Looking to be self employed in 2022? Find out everything you need to know below. Follow our 9 key steps below to successfully launch your self employment journey.
What is self-employment?
A self-employed person does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals, or independent contractors, earn income by contracting with a trade or business directly.
Self-employed persons may be involved in a variety of occupations but generally are highly skilled at a particular kind of work. Writers, tradespeople, freelancers, traders/investors, lawyers, salespeople, and insurance agents all may be self-employed persons.
How do I qualify as being self employed?
A self-employed person refers to any person who earns their living from any independent pursuit of economic activity, as opposed to earning a living working for a company or another individual (an employer). A freelancer or an independent contractor who performs all of their work for a single client may still be a self-employed person.
A self-employed person is not often the same thing as being a business owner. The owner of a business, for instance, may hire employees and essentially become the boss—an employee-owner who operates and manages the business.
Do you have to register a business if you are self-employed?
The short answer is no, however if you are self-employed, meaning you run an unincorporated business by yourself, you may not need to register your business.
But you may miss out on legal and tax benefits and personal liability protection if you don’t. When you’re self-employed, the IRS considers your business as an extension of you. In other words, you are personally responsible for your business’ taxes, liabilities, and everything else.
Unofficially, self-employed means different things to different people: freelancer, contractor, business owner, entrepreneur, and the list goes on. But officially—from a governmental, legal, and tax perspective—it all depends on the steps the business owner takes to organize the business.
Play it safe by following the IRS definition. Call yourself what you want when chatting with friends and family. When paying your taxes, classify yourself correctly.
The IRS considers you self-employed if any of the following apply:
- You carry on a trade or business as a sole proprietor or an independent contractor
- You are a member of a partnership that carries on a trade or business
- You are otherwise in business for yourself (including a part-time business)
Main types of self-employment
The main types of self-employment categories are independent contractor, which is an individual working a specific job; a sole proprietorship, which is a business enterprise run by an individual and which may or may not have additional employees; and a partnership, which is a business structure between two or more individuals with ownership status
Benefits include being your own boss, creating your own schedule, flexibility, working towards your own dreams, taking enjoyment in the challenges of starting something from scratch, choosing the people you work with, and creating your own work environment.
9 tips on how to become self employed legally
1. Analyze your skills and potential business interests
Once you have some idea of a business that fits your goals and lifestyle, the next step is to analyze your idea. Who will your customers be? Who will be your competition?
Think about your skills and talents. What are you good at and what can you monetize? What skill do you have that others are willing to pay good money for?
Consider whether you might want to sell a service or a product and how much money you are willing to risk. What do you love doing so much that you would like to do it every day?
Your answers to these sorts of questions will help you focus and pick a business. If you don’t know what sort of business you want to start, here are a few tricks of the trade:
- Drive down the street and notice what businesses catch your eye
- Go to trade shows
- Google an industry of interest and see the many sorts of businesses are out there
2. Form a business
Once you’ve found your area of talent and money making ways, there are several ways to form a business including:
- Form a sole proprietorship
- Form a partnership
- Launch a limited liability company (LLC)
- Start a corporation
Generally speaking, the latter two options are preferable because they limit your personal liability and create a business that is separate and apart from you.
You will also need to get the proper business licenses and permits from your city, county, and/or state. Start with your city business office and see what they recommend. You should also check out your insurance options, and find a good accountant and lawyer to be on your team.
If you are forming a company, you will need a name. Think of something distinctive that describes the services you are offering. Search for your company’s name in the Department of State Business Registry under “Corporate Name Availability” to make sure nobody else has used it.
If you’re unfamiliar with the company formation process, then hiring a professional company formation service may be the best option to ensure a smooth and quick formation.
3. Draft a business plan:
If you will be seeking outside financing from friends, relatives, investors, or a bank, a business plan is a necessity. But even if you are going to self-finance the venture, drafting a business plan will help you figure out:
- How much money you will need
- What roadblocks to be on the lookout for
- How long it should take before becoming profitable
This should include a summary of your business plan, a description of your company, an analysis of the market you are entering, a description of your company’s structure, a description of your service or product, a statement on marketing strategy, financial projections, and, if you showing this to investors, a request for funds.
4. Choose a location
If you need an office space or a storefront, find it. If you are not ready to commit to a rental, or if you are planning on working from home, you can register your house as a home office. There may be exceptions for some forms of company in some states.
Post office boxes are generally considered bad form for businesses, and may not fulfill legal requirements for some business models. Independent contractors are not required to register a business address.
5. Finance your business.
Determine how much money you need to start your business. Make a budget that accounts for permit and license fees, rent, retirement plans, insurance, an initial purchase of goods, and anyone you will need to hire.
Search for business start up expense calculators. To make the money you will need, apply for loans and private and government-sponsored grants. Pursue venture capital by offering shares to investors.
Apply for a loan with your bank or with the Small Business Administration: If you are starting a low-cost business such as lawn-mowing or babysitting, you may not need any financing at all.
6. Register with the IRS
If you want your company to have employees, or sell goods and collect sales tax, you’ll need to register with the IRS and receive an employer identification number (EIN), a nine-digit number assigned by the IRS.
It’s used to identify the tax accounts of employers and certain others who have no employees. The IRS uses the number to identify taxpayers who are required to file various business tax returns.May 20, 2022
Go to your state’s Department of Revenue and register there. If you are the only member of your new business, and will not collect sales tax, you will pay self-employment tax instead.
7. Obtain your business license and permits
Before you open for business, take a moment to make sure that you have all the correct licenses, permits and insurance policies to operate legally. The last thing you want at this stage is to be shut down by a government agency.
Some businesses may also require federal, state or local licenses and permits to operate. The best place to obtain a business license is at your local city hall. You can also use the SBA’s database to search for licensing requirements by state and business type.
If your business operates in certain industries, such as agriculture and broadcasting, you might need a federal license. Other industries, like health care, typically require professional licenses.
Even if you don’t fall into one of these categories, you may need some form of permission to conduct business. Freelancers and consultants, for example, sometimes have to have a home occupation permit.
8. Open a business bank account
To make managing your finances far easier, take the time to open a business bank account and obtain a business credit card and credit card reader.
Keeping personal and professional finances separate makes doing your taxes much simpler and can help you automate some of the financial steps to running a business as well. Doing this will be especially helpful if you want to know how to start with no money.
What works for your business may not work for another and it’s important to remember that business checking accounts aren’t all alike. When comparing business bank accounts, including checking and savings accounts, there are several things to consider, including:
- Account features and services
- Interest rates for deposit accounts
- Service fees
- Branch banking and ATM access
- Daily, weekly and monthly transaction limits
- Introductory bonus offers
- Ease of integration
9. Get business insurance
Your insurance needs will depend on what type of business you have, but there are also requirements that vary from state to state. Examples of types of insurance you may need to consider include:
- Workers’ compensation: Mandatory in most states, workers’ compensation provides coverage for on-the-job injuries or illness.
- General liability insurance: This insurance usually covers accidents, injuries and claims of negligence.
- Product liability insurance: Often essential for businesses in manufacturing or distribution, product liability helps protect against financial loss due to a defective product that causes injury or bodily harm.
- Professional liability insurance: If you provide a service, professional liability, or errors and omissions insurance, helps safeguard you from malpractice and negligence lawsuits.
- Commercial property insurance: Property damage and loss caused by fire, smoke, storms, vandalism and other events are usually covered by commercial property insurance.
- Business owner policy: Designed for small and medium-sized businesses, BOP combines general liability insurance and property insurance into a single, more cost-effective policy.
How do I establish myself as self-employed?
To legally be self-employed, a person does not need to register your business however you may miss out on legal and tax benefits and crucially personal liability protection if you don’t. When you’re self-employed, the IRS considers your business as an extension of you.
What does self-employed mean legally?
To be self-employed means one conducts business on their own, as a partner or owner, rather than working for employers. According to the IRS, the person who will “carry on a trade or business as a sole proprietor or an independent contractor” is a self-employed person.
Can you be self-employed and not own a business?
You can be a self-employed business owner without establishing a formal company. According to the IRS, you qualify as self-employed if you do odd jobs for pay, sell the occasional short story, or have both a day job and a side hustle.
Tom is the founder of Gottagrow.io. He reads the offers, deciphers the details including features, pricing, included services and more to find you the best products and services.