Leaving a stable job to freelance or start your own business requires proper planning. During the “Great Resignation” and ongoing coronavirus pandemic, millions of Americans are taking a step back and rethinking their work lives.
According to data from the US Department of Labor, a record 4.5 million people quit their jobs in November, continuing a trend of workers fleeing their employers in droves.
Some of these employees are opting to freelance or start their own businesses. According to the US Bureau of Labor Statistics, there were roughly 9.2 million unincorporated self-employed individuals in the country in December.
According to data from the US Census Bureau, more than 5 million Americans applied for federal Tax Identification Numbers (TINs) needed to register new businesses this year through December. This has already surpassed the roughly 4.3 million new business applications filed in 2020, as well as the 3.5 million filed in 2019.
Leaving a steady job to freelance or start your own business isn’t something you should do without careful consideration. Here’s what experts say you should do before, during, and after you leave your 9-to-5 job.
“I always encourage people to do it the right way if they’re thinking about making the move,” Sheneya Wilson, CPA and founder of Fola Financial in New York, said.
Before you take the plunge, consider the following.
According to Kevin Lao, a certified financial planner and founder of Imagine Financial Security in St. Augustine, Florida, it’s a good idea to create a business plan for yourself and your new venture before going it alone.
He explained that this entails writing down in simple language what your business’s goal is, who your target audience is, and how much you hope to charge.
“If you don’t have a compelling ‘why,’ it’s very difficult to succeed,” Lao said.
Mandi Woodruff-Santos, a personal finance expert and executive producer and co-host of the podcast Brown Ambition, recommends identifying multiple potential income streams for yourself.
She goes on to say that you should be open to taking on new work or revenue streams as you see fit.
Once you’ve mapped out your next steps as a solo entrepreneur, you’ll need to make sure you’ve set aside enough money to support yourself while you grow your business.
The exact amount will depend on your risk tolerance and how quickly you think you can turn a profit, according to Lao, who said he had 12 months of living expenses and three months of business expenses saved when he started his own financial firm.
Expenses for a business include the cost of forming an entity, such as a limited liability company (LLC), and paying for equipment and services, such as bookkeeping software or purchasing a new computer. You may also need to purchase your own health insurance and set up your own retirement savings plan, which is typically provided by your employer.
Setting an income goal for yourself can help you pace your work each month and ensure that you’re covering your expenses.
There are other options if you aren’t ready to take the plunge, such as starting your business as a side hustle and growing it into a full-time income source later.
When you’re just getting started
There are even more factors to consider once you’ve made the decision to go it alone.
The first is that you must keep track of your finances and understand what constitutes a personal versus a business expense.
“You want to start separating yourself from your businesses,” Wilson said, adding that the simplest way to do so is to have a separate bank account and credit or debit card for business expenses.
She went on to say that staying organized will aid you in proper tax planning, including maximizing deductions. Because small business owners have one of the highest effective overall tax rates, this is the case.
“Knowing that, you should be thinking about how you can reduce your tax liabilities before the end of the year,” she advised. This includes understanding what you can deduct as a business expense and what other credits and deductions you may be eligible for.
People who have freelanced or started businesses this year, for example, can take advantage of the home office deduction, a significant tax break available only to people who run their own businesses from home.
It’s a good idea to have a few professionals on speed dial to ensure everything is set up correctly. Wilson advises hiring an accountant or tax preparer to assist you in properly filing your taxes.
Depending on the type of business you’re starting, she also suggests hiring an attorney.
Additionally, as you transition into freelance life, having the advice of a financial planner who can help you with your own budget and financial goals is beneficial, according to Woodruff-Santos.
The advantages of working as a freelancer
Don’t forget to treat going freelance or starting your own business like any other career move once you’ve made the decision.
“I announced it in the same way that people announce getting engaged or having a baby,” Woodruff-Santos said, adding that it can help drum up potential business in your current network.
She also suggests maintaining contact with a network of other freelancers, small business owners, or entrepreneurs who do similar work so that you have a professional support system.
This is because those who start their own businesses don’t have access to office happy hours or other built-in social aspects that come with working for a larger company, and it can be lonely.
She also advises establishing and sticking to professional boundaries, such as deciding how much time you’ll spend on various projects and when you’ll be off the clock.
“Creating a different 9-to-5 job and becoming too monotonous is a mistake,” she said. “I think one of the best things about being a freelancer is that you can vary your schedule.”
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