At one time or another, you may have dreamt of starting your own business and becoming your own boss. You may have even considered some potential ideas like starting a new business from the ground up or working as an independent contractor for a large company or maybe even owning a franchise business. But for those who take it one step further and really do pursue their dreams of self-employment, there are details to consider before making the final leap into the challenging and exciting world of self-employment. Check out the list below to understand some of the finer details of working for yourself.
The first is legal. You need to make sure that you register, license or incorporate your name or your business. It would also be a good idea to schedule time with an attorney who has experience dealing with small business owners and understands the legal considerations for self-employment.
Next is income tax. For those who are new to self-employment, its easy to get caught up in the money coming in and forget about paying income taxes. When you worked for someone else, it was their responsibility to take out the appropriate taxes but when you work for yourselfit now becomes your responsibility. Discuss your situation with your tax preparation advisor and find out if you need to pay quarterly, annually or if your write offs and taxes taken out of your spouses paycheck (if that is the case) could possibly cover your share. All business expenses, health insurance payments and retirement savings can contribute to reducing your total federal taxable income.
In addition to income tax, small business owners are also responsible for paying self-employment tax. If you are self-employed, you are responsible for paying federal self-employment tax up to $106,800 (2010 maximum) of your net income (including all income earned from self-employment less all business expenses). The rate is 15.3% and it is for social security benefits. When you work for someone else, the employer pays half the rate. The up side is half of what you pay for this self-employment tax can be used to reduce your total federal taxable income.
Benefits and Insurance are another consideration for those wanting to start their own business. If you are the only employee, you will have to pay for your own benefits unless you are covered from a previous employer or have Medicare. However, if you have employees who work for you, you will have to pay their Social Security (FICA) tax as well the premiums for any benefits you are providing them. Employers today are paying at least $3,000-$4,000 on average per employee for health insurance benefits alone.