Nothing is more exciting than a client who’s ready to jump from her full-time job into her booming business.
She’s done everything to set herself up for success. She’s built a solid reputation, created a steady stream of new clients, and nearly matched her business income to her job’s paycheck. She’s ready to leave the job behind and work for herself full-time. Woohooo!!
This sounds like an exciting time, and it is. However, there is an entirely new level of “logistics” that you have to manage when you work for yourself. You need to consider things like insurance, taxes, vacation time, retirement plans, and more.
Business isn’t 100% glamorous; I’ll be the first to admit that. But there are parts of business that are essential if you want to work for yourself.
Even if you’re not ready to jump ship (or if you already have), you won’t want to skip this list, because there’s a good chance you’re missing some critical details around self-employment.
#1 – Business Registration
In most states, you are required to register your business. Before you can register, however, you’ll need to determine what kind of business entity you want to have. Consider speaking with an attorney and a tax professional in order to understand what type of business entity you should register and how to go about doing so in your state. This will most like be a sole proprietorship, limited liability corporation (LLC), or S-Corporation.
The business entity selection will then inform many of the other decisions you will need to make regarding financials, insurance, and retirement plans. (More on all of that below.)
#2 – EIN
An EIN is an Employer Identification Number. It’s used similarly to a social security number, but instead of identifying an individual, an EIN identifies a business. Depending on your entity type, you may or may not need an EIN. Regardless of need, you can chose to get an EIN. Having one allows you to use your EIN in place of your SSN which is great for helping mitigate identify theft risk.
#3 – Financial Record-Keeping
There’s a lot involved in getting your financials in order, and many of these details should be in place no matter what. I see many entrepreneurs neglecting these specifics, so please read it through even if you’ve been in business for awhile.
First, make sure you have separate checking, savings, credit card, and PayPal accounts for your business. Although this isn’t technically required if your entity type is a sole proprietorship, it’s wise to do so no matter what. Not only does it make tracking your income and expenses easier when you separate your business and personal accounts, it’s simply the professional thing to do! If you don’t have this set up yet, do it this week. Yes, it’s that important.
Second, you need to get your books in order. If you’re taking your business seriously (and if you’re reading this, you are), skip the spreadsheets. Sign up for a web-based bookkeeping system. I use Outright.com, though there are several options out there that work great. (Outright is now called GoDaddy Bookkeeping, though I’m still in denial that this privately developed software company has been purchased by GoDaddy. Don’t be fooled by the GoDaddy name — this bookkeeping system is fantastic.)
You’ll want to make sure the system you use is suitable for your entity type because there are different accounting requirements for an S-Corp as compared to a sole proprietorship and an LLC. (This is why that first step above is so important.)
Once you determine what software you’ll be using, you’ll connect your business banking, credit card, and PayPal accounts to it. Modern technology means the software does 90% of the work for you. Sure, you’ll need to set up the appropriate expense and income categories when you get started, but your accountant should be able advise you on the best way to do this.
Then you’ll put a monthly to-do item on your list for reconciling your statements, receipts, and your books. This saves a ton of headaches when tax time comes, and as your income rises, it will be fun to watch the numbers grow!
Third, you need to have an accountant you trust. (I don’t mean a bookkeeper, as you can do your books yourself with little effort.) An accountant should be able to help you get your books squared away initially then make sure they’re set each year with the tax seasons. Additionally, your accountant will file your taxes for you, because you want to make sure this is done right!
Need motivation to search for an accountant? Try this: all of those expenses you’ve been accruing since the beginning can be deducted from your tax return. An accountant will be able to do that for you. This means you’ll owe fewer taxes next time you file, and you may even get a refund!
Need help finding an accountant? Reach out to other business owners in your area or check with your local chamber of commerce. Lastly, Google it. You have no more excuses!
Once an accountant’s on board, you’ll need to:
1. make sure your books are in order
2. file quarterly taxes (if your income requires it)
3. start saving for year-end tax returns (those payments can creep up on entrepreneurs!)
4. file 1099 forms as required by law (Don’t know what I’m talking about? You should! And an accountant will set you straight. This is a legal requirement, so get on it!)
Doing the Math
Lastly, you’ll want to do what I love to call “doing the math.” With your business financials in order (accounts set up, bookkeeping squared away, and a fantastic accountant in your corner helping you plan for taxes), you’ll have a pretty clear picture of where you stand financially. This will help you make informed decisions about leaving your job or planning for future personal and business expenses.
You’ll also know how much you’re really making once everything’s accounted for — and that, my friends, is financial empowerment. Tweet that!
#4 – “Paid” Vacation Time
When you work for someone else, you often get some paid vacation time. When you work for yourself, you have dreams of taking months off at a time!
Unfortunately, if you’re in a service-based business like me, when you stop working, the money stops coming in. So if you want to take time off (weeks, months, or more!), you need to plan ahead and create your own paid vacation time.
Want to take August and December off? Great! But first you’ll need to make sure you’re generating an extra two month’s worth of revenue across the other 10 months of the year. If you’ve “done the math” like I mentioned above, then you’ll know exactly how to plan for and create your own paid vacation time.
And just like paid vacation time, you’ll also need to cover your own maternity leave, if that’s something you see in your near future.
#5 – Health Insurance
Depending on your current health insurance situation, you may need to investigate finding your own health insurance coverage. If you were like me when I was working in corporate America, I had a great insurance plan through my company. When I went out on my own, I had to find private health insurance coverage.
If you’re in the US, it should be easier to get health insurance than it has been in the past (as long as the new health care bill goes through). This has historically been one of the biggest hurdles to self-employment.
I recommend finding a local health insurance agency that understands the ins and outs of companies and coverage options in your area. It doesn’t cost you anything extra to go through an agency, and they will help you navigate the different health insurance companies available to you.
It’s important to work with someone locally because the options vary significantly from state to state. Getting guidance on navigating this complicated industry can make the process much less stressful and ensure you’re the coverage that’s best for you.
#6 – Disability Insurance
I’m not here to induce a panic, but something to seriously consider as a self-employed person is disability insurance. If you work for someone else, there is a good chance you have some disability coverage (even if you don’t realize it). This means that if you were unable to work for an extended period of time, you would receive financial compensation (about 40-60% of your income) to help cover your loss of income while you were disabled.
When you go out on your own, you’re also on your own for disability insurance. Depending on your financial and family situation, if you were disabled (or got cancer or were in a car accident or something else that left you unable to work for an extended period of time), it could leave you and your family in a major financial lurch.
I tend to play things safe, so I got disability insurance before I left my corporate job (I found it easier to get based on a W2 income). Now I know that if something happens to me and I can’t work for a period of time, I have financial coverage (in addition to an emergency savings fund – more on that below). It’s not that expensive and for the peace of mind it provides, it’s priceless!
#7 – Life Insurance
Life insurance isn’t something to consider just because you’re quitting your job. However, if you are quitting and looking at everything else in your financial big picture, you’ll want to revisit this area as well.
Find a local insurance agent you trust and find a plan with the coverage that feels right for your situation. If you’re like me, the household breadwinner, your passing could have a huge impact on your family’s financial situation. Not that I’m wishing these things on anyone; I simply prefer to play safe over sorry.
#8 – Retirement Planning
You’ll also want to find a personal financial advisor to help you both roll your current 401k (or whatever retirement plan you have from your employer) into an IRA when you leave your job. Plus, you’ll want to set up a new retirement account funded through your business.
If you don’t currently have someone you trust, start looking using the same tips I mentioned above for your accountant search.
#9 – Emergency Fund
We all should have an emergency fund (though I know many people don’t!). As with everything else I’ve listed here, big transitions offer us great opportunities to get everything in order.
Consider having an emergency savings account that can cover between 3 and 12 months of living expenses. (I prefer 9-12 months because, as you’re seeing, I tend to play it safe!) It’s often easier to create this savings buffer while you’re working a job, as opposed to adding the extra pressure to your new business. And when you do leave your job, it will be that much less stressful knowing that you have a cushion available.
#10 & 11 – Business Insurance and Legal Support
Two final areas you’ll want to look into are business insurance and legal support. I have much less information for you on these because the specifics are going to be very unique to you and your business. You’ll want to talk with qualified business insurance and legal professionals to make sure you have in place what you need to protect yourself and your business.
Again, reach out to business owners in your area to find the right professionals for you and your business.
Have More Questions?
I’ve covered a lot of information here because there’s just so much you need to consider for your own business!
If you have more questions about business requirements, start with the IRS website. There’s a helpful section on starting a business. You’ll also find more information than your brain can handle at once, so if you’re new to business, set aside time weekly to educate yourself on all of the aspects of business that are new to you.
Also, the lawyers want me to tell you that I am not an accountant, tax professional, financial advisor, bookkeeper, insurance agent, or attorney, so you’ll want to consult a professional for advice specific to your business in all of the areas mentioned in this post.
Finally, although this list is generated based on conducting business in the United States, many of the same high level details apply to businesses in other countries. Be sure to check out the laws and guidelines in your area to ensure you’re in compliance.
Found this list helpful? Please Tweet it to share it with others!!
What’s on Your List?
Now, I want to hear from you! Tell me….
If you’ve already jumped into self-employment full-time, what other things should be added to this list?
If you are thinking about leaving your job, what other things are you thinking through before you leave? And what are you going to add to your consideration list after reading today’s post?
We each have unique situations to consider when we leave employment for self-employment, and I know you have something useful to add to the discussion. I can’t wait to hear from you in the comments below!