10 Tips to Help You Become Self-Employed

How to Become Self Employed: 10 Tips; Becoming self employed can be a huge transition for new business owners. Here are10 tips from Lantern to help you be successful while self employed.

Lauren WardUpdated September 11, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Learning how to become self-employed is just as important as knowing the type of business you want to start. From new tax responsibilities to a different financial prioritization, there are plenty of changes to navigate. Follow this self-employment guide for a smooth transition to becoming your own boss.

1. Build a Business Plan

One of the first things you need to do when starting a business is to create a business plan. Writing a business plan can help you map out your focus, strategy, and market demographics. Having a business plan on hand also helps you determine how much capital you’ll need and when you should expect to start bringing in revenue. All of this can help give you a realistic idea of your finances once you’re self-employed. And it can help you consider how to handle various potential scenarios, like suffering a financial setback or finding that you’re low on inventory when there’s an unexpected demand.A business plan is also a must-have if you intend to seek out any external financing, whether from a bank or from investors.

2. Start Small

There are multiple ways to be self-employed, depending on your business model. If it's possible, consider starting out small rather than jumping into full-time self-employment. You may not want to quit your day job until you’ve had some success and revenue is coming in. This might mean working on your business as a side hustle in the evenings and on weekends until you feel ready to take it full time. If you take the time to grow your business, you’ll have less financial risk to deal with. For instance, if you’re launching an e-commerce store, you could purchase a small amount of inventory upfront, then roll your profits into more inventory rather than paying yourself, since you'll still have your day job.Recommended: When Does a Side Hustle Become a Business?

3. Incorporate Your Business

It’s important to incorporate your business so that you can manage your income, expenses, and taxes in an appropriate way. Incorporation can also protect you from personal liability in case any legal matters arise from your business. There are multiple business structures to choose from. A sole proprietorship might make sense if you’re the only employee, but a limited liability company (also called an LLC) may offer more personal liability protection. It can be worthwhile to take a little time to explore these options and others to determine the best structure for your business.

4. Understand Self-Employment Taxes

Your taxes will probably change significantly when you switch from traditional employment to self-employment. In addition to your normal tax rate, you’ll also have to pay a 15.3% self-employment tax, which covers your Social Security and Medicare contributions. When you’re an employee, your employer pays this tax. You’ll also have to make estimated tax payments if you expect to owe more than $1,000 when you file your taxes. Estimated tax payments are made quarterly, so it’s best to open a separate bank account where you can set aside tax payments as needed.

5. Maximize Your Tax Deductions

While your tax rate will probably jump once you’re self-employed, you can still lower your taxable income by taking self-employment tax deductions. According to the IRS, you can deduct “ordinary and necessary” business expenses from your profits. Self-employed tips for taxes also include using a home office deduction and a deduction on business loan interest.

6. Open a Business Bank Account

No matter what type of incorporation structure you choose, it’s likely a good idea to open a business bank account. Having a separate account helps you keep your income and expenses apart from your personal finances. Keep in mind that in order to do this, you’ll need a federal employer identification number. There are plenty of business bank accounts to choose from, whether you prefer a local bank or an online financial institution. Check for fees and minimum balance requirements to find one that suits your current self-employment finances.

7. Prepare for Retirement

Once you fully enter the world of self-employment, you won’t be able to rely on an employer’s retirement plan to help you (and, potentially, employees you might have) prepare for the future. Explore your different options for self-employed retirement plans so you don’t miss a beat as you make the transition from wage earner to small business owner. The IRS recommends considering a few different options that still offer tax benefits:

Simplified Employee Pension (SEP) IRA: You can contribute 25% of your net earnings each year tax-free, up to $66,000 for 2023.
Solo 401(k) Plan: You can make an annual salary deferral up to $22,500 for 2023, plus an additional $7,500 in 2023 if you’re 50 or older.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan): You can contribute all of your net earnings up to $15,500 in 2023, plus an additional $3,500 in 2023 if you’re 50 or older, in addition to either a 2% fixed or 3% matching contribution.

8. Be Frugal

No matter how successful your new venture is, even right from the beginning, it’s smart to instill some frugal habits in case things change. Work on lowering your expenses. Not only does this help you weather the storm of unpredictable income, it could also let you reach full-time self-employment sooner. Cutting down on your personal spending might also let you bootstrap your business with extra cash rather than having to borrow funds.Being frugal and lowering your debt might also help build your credit score. That could be helpful in case you need to apply for business financing in the future. Recommended: All About Getting a First-Time Business Loan

9. Prepare for Irregular Income

Learning how to manage your money with irregular income can take some practice. It’s smart to keep a financial buffer fund on hand in case your monthly income dips or a client pays late. Figure out an average amount that you can expect to earn each month and use that as your budget baseline. If you earn more than that, put those funds in your buffer account until you build up a reservoir. Then, you can dip into that money during months when you make less than you expect. In the period leading up to your self-employment, it can be wise to establish a personal emergency fund. In the event your business takes an unexpected turn for the worst — if, for example, an inventory shipment is incorrect or you lose a major client — you’ll have extra funds to rely on. A financial safety net is a must when you’re self-employed.

10. Explore Financing Options

As you grow your business, you may wish to apply for financing to help launch or scale your company up. Online small business loans generally have a quick and easy application process. To qualify, you’ll typically need to meet certain revenue requirements and have been in business for a specified period of time. If you do choose to use business financing, be sure to understand all of the loan agreement details. Do you need to offer collateral for the loan? Is there a personal guarantee? How about a lien placed on your business? All of these factors could have a substantial impact on your financial well-being if you default on the loan. Recommended: A Guide to Personal Loans for the Self-Employed

The Takeaway

Striking out on your own may feel intimidating at first. You’ll need to grow your actual business, as well as learn how to run the financial and administrative side of things. Following these self-employment tips can help you prepare for the transition to being your own boss, and it’s a good idea to learn as many of these ins and outs as possible in advance. Doing so not only prepares you for your new adventure, but it can help give you the confidence to take the next step in your self-employment journey.When you’re ready to seek small business financing, consider Lantern by SoFi to compare multiple offers from leading lenders so you can find the best fit to help your business grow.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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