self-employed contractor. Or maybe you have the custodial skills, advertising or marketing skills, or skills in website design to support other small or large businesses. If self-employment is your preferred gig, but you don’t want to run a full operation, you may be able to perform your special function as a contractor for one other business or a collection of businesses, so that your days are very much like the days of a corporate employee, only without the supervision and control of corporate managers. If you’re fed up with running your own operation, see if you can connect as an independent contractor with other businesses doing similar work, to provide your preferred function, or if you can pare down your operation to serve only a single or small number of customers or clients, again as an independent contractor integrated into their operations. They may have to qualify you as an employee for income tax, worker’s comp, and liability purposes, if they direct and control your activities. Keep your status, whether an employer, employee, or contractor, clear with anyone with whom you deal.
Development
Continual business development is a key function in many forms of self-employment. Business development here means generating profitable new work to keep your self-employment solvent. You may already have a well-established clientele so that you need not do substantial advertising or networking for new business. But even then, you need to ensure that your current clients or customers are themselves solvent, planning to stay in business, and planning to continue to do business with you. You may, in other words, have continual business marketing to do within your established customer or client base. The point is not to ignore business development when self-employed. You may have a great product or service to offer. But others who would need or want your product or service must know of its availability. Make time for business development, among your many other self-employment responsibilities.
Reflection
Do you have the right form, whether a sole proprietorship or LLC, for your self-employment? If you’re unsure, then investigate the advantages of an LLC with the guide Help with Your LLC. Are you drawing sufficient income from your self-employment? If not, analyze how you can reduce expenses and increase profits by reading the guide Help with Your Money, covering personal and business finances. Can you lawfully shelter more of your income from taxes in ways that bring short-term and long-term advantages, as suggested above? Are you managing your self-employment well? Could you manage better by contracting out some of your self-employment functions? Could you reduce your self-employment overhead and administration by focusing your business on a single customer or small number of customers, providing them with contract services? Are you paying sufficient attention to business development?
Key Points
Self-employment has advantages and disadvantages to employment.
Have the right proprietorship or LLC form for your self-employment.
Ensure that you draw sufficient income from your self-employment.
Take proper advantage of available tax shelters for self-employment.
Consider reducing your management burden with contract services.
Consider reducing administration by contract with another business.
Pay due attention to continual business development for enough work.