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Amid the “big resignation” and the ongoing pandemic, millions of Americans are quitting their jobs to become their own bosses.
As of October, there were an estimated 9.44 million unincorporated self-employed workers in the United States, according to data from the United States Bureau of Labor Statistics. Since April 2020, the number of these independents has increased by nearly 2 million.
And, this year through October, Americans have applied for more than 4.5 million federal tax identification numbers, needed to register new businesses, according to Census Bureau data. This already exceeds the roughly 4.3 million new business applications for 2020 as a whole, as well as the 3.5 million filed in 2019.
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Deciding to leave a stable job to become self-employed or to start your own business is usually not something you should do without proper planning. Here’s what experts recommend before, during, and after a 9-to-5 job transition.
“If you’re considering taking the step, I always encourage people to do it the right way,” said Sheneya Wilson, CPA and founder of Fola Financial in New York City.
Before taking the plunge
Before going on your own, it’s a good idea to first establish a business plan for yourself and your new business, according to Kevin Lao, certified financial planner and founder of Imagine Financial Security in St. Augustine. , in Florida.
It means writing in plain language what your business purpose is, who your audience is, and what you hope to charge, he said.
“It’s very difficult to be successful if you don’t have a very compelling ‘why’,” Lao said.
You may also want to identify several potential sources of income for yourself, said Mandi Woodruff-Santos, personal finance expert and executive producer and co-host of the Brown Ambition podcast. From there, you should also be open to new work or sources of income as you see fit, she said.
Once you have a vision for your next steps as a solo entrepreneur, you want to make sure you have the finances in place to support you as you grow your business.
The exact amount will depend on your risk tolerance and how quickly you think you can turn a profit, Lao said, adding that when he started his own finance company, he saved 12 months of living expenses and three months. professional expenses.
Business expenses include items such as the cost of setting up an entity such as an LLC if necessary, and paying for equipment and services such as accounting software or purchasing a new one. computer. You may also need to purchase your own health insurance and set up your own retirement savings plan, benefits that you would usually get through an employer.
One thing that can be helpful is setting an income goal that can help pace your work each month and make sure you cover your expenses.
If you’re not quite ready to take the plunge, there are other options, such as starting your business as a side business with the hopes of turning it into a full-time income stream later. .
When you start
There are even more things to consider once you’ve taken the plunge and gone solo.
The first is that you need to stay organized with your finances and be clear about what is a personal expense versus a business expense.
“You want to start creating a separation between you and your businesses,” Wilson said, adding that the easiest way to do that is usually to have a different bank account and credit or debit card for your business expenses. .
Staying organized will help you plan your taxes well, including maximizing deductions, she added. This is because small business owners typically have one of the highest overall tax rates.
“Knowing this, you should plan ahead of the year how you can minimize taxes payable,” she said. This includes knowing what to deduct as a business expense and what other credits and deductions you are entitled to.
For example, people who have established an independent business or started this year can take advantage of the Home Office Deduction, a significant tax break that is only available to people who run their own home business.
To make sure you’re setting everything up correctly, it makes sense to have a few professionals on the speed dial. Wilson recommends having an accountant or tax preparer who can help you file your taxes correctly.
She also recommends having a good lawyer depending on the type of business you are starting.
Also, it’s helpful to have the advice of a financial planner who can help you with your own budget and financial goals as you transition to independent living, said Woodruff-Santos.
Benefits of living as a freelancer
Once you’ve made the decision to become self-employed or start your own business, remember to treat it like any other career change.
“I announced it as people report they got engaged or had a baby,” said Woodruff-Santos, adding that it can help develop potential business in your current network.
She also recommends staying in touch with a network of other freelancers, small business owners, or entrepreneurs who do similar work, so you have a professional group to build on.