3 Common Obstacles of Self-Employment (And How to Overcome Them)

by Tom Ewer 5 Minutes

Obstacles to self-employmentAre you currently an employee, but you’ve been contemplating going out on your own?

Do you sit at your desk and think that you could do your job in less time or better if you were self-employed? Or do you want to do something completely different than you do now, but have been held back by the “golden handcuffs” of employee benefits?

Not everyone is born to be an entrepreneur or to be self-employed – odds are if you’re reading this then you are. There are a few different obstacles that prevent folks from going out on their own. Of course there is fear of taking the leap and not wanting unstable or fluctuating income. For a lot of people it boils down to the benefits they get at their current employer and not wanting to give them up. They aren’t sure how or if they could recreate them on their own. They see being an employee as the only way to fulfilling their financial plan – or at least the easiest way.

What if I told you that kind of thinking is wrong? That it doesn’t have to be that way. I can’t guarentee that you’ll make it on your own or that it’ll be easier, but I do know it’s possible providing you have the right things in place. It’s easier now than ever to secure your own health insurance, as one example thanks to ObamaCare. We’ll delve deeper into health insurance, as well as additional obstacles that prevent people from taking the leap – and you’ll be a little more educated on how to overcome them. It might not be as hard as you think!

1. Health Insurance

Health insurance used to be the biggie that kept people working for their current employer when they had health conditions. It used to be that you were underwritten based on your individual health  – thankfully this is no longer the case.

Based on previous legislature, ObamaCare has now been put in effect basically guaranteeing health care for all. You can no longer get denied individual health insurance coverage and your premium is no longer dependent on your existing or previous health conditions. It is more based on the provider you select and the deductible/coinsurance you choose. The higher the deductible and the lower the coinsurance amount (the amount the insurance company is on the hook for versus you), typically the lower your premium.

Dependent on your income and the state you live in, there may also be tax credits to lower your premium. This is a bit more complicated, so I recommend you reach out to an insurance broker or your state’s health care website for more info. Just know it’s no longer as big of an obstacle as it once was and it might not be as expensive as you once thought.

2. Retirement

It can be hard to give up retirement benefits offered by your employer. This could include a match on a 401(k) plan, a pension contributed to on your behalf, an employee stock purchase plan and more. When your employer is giving out free money, you should take it! It can also be helpful to enroll in the plan and have your retirement savings deducted from your paycheck automatically. Out of sight, out of mind.

Not every employer offers a retirement plan though. Even out of all the ones that do, not all of them offer a match. I point this out, because it’s normal to think that every company offers what yours does – but it’s not true.

You can start your own retirement plan. It’s not as hard as you think either. If you’re not already working with a financial professional, seek out a referral from your family or friends. Or set up your own Traditional or Roth IRA online. You can contribute up to $5,500 for 2014 to either option (plus an additional $1,000 per year if you’re over 50). Or talk to your accountant to see if a SEP or Simple IRA makes more sense for your individual situation. My main point is you have to do something. If you’re self-employed, no one will do it for you. You have to take the initiative to save – and you should!

3. Accounting

Taxes are scary when you don’t understand them. They are serious though and shoudn’t be ignored. The IRS has benefited in many ways with all of the technological advancements and they are being provided with all sorts of reports when it comes to whom they should collect taxes from and how much.

It boils down to if you make money, you should expect to pay taxes on it. As an employee, your employer does the withholding (and payment) on your behalf. You fill out a form and based on what exemption you choose, they’ll withhold a portion of your income for payment to the state and federal government for income taxes.

The other benefit of being an employee, is that your employer pays a portion of taxes on your behalf. When you’re on your own, you have to pay self-employment taxes – basically the portion your employer would pay towards Social Security and Medicare are now your responsibility. You do get to deduct them on your return at least.

When you’re self-employed, you can deduct a lot more than when you’re an employee. Legitimate business expenses will serve as tax deductions and bring down your taxable income – if claimed right. Everything from rent to technology and mileage can be deducted, and much more. Make sure to keep records of your expenses!

The key is to develop an accounting method that works for you. It can be as basic as saving physical copies of all of your receipts or you can use some sort of accounting software program. If you haven’t been preparing your own tax return already, I’d suggest that you work with an accountant to help you maximize your deductions and set up a quarterly tax schedule.

Quarterly tax schedules are just payments made to the IRS and your state for estimated income tax payments. You and your accountant can project out your income for the year and based on your other individual circumstances, forecast how much your tax bill will be. Then it’s as simple as dividing by four – as there are four quarters to the year. You’ll have tax payments due on April 15, June 15, September 15 and January 15th of the following year.

You don’t have to pay quarterly tax estimates/payments, but I think it makes sense to. One reason is that it forces you to save to make the payment, rather than spending all of your income. Another reason is that if your tax payments are close, you’ll avoid paying a penalty for not paying them. You’ll for sure lower the penalty by paying something. This could be hundreds of dollars (or more) per year!

Honestly I think taxes are something that trips up a lot of self-employed individuals – especially in the beginning. Have a plan in place from the start by working with an accountant and projecting your income and expenses.

It’s Not Impossible

No longer having benefits can be scary. Needing to secure your own health insurance, retirement plan and pay your own taxes can seem overwhelming. Know that it’s not as confusing or impossible as it seems. Educate yourself, get in touch with people that can help and take the leap into self-employment with a plan. You’ll be happy you made the extra effort in the future.

Are you ready?

Have any of the above three obstacles kept you from taking the leap? If you’ve already taken the leap, how did you resolve them?

Photo Credit: StockMonkeys.com

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by Tom Ewer
Tom Ewer and the WordCandy team have clocked some serious mileage as freelancers, agency employees and even agency owners over the years, and they love sharing their combined expertise here on the Bidsketch blog.