Women become self-employed in many ways. For example, they may decide to leave full-time work and become a consultant or freelancer. While holding a full-time job, they “moonlight” in a side business, such as tutoring children or selling goods on eBay. Or, they can start a new company, raise capital and hire employees.
In each case, women join the millions of Americans who become “sole proprietors” and report self-employment income. Self-employment is partly a state of mind (being free to do what you want) and partly a business structure. In this article, we’ll cover five ideas that can help you make progress in your first few months of self-employment.
1. Understand What Self-Employment Means
Although people define “self-employment” in different ways, technically the IRS has the last word. According to the IRS: “You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. A sole proprietor is someone who owns an unincorporated business by himself or herself.”
A sole proprietorship can choose the identity of its owner and use the Social Security number of its owner as its Tax Identification Number. Alternatively, the business can choose a separate DBA (“doing business as”) identity and request a separate Employer Identification Number from the IRS. In either case, the IRS considers the finances of the company to be the same as those of the proprietor. The business owner reports profits and losses on a Schedule C attached to the owner’s 1040 tax return.
A proprietorship, by definition, can have only one owner and that owner is considered to be responsible for business affairs, finances, and debts. If two or more people share in ownership and management, they should form a partnership or incorporate the business.
2. Create Separation Between Business and Self
Just because the IRS treats the finances of the owner and the proprietorship as one-and-the-same doesn’t mean you can’t create separation between personal and business money. Start by setting up a separate bank account used only for business matters. This will help you track business expenses and avoid dipping into personal funds to finance your business. Periodically, write a check from the business account to yourself to cover your “salary.” Technically, sole proprietors are not allowed to draw salary, because their compensation consists of net business profits, but taking regular draws will remind you of the need to become profitable
Also, think through the potential liabilities of the business, which are 100% the personal responsibilities of the proprietor. Consider obtaining adequate insurance coverage to protect yourself, including life and disability income insurance to protect your dependents against the loss of your own income.
3. Know the Rules for Hiring Employees
The majority of proprietorships technically have no employees, because the proprietor is not considered to be employed. However, there are no restrictions on your ability to hire the employees your business needs to succeed. If your spouse works in the business, it’s advisable to pay the spouse a salary to avoid the appearance of having married co-owners. Under IRS rules, an unincorporated business jointly owned by a married couple is classified as a partnership for federal tax purposes, and additional red tape may result.
If any employees are hired, the business may be liable for federal and state wage withholding, worker’s compensation and unemployment insurance coverage. W-2 annual wage forms should be prepared and delivered to each employee. If the business sets up a retirement plan for the owner such as a SEP or SIMPLE, any eligible employees also must be covered.
4. Set Up Your Books and Records
Because there is no withholding on the profits of self-employed proprietors, it’s a good idea to make quarterly estimated tax payments to federal and state governments. These payments are the equivalent to payroll tax withholding for salaried people. As an alternative, you may be able to avoid paying estimated taxes by increasing your withholding at a full-time job. Because penalties and interest for failing to make timely estimated tax payments can be costly, try to form a quarterly filing discipline. You can download Form 505, Tax Withholding and Estimated Tax Payments, from www.irs.gov
If you work in an “office-in-home” or use your car for business purposes, set up separate records to track these expenses, as required by IRS rules. For most work you perform for hire, keep records of payments from clients so that you can compare the year-end totals (per client) with the Form 1099-MISC that each client will report as non-employee income paid to you. Refer to IRS Publication 583, Starting a Business and Keeping Records, for details.
5. Choose Professionals Wisely
Self-employed people rely upon a variety of professionals including CPAs, attorneys, bankers, financial planners, insurance specialists, business coaches, and employee benefits consultants. Depending on the size and growth of your business, it may not be necessary to employ professionals right away. But you can make the effort to network with professionals in your community and learn more about how they work. In some cases, professionals may be able to suggest profitable strategies or help you make valuable connections with financing sources, new clients, key employees or suppliers. You don’t have to spend an arm and a leg on professional fees right away to receive benefits.
Whether your business is big or small, full-time or part-time, you can start to implement these ideas now, and they can pay dividends quickly. Then, you will be in better position to aim your business toward the next level of growth and begin reaping personal rewards from business success.
John “Jake” Akoury, MBA, CLTC, AAMS, and John G. Balzer, JD, CLTC, RFC, are Registered Representatives of Park Avenue Securities LLC (PAS), 140 Kendrick Street, Needham, MA , 02494. Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. The Bulfinch Group is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC, is not licensed to sell insurance. PAS and the representative do not provide legal advice or services.
The Bulfinch Group
781-876-5880 x222 / x224
JAkoury@bulfinchgroup.com
JGBalzer@bulfinchgroup.com
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