Millions of Americans are taking a step back and rethinking their professional lives amid the “Great Resignation” and the ongoing coronavirus pandemic.
A record 4.5 million people left their jobs in November, according to data from the US Department of Labor, continuing the trend of workers leaving their employers in droves.
Some of these workers decide to become self-employed and start their own business. In December, there were about 9.2 million unincorporated self-employed people in the country, according to the US Bureau of Labor Statistics.
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This year through December, Americans applied for more than 5 million federal tax ID numbers needed to register new businesses, according to data from the US Census Bureau. This already exceeds the roughly 4.3 million new business applications for all of 2020, as well as the 3.5 million filed in 2019.
Deciding to leave a steady job to become self-employed or start your own business is generally not something you should do without proper planning. Here’s what experts recommend before, during, and after transitioning from a 9-to-5 job.
“If you’re considering taking the plunge, I always encourage people to do it the right way,” said Sheneya Wilson, CPA and founder of Fola Financial in New York.
Before taking the leap
According to Kevin Lao, Certified Financial Planner and Founder of Imagine Financial Security in St. Augustine, Florida, before going out on your own, it’s a good idea to first draw up a business plan for yourself and your new venture. .
That means writing in plain language what your business’s goal is, who your audience is and what you hope to charge, he said.
“It’s very hard to succeed if you don’t have a very compelling ‘why’,” Lao said.
You can also identify several potential income streams 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 new sources of income as you see fit, she said.
Once you have a vision of your next steps as a solo entrepreneur, you want to make sure you have the finances in place to support yourself as you grow your business.
The exact amount will depend on your risk tolerance and how quickly you think you can make a profit, Lao said, adding that when he set up 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 a limited liability company (LLC) if necessary, and payment for equipment and services such as accounting software or buying a new computer. You may also need to purchase your own health insurance and set up your own retirement savings plan, benefits you would typically get through an employer.
One thing that can be helpful is setting an income goal that can help you pace your work each month and make sure you’re covering your expenses.
If you’re not quite ready to take the plunge, there are other options, such as starting your business as a side hustle in hopes of turning it into a full-time income earner later on. .
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. Indeed, small business owners generally have one of the highest effective overall tax rates.
“Knowing this, you should plan before the end of the year how you can minimize tax liabilities,” she said. This includes knowing what to deduct as a business expense as well as other credits and deductions you are entitled to.
For example, people who started their own business this year can take advantage of the home office deduction, a major tax break that’s only available to people who run their own business from home.
To make sure you’re setting everything up correctly, it makes sense to have a few speed dial professionals. 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’re starting.
Plus, it’s helpful to have the guidance of a financial planner who can help you with your own budget and financial goals as you transition into independent living, Woodruff-Santos said.
Benefits of independent living
Once you’ve made the decision to go freelance or start your own business, remember to treat it like any other career change.
“I announced it the way people announce they got engaged or had a baby,” Woodruff-Santos said, adding that it can help generate potential business in your current network.
She also recommends staying connected with a network of other freelancers, small business owners, or entrepreneurs doing similar work, so you have a professional group to lean on.