Millions of Americans are taking a step back and rethinking their working lives amid the “Great Resignation” and the ongoing coronavirus pandemic.
4.5 million people quit their jobs in November, according to data from the US Department of Labor, and it continues the trend of workers leaving employers in droves.
Some of these workers decide to go on strike on their own, on their own, or start their own businesses. In December, there were nearly 9.2 million self-employed individuals in the country, according to the US Bureau of Labor Statistics.
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From this year through December, Americans applied for more than 5 million federal tax identification numbers required to register new businesses, according to data from the U.S. Census Bureau. This has already exceeded nearly 4.3 million new business applications for the whole of 2020, in addition to the 3.5 million applications made in 2019.
Deciding to leave a stable job for freelance work or start your own business in general is not something you should do without proper planning. Here’s what experts recommend before, during, and after the transition from a nine-to-five job.
“If you’re thinking about taking this step, I always encourage people to do it the right way,” said Shinya Wilson, CPA and founder of Fola Financial in New York.
Before you take the leap
Before starting on your own, it’s a good idea to first create a business plan for yourself and your new endeavor, according to Kevin Lau, a certified financial planner and founder of Imagine Financial Security in St. Augustine, Florida.
This means writing in simple language what your business goal is, who your audience is, and what you hope to achieve.
“It is very difficult to be successful if you do not have a very compelling reason,” Lau said.
You may also want to identify several potential income streams for yourself, said Mandy Woodruff Santos, personal finance expert, executive producer, and co-host of the Brown Ambition podcast.
From there, you should also be open to new business or revenue streams 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 financial resources to sustain yourself while building your business.
The exact amount will depend on your tolerance for risk and how quickly you think you can turn a profit, Lau said, adding that when he started his own financial company, he had 12 months of living expenses and three months of business expenses.
Business expenses include things like the cost of setting up an entity such as a limited liability company (LLC) if needed, paying for equipment and services like bookkeeping software or buying a new computer. You may also need to purchase your own health insurance and set up your own retirement savings plan, the benefits you generally get through your employer.
The only thing that can be helpful is setting an income goal for yourself that can help you speed up your work each month and make sure that your expenses are covered.
If you’re not quite ready to take the leap, there are other options, such as starting your own business as a side business with the hope of building on a full-time income stream later.
when you just start
There are more things to consider once you’ve jumped in and gone on your own.
The first is that you need to stay organized with your money and be clear about personal versus business expenses.
“You want to start separating yourself from your business,” Wilson said, adding that generally the easiest way to do this is to have a different bank account and a credit or debit card for your business expenses.
She added that staying organized will help you with proper tax planning, including maximizing deductions. That’s because small business owners typically have one of the highest effective total tax rates.
“Knowing that, you should plan ahead of the year on how to reduce tax liabilities,” she said. This includes knowing what to omit as business expenses as well as other credits and deductions for which you are eligible.
For example, people who have been self-employed or started their business this year can take advantage of the home office deduction, a significant tax break available only to people who run their own businesses from home.
To make sure you’re setting everything up right, it makes sense to have a few professionals on speed dial. Wilson recommends having an accountant or tax preparer who can help you file your taxes correctly.
It also recommends hiring a good attorney, depending on the type of business you are launching.
Plus, it’s helpful to get the advice of a financial planner who can help you with your own budget and financial goals as you transition into independent life, Woodruff-Santos said.
Benefits of an independent life
Once you have made the decision to become self-employed or launch your own business, don’t forget to treat it like any other career move.
“You announced it as people announced they were engaged or had a baby,” Woodruff-Santos said, adding that it can help crowd potential business in your existing network.
She also recommends keeping in touch with a network of self-employed, small business owners or entrepreneurs who do similar work, in order to have a reliable career pool.