Working for yourself

The first few years of working for yourself means spending time figuring out financial and legal specifics. It may be a pain, but it’s worth it in the long run.

In This Checklist

Budget for your business.
Decide to use your name or a business name.
If you decide on a different business name, file the right paperwork.
Figure out your business address.
Separate your personal bank account from your work account.
Consider an employer identification number.
Track your income and expenses.
Plan ahead for taxes and hire a financial professional.
Get necessary licenses and permits.
Get insurance for yourself and your business.

Ten steps to take to start working for yourself

This checklist is for independent or freelance workers who don’t plan on having employees. If you're looking for small business resources, visit the Small Business Administration at www.sba.gov.

1. Budget for your business.

If you’re working for yourself part- or full-time, you need enough set aside to cover any supplies, commuting expenses, living expenses or other start-up costs associated with going out on your own. If you're taking out a business loan or borrowing from another source, have a plan for exactly how you'll pay it back. Make sure you have enough you need to cover any expenses and loans that you might expect — and a little extra, just in case.

See also: Self-employment

2. Decide to use your name or a business name.

If you don’t want to do business under your own name, come up with a business name. You need to check if the name is available by doing a quick web search for both the name and the URL, if you want to use the name for a website. To make sure someone else doesn't own your business name, go to the U.S. Patent andTrademark Office website:

U.S. Patent and Trademark Office: www.uspto.gov

You may also want to do an Internet search of the name you want to use to see if there might be other business already operating under that name. Talk to a lawyer if it seems unclear.

3. If you decide on a different business name, file the right paperwork.

If you don’t want to use your name, you have two basic options: filing a business entity or filing a Doing Business As (DBA). If you’re doing any kind of work that is risky or where you could possibly get sued in the event of a mistake, we recommend you talk with a lawyer about filing as a business entity, like a Limited Liability Corporation or a Sub-chapter S Corporation.

IRS LLC: www.irs.gov/businesses/small/article/0,,id=98277,00.html
IRS S Corporations: www.irs.gov/businesses/small/article/0,,id=98263,00.html

If you just want to use a different name, but you’re doing something that is relatively low-risk, you can file a DBA in your county or state It’s an easy way for an independent worker, called a sole proprietor, to use a business name other than their personal name. If you’re unsure what to do about your name, talk with a lawyer before making any decisions.

4. Figure out your business address.

You will list your address on a lot of documents, so you don’t want to have to make changes. If you work from home or don’t yet have a permanent address, consider using a post office box.

5. Separate your personal bank account from your work account.

Open a checking account at a local bank in the name of your business. This will avoid one of the most common mistakes in sole proprietorships, which is mixing business and personal funds, creating a nightmare scenario for your accounting and record-keeping. If you use your own name, it’s easy to open a bank account.

If you use a DBA, you’ll need to show some paperwork to prove that you filed the DBA in order to open the account. Shop around for the best banking options. Business accounts are usually more expensive than personal ones, but many banks will let you tie the two together for meeting minimums to avoid or reduce monthly fees. Ask about how you can get set up to accept credit card payments, as well as make payments online, if these will be needed for your business.

6. Consider an Employer Identification Number.

A lot of vendors and customers require freelancers and contractors to provide an Employee Identification Number (EIN) or Social Security Number (SSN) to file tax information. An EIN allows you to file all the paperwork without having to give out your SSN. You can learn about filing for one on the Internal Revenue Service (IRS) website.

IRS: www.irs.gov

7. Track your income and expenses.

You will need to track your working hours, your invoices (what you submit to get paid), your expenses and any other costs associated with your work. Some common accounting software packages for doing this are:

These all have a learning curve to get started, but make it much easier to run your business and keep up with taxes. If you’ll have a lot of transactions, you might want to hire a bookkeeper, even if only to get your accounting software set up.

8. Plan ahead for taxes and hire a financial professional.

As your business grows, your taxes will get more complex. Before doing anything else, we recommend you find and work with a trusted Certified Professional Accountant (CPA) or a tax professional to help you manage the complex details. It will be very difficult for you to do it yourself.

After finding a CPA or professional to work with, download a Schedule C from the IRS:

IRS Schedule C: www.irs.gov/instructions/i1040sc/ar01.html

This is the form on which you will report all of your income and expenses for your federal income tax return. You can use this form to understand all the categories of business expenses that you might be able to deduct as part of your tax return.

You also can learn more on IRS Publication 535, Business Expenses:

IRS Publication 535: www.irs.gov/publications/p535/index.html

One common deduction you can take is any funds you put into a small business retirement plan, called a SEP IRA or a solo-401(k) plan. If you work in your home, you might be able to deduct the square footage you use for an office. A CPA can help you learn more about these and all the other deductions out there, that could help you save money on taxes.

IRS SEP IRA: www.irs.gov/retirement/article/0,,id=111419,00.html
IRS 401(k) overview: www.irs.gov/retirement/participant/article/0,,id=151753,00.html

If you make miscellaneous income, meaning your income isn’t taxed, you need to set aside money for taxes and pay quarterly estimated taxes and self-employment tax. Self-employment tax covers Social Security and Medicare payments that an employer normally makes on your behalf. Paying quarterly taxes requires that you know how much you’re earning and what you think you will earn over the course of the year, and how much tax you owe. If you don’t pay quarterly, you risk extra fees and penalties.

You can learn more about estimated taxes on the IRS website and file federal quarterly taxes online through the IRS’ Electronic Federal Tax Payment System (EFTPS):

IRS small businesses: www.irs.gov/businesses/small/article/0,,id=110413,00.html
IRS EFTPS: www.eftps.gov

If your state requires income tax, you can search on your state’s tax bureau to figure out how to pay quarterly state taxes. Because these both can be tricky, we recommend you work with a certified public accountant or tax professional.

See also: Self-employment, Withholding and estimated taxes

9. Get necessary licenses and permits.

Depending on your business, you may need to take out a business license or pay for some type of a permit. Some locations even require one just to work out of your home as a consultant. This varies a lot by your type of business and where you live, so look at your local Small Business Administration for more information. You can get general information on the U.S. Small Business Administration website: www.sba.gov.

We recommend talking with a trusted lawyer local to you to help you figure out what you need.

10. Get insurance for yourself and your business.

If you don’t have health or life insurance through your spouse or some other source, you need to pay for it yourself. You can talk to a health agent in your area to discuss the options (the prices are the same whether you use an agent or not). Health insurance is critical. Life insurance is more important if you have a spouse or family that depends on you for their financial support.

Your business also may need insurance or liability insurance just to operate, depending on what kind of work you do. The more risk that is involved — risk of personal injury or technical/financial problems, for example — the more you may want to seek liability coverage. If you rent office space, you may need a general premises liability policy, which is usually cheap, but a condition of the lease. If you use a car as part of your work, look into an auto insurance policy for that, too. We recommend working with legal and financial professionals to work out all these details.