The April 2015 OneOp Personal Finance webinar was about entrepreneurship. Like many American workers, service members and their spouses are becoming entrepreneurs (a.k.a., independent contractors or freelancers) because they want to or have to. The U.S. is increasingly becoming a “freelance nation” as employers address their labor force needs by hiring people on contracts to avoid layoff hassles, payroll taxes, and fringe benefits.
Independent contractors work project-to-project and are hired to get a job done without regard for the means by which the result is accomplished. They use their own equipment and set their own work schedule, even if it is 3 am in their pajamas! It is estimated that 4 of 10 U.S. workers will be freelancers by 2020.
Becoming a successful entrepreneur requires certain personal qualities such as a strong work ethic, creativity, good people skills, a broad skill set, and comfort taking risks. It also requires different financial planning strategies compared to employees who earn a salary. Below are ten tips for aspiring entrepreneurs:
- You are able to deduct self-employment expenses, such as equipment, materials, and travel, directly against business income on the Schedule C tax form. Be sure to keep good records, such as a travel log for mileage.
- You must pay both the employee and “employer” portions of FICA tax for Social Security and Medicare totaling 15.3% of net earnings from self-employment.
- You can’t use a budget that assumes a regular income when you’re an independent contractor. Instead, estimate baseline expenses and set aside money from peak earning months for times with lower income.
- You should build a substantial emergency fund (many experts recommend 6 to 12 months of household expenses) to tide yourself over in between freelance work projects.
- You must make quarterly estimated taxes to the IRS by April 15, June 15, September 15, and January 15 of the following year. Set aside at least 30% of self-employment income “off the top” for taxes.
- You, like most Americans, must purchase health insurance. Sources include a government-facilitated Marketplace, a private policy, group insurance through a trade group, and a spouse’s employer plan.
- You can save for retirement using a simplified employee pension (SEP), the easiest savings plan for entrepreneurs. Contribute up to 20% of net self-employment income by April 15 of the following year.
- You can also fund a Roth and/or traditional individual retirement account (IRA) for retirement savings up to the larger of $5,500 ($6,500 if age 50 and over by year-end) or 100% of net earnings from self-employment.
- You have many resources to assist you including professional advisors (lawyer, CPA, etc.), Small Business Development Centers, SCORE, and the websites SBA.gov and eXtension.org/entrepreneurship.
- You should begin any entrepreneurial activity with a business plan that includes your objectives, product or service niche, marketing plan, pricing methodology, financial projections, and business title and structure.
To watch a recording of this webinar, visit the event page.
This post was published on the OneOp blog on April 28, 2015.