To be self-employed, you will not be paid through the Pay as You Earn (PAYE) system and do not have the same employment rights, like sick leave and pension contributions. HMRC requires you to register as self-employed even if your business is not yet making profits. In the US, you will self-employed if you run a business as a sole proprietor or independent contractor, or as a partnership or Limited Liability Company (LLC). Self-employed work is varied – you will find self-employed tradespeople like plumbers and electricians, self-employed beauticians and hairdressers, as well as a range of service providers like writers, graphic designers and business consultants. In essence, almost every employed job role can be completed by someone who is self-employed.
Why Might You Consider Self-Employment?
The reasons for becoming self-employed vary. Some people become self-employed as a way to manage their work-life balance better, adjusting working hours around the needs of family and other interests. For others, it is the opportunity to make (almost) unlimited income a reality – choosing how much to charge and not being limited to an hourly or monthly salary. Choosing a self-employed job can mean looking at profitable work from home opportunities or taking a more traditional freelance role In essence, the key draw for many people is flexibility.
What Are the Pros and Cons of Self-Employment?
If you are considering a move into self-employment, it is always worth ensuring that you understand the benefits and drawbacks that you might come across.
Benefits of Self-Employment
Be Your Own Boss
The ability to choose your own hours, charge what you want, decide who to work with and completely control the direction your business goes in – basically, being your own boss – is quite possibly the most important reason that people decide to jump into self-employment. With nobody else making the decisions in your business, you are in charge.
More Earning Potential
When you can decide how much to charge for your service, it means that you are not being held back by an hourly wage or a yearly salary. As long as you can find customers who are willing to pay the amount you are charging, your earning potential could be unlimited.
Variety
They say variety is the spice of life – self-employed people can decide who they want to work with and what they want to do. This opportunity to have customers from a variety of different backgrounds adds variety – as does performing different tasks or selling different products. Depending on the nature of your chosen self-employed business, you can increase the variety of your working day and reduce the potential for boredom.
Tax Benefits
As a self-employed person, you can claim tax relief and benefits on your business income, like travel expenses (mileage, fuel and public transport), getting money off utility bills and other expenses.
Choose Your Location
Where do you want to operate your business? A self-employed person can relocate to a new city, or even to a new country much more easily than someone who is employed. Also, your working environment is almost entirely up to you. You can work from home, from a coworking space, or you can rent a salon, an office or even a warehouse – you have flexibility.
Work in a Business You Love
The most successful businesses are built from passion and enthusiasm. Self-employed people can take the opportunity to work every day in a business that they love. Complete job satisfaction – guaranteed.
Drawbacks of Self-Employment
No Employee Benefits
If you are moving from an employed position to being self-employed, there are several things that you will have to give up, including certain employment benefits like:
Sick pay Paid holidays Company car Pension contributions
Less Job Security
Without a salaried position, your income is tied to the amount of profit your business can make. If you have a dry spell or lose a key client, you might not have enough of an income to pay your bills. Depending on the area in which you work, this can make self-employment riskier.
Record-Keeping and Books
A self-employed person is responsible for payroll, HR and finance for their business. You need to keep hold of receipts, create invoices and manage the books for your company. This also means paying tax, National Insurance and Self-Employment Contributions Act (SECA) tax. If this is an area in which you are not confident, you might need to hire an accountant.
Start-Up Costs
The costs of starting up on your own will depend on the type of business, but there is always some form of payment needed to start a business. You may need to apply for funding or a loan to cover those costs.
Work-Life Balance
While the idea of a better work-life balance might be a factor in becoming self-employed, the reality for a lot of business owners is that a lot more time is spent working than not. Whether working on the business in terms of marketing or behind-the-scenes administration, or completing services or selling products, getting the right mix between work and life is difficult.
Responsibility
At the end of the day, the freedom that comes from being a self-employed business owner also comes with the responsibility that everything is on you. You are ultimately responsible for the success or failure of your business – and when you combine this responsibility with a family or other commitments, it could be an expensive problem if it all goes wrong.
How to Go Self-Employed
Make a Business Plan
There are several reasons why a strong business plan will help with your self-employed business. Whether you are based in the US or the UK, your business plan will be the starting point and something to refer to as your business grows and develops. Your business plan might include the following:
Market research – What are your competitors doing? How much are they charging and who are they targeting? Are there any areas in the market which they aren’t addressing that you could exploit as a unique selling point? Financial projections – Have a good idea about how much you can (realistically) make in the first year of business and beyond – with evidence where possible. This will help if you are looking for funding or approaching a bank for a business loan. Strengths and weaknesses – Where is your business particularly strong? What weaknesses do you have and how can you counteract these? For example, you may be highly skilled in your trade, but not be strong on the administration side, so you may consider employing an assistant.
Check Whether You Need a License
Different business types may require further education and/or licensing to operate. Licensing laws for businesses vary from country to country, and even from state to state, so make sure you understand the laws in your area.
Licensing in the UK
For certain business types in the UK (like selling alcohol, offering healthcare or medical services, or offering childcare services) you might need to be licensed by a relevant authority. It is usually simple to find out if you need a license for your business and whom you need to register by checking online. Your business plan should include details of the licensing requirements that you need to meet. If you are unsure or unclear, it is always worth speaking to a local business in the same sector to find out.
Licensing in the US
You might need a specific business license if you have what is defined by the Small Business Authority (SBA) as a ‘professional business’. These are often roles that need specific education and a license, such as accounting or legal services, real estate, anything agriculture-related or to do with fish or wildlife, as well as TV or radio broadcasting. Licensing in the US can also be based on location – if you are licensed to perform a service or sell a certain product in one state, it does not immediately follow that you can do the same in other states.
Register as Self-Employed
You will need to let your government know that you are self-employed whether you are in the US or the UK, and the process is slightly different in each country:
Register as Self-Employed in the UK
Firstly, you need to decide which type of business you are running. If you are creating a limited company – which you will be the director of – you will need to register with HMRC and Companies House. For most people beginning as self-employed in the UK, setting up as a sole trader is the best way to start a business. Sole traders and their businesses have no financial distinction between the business and the owner. Owners can keep all the business profits after tax but are also personally responsible for the finances of the business. Once you have decided on your business structure, you need to let HMRC know that you are self-employed. After registering your business, you will receive a Unique Taxpayer Reference (UTR) that you will use to complete a self-assessment tax return. You will then be responsible for paying any tax that is due, as well as Class 2 and 4 National Insurance contributions (if applicable). You need to let HMRC know about your business by October 5 of the second tax year that the business is operating (the tax year runs from April 6 until April 5) or face a fine. You can register via the HMRC website.
Register as Self-Employed in the US
In the US, a self-employed person is a sole proprietor by default. In other words, they alone are solely responsible for the business (no business partners). A sole proprietor or partnership might be the simplest form of business structure, with limited interaction with the government, but you will be financially responsible for the business as it is considered an extension of you. Your business taxes will be filed as part of your personal tax return. If you are looking for more protection, and a distinct separation of the financial aspect of you and your business, there are two business structures to consider:
Corporation – A corporation is owned by shareholders and controlled by a board of directors. There are legal requirements regarding reporting of the business, including tax forms, employment documentation and minutes of board and shareholder meetings. LLC – The LLC offers a simpler version of a corporation, with fewer legal requirements, but with the valuable separation of personal and business financials. The best thing about starting a business as an LLC is that it can grow in complexity as the business develops, taking on more of the legal requirements of a corporation as more people are employed and so on.
Registering as a self-employed business is completed by applying for your EIN (Federal Employer Identification Number). This number is used for the tax administration of your business and if you do not have one, your personal Social Security number will be used instead.
Keep Financial Records
The key to effective business finances is definitely organization – whether you’re in the US or the UK. Filing tax returns and ensuring that you are paying the correct amount of tax and other contributions is only possible with careful record-keeping.
Business Finance Considerations in the UK
Deciding how best to keep track of your business spending and income is a personal choice, but it is always a good idea to open a business bank account to make it simple. If all your business-related transactions happen in one place, your financial year-end and the associated tax return will be much easier. Some people prefer to keep a record of their business finances on a spreadsheet, and many business bank accounts offer help with bookkeeping – from estimating your tax liability to allowing you to snap and upload receipts. In some cases, accounting software might be a good investment, and for others, employing an accountant is a great idea. You must keep track of everything finance-related in your business, however you choose to do it. In general, a sole trader needs to keep the following records for at least five years:
All sales and income All business expenses VAT records – if you are registered for VAT – find out more PAYE records – if you have employees Any personal income
There are other financial considerations that are important for the self-employed, including insurance and pensions. Businesses should consider professional indemnity insurance as well as public liability insurance, and if you are employing staff, you will need employer’s liability insurance. You will no longer have a company pension or be receiving an employer’s pension contributions, so it might be worth finding a good personal pension and making contributions yourself. Some pensions allow you to move your existing pension(s) over, and any payments you make into a pension will attract government funding in the form of tax relief.
Business Finance Considerations in the US
As with the UK, good record-keeping is particularly important to remain compliant. This can be achieved using accounting software, through a business bank account or by employing an accountant. The documentation that you need to keep records of – and for how long – is governed by the IRS. The following records need to be kept:
Business income Receipts Inventory Expenses Assets Employment records Tax returns from previous tax years
Tax reporting in the US depends on the way your business is structured. A corporation is based on a ‘double taxation’ model – the business income is taxed, and the salaries and dividends paid to employees are also taxed – with separate tax returns completed. For those who decide to be either a sole proprietor, a partnership or an LLC, tax returns are completed all at once with what is known as ‘pass through’ taxation. In this case, the personal and business income is reported on the same tax return (in different sections). The benefit of using pass-through taxation is that there is more of an opportunity for tax deductions. There are several general business expenses that could be tax-deductible, including:
Travel expenses Home-office expenses Business equipment Legal costs
Market Your Business
A business cannot survive without customers, whether you are selling a product or a service. Marketing a business in the US and the UK will look mostly the same and will depend on the type of business. When you have a business name, you will also want to design a logo and your brand. This will be used on things like business cards, headed paper, social media and your website. You want to be instantly recognizable, and unless you are a confident designer, you may consider outsourcing your logo creation to a specialist. You can get out there virtually using social media, build a website to be found in online searches, and even consider creating physical promotional material (maybe a maildrop or posters in a local shop).
Have a Real/Virtual Opening Event
The launch of your business is an important time, but the way you orchestrate it will depend on the type of business. You might want to offer an introductory discount, a loyalty scheme or just have a bit of a party. This is easier if you have physical premises, but you can organize an online party instead.
Get Your First Client
That first client is perhaps the real start of your business. Getting your first customer to sign on the dotted line might be a struggle, but there are a few things you can do to make it happen:
Word of Mouth
If you have already been performing the role that your self-employment is based on, personal recommendations can be a great way to find paying clients. This might have been a customer when you were employed, or a friend or family member for whom you provided a service before you were self-employed.
Network
Being self-employed can be a lonely pursuit, especially if you are a sole trader or a sole proprietor. You don’t have to work alone, though, and networking events are not only a great way to meet new people, but they can also provide warm leads for your business through qualified referrals.
Be Where Your Customers Are
Whether your customers are in Facebook groups or LinkedIn, or in a supermarket or a mall, being present with them and interesting where you can is important. You might choose to put up posters in shops or to answer industry-related questions online.
Website and SEO
Customers will not choose you if they cannot find you – so ensuring that your website is completely up to date as well as being simple to navigate is important. To be found in searches, it’s important to apply search engine optimization (SEO) techniques too. An important consideration before you start working with your customers, especially in a service-based business, is a contract. Make sure that you have a contract that details the work to be completed, the time frame it should be completed in (where relevant) and the payment schedule. You can sometimes create a good contract from a template, but it is always worth asking a lawyer to check it to make sure it is legally binding and will protect you if there are any problems.
Tips for Being Self-Employed
Becoming self-employed can be a major change to your working life, but you can make the most of the opportunity with careful planning and by staying motivated. The following tips will ensure that you make the most of your business:
Stick to the plan – Your business plan will set out all the things you need to consider when launching your business, but it should also contain financial projections for the future. You can use this plan to ensure that you remain on track with all your decisions. Marketing – A regular flow of customers (and income) arises from regular, effective marketing and maintaining brand awareness in potential clients. Priming the pump with regular marketing – even when you are busy – makes it easier to avoid dry spells or risking income if a regular client stops needing your services, for example. Find the right pricing – The idea that you can set your own pricing can make some people charge less than they are worth – or go the other way and set prices far higher than their customers would be comfortable paying. Finding the right pricing, and increasing when necessary, is a personal choice and a delicate balance between being affordable for customers but still earning enough to pay your bills and make a profit. Take time off – When you are self-employed and responsible for the business, taking time off might seem counterproductive, but you run the risk of burnout if you do not take time for yourself. Make use of quieter periods, take lunch breaks and ensure that you are maintaining a good work-life balance for your own physical and mental health. Get help where you need it – Although you might want to be in complete control of every facet of your business, it makes sense to get help for areas where you are less of an expert. You can ask for advice to complete tasks like admin and accounts for yourself, or you can make the most of your time by outsourcing – perhaps to another self-employed person. This can help ensure that you aren’t spending hours on behind-the-scenes work when you could be earning income. Put money aside – While a healthy income is exciting, it is always a good idea to put money aside to ensure that you can cover your tax liabilities, pension contributions and any unforeseen emergencies. The amount you need for this will depend entirely on your business income and expenses. Consider what happens when you are sick – If you are unable to work due to an accident or illness, what is your contingency plan? Do you have people available who can take over your client workload to avoid a gap in service, or will you have to put the business on hiatus? Can you afford to pay yourself even if you aren’t physically able to work?
Final Thoughts
Being self-employed is a dream role for many of us. The freedom to choose when, where and how to work, what to offer and who to work with gives the self-employed enjoyment and motivation to succeed. Doing the job you love in the way you want, with nobody else to answer to, is a popular lifestyle choice. However, self-employment comes with the reality that you are responsible for every facet of the business, effectively needing to become your own accounts, HR and compliance departments. For some people, this will mean learning new skills or finding competent experts to outsource to. The buck stops with you as the business owner when you are self-employed. All the success – and the potential failure – is your responsibility.
