Over 15 years ago I decided to become self-employed IT Consultant. I was already a consultant for 5 years before that so becoming self-employed seemed the next logical step to me. At that time, I had written a word document that described the steps I took to setup my consulting business. Over the years, I shared this document with many people and asked them to update it and share it back with me. If you are considering self-employment I want to share these resources with you. I live in Minnesota so some of the information may not apply to you.
The very first decision you need to make is what type of legal entity you need to setup for your business. Here are some options:
LLC’s have fewer paperwork requirements and are easier to manage as compared with S. Corporation. Your circumstances may vary so this is one of the first decision you need to make. You may want to consult your Certified Public Accountant to determine which option is best for you.
Name of your Legal Entity
Once you have decided the type of legal entity you need to create you will need to select its name. Most businesses have a website so you may start with finding out if a domain name is still available.
You website address is also known as your domain name. You can check if a domain name is still available from any website registrar like GoDaddy. https://www.godaddy.com/
Legal Entity Name
Before you purchase your domain name you need to make sure that the name is available in the state where you are forming the legal entity. Most states have business information lookup website you can use.
In Minnesota, you can l do a name search at https://mblsportal.sos.state.mn.us/
Federal Tax Identification Number
Every Legal entity is required to have a Federal Tax Identification Number. You can apply for it online: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online
State Tax Identification Number
Most states require you to get a state tax identification number. For the state of Minnesota, you can get a tax identification number here: http://www.revenue.state.mn.us/businesses/withholding/Pages/HowdoIgetaMinnesotawithholdingtaxIDnumber.aspx
State Unemployment ID
You will also need to setup an account with your state unemployment office. In Minnesota you can open your account here:
You will need to open a dedicated business checking account for your business. You will need to have Federal TIN before you can open a business checking account. You may also want to open a business savings account.
You can look at http://www.bankrate.com to find a bank that will meet your needs.
When opening your bank account you may also want to apply for a credit and debit cards. Always charge your business related expenses on your business credit card. This makes it easier to do your bookkeeping.
I found Costco to be one of the least expensive places to print business checks.
Certified Pubic Accountant
Business taxes are different than personal taxes so it may be worthwhile to find a reputable Certified Public Accountant(CPA) to help you with your business Taxes
In addition, to finding a CPA you also need to determine how you will keep track of your business related transactions. Most commonly used business accounting software is QuickBooks. I used QuickBooks for many years. For the past 1.5 years, I have started using a service called Xero (http://www.xero.com ). They have an application for IPhone along with a website. I also evaluated Freshbooks but I chose Xero as they had double entry accounting which is helpful for business related accounting. Xero does offer payroll service in some of the states in the US. They currently don’t support a payroll service in Minnesota. Xero was an easy choice because they were inexpensive, they automatically downloaded banking and credit card transactions, allowed me to give access to the books to my accountant, partners, and their mobile application allowed uploading receipts. They also had a large number of integrations with other services. Even their service levels could be adjusted in the middle of the month to save money on their service charges.
I have always used a third party payroll provider to do my payroll and all the associated filings. The cost of payroll can vary a lot. The majority of payroll services are providing a similar type of services but they reserve the right to charge you exorbitant fees to prey upon your ignorance.
I currently use a service called Gusto (http://www.gusto.com ). They had lower fees than most other payroll providers, they allowed me to run an unlimited amount of payrolls every month, they did all the quarterly filings and provided W2 every year for no additional cost.
I have seen others use these types of services for payroll:
- Wells Fargo Payroll
- Sure Payroll
- Use and accountant
- Do your own payroll and business filings
When you are self-employed you will be pay self-employment taxes. If you have a payroll provider you will not have to do anything else but you may still want to read about self-employment taxes here:
Time Management Software
Over the years, I have used a variety of methods to keep track of my time to bill my clients. If you have more than one clients I highly recommend Harvest App. They have the web and mobile applications. They are super easy to use and inexpensive. You can learn more about Harvest app here: https://www.getharvest.com
In addition to looking at ease of use, cost and features one other criterion you should use while selecting an application are integration. In my case, I chose Xero, Harvest, and Gusto. All of them integrate well. I can keep track of my time in Harvest and the invoices from Harvest are automatically transferred into Xero. I use Gusto for payroll and the transactions automatically flow into Xero. Xero automatically downloads the transactions from my bank accounts and credit cards.
Workers Comp Insurance
If you are self-employed your state will most likely require you to purchase workers comp insurance. Since you are working for yourself you are not allowed to file a worker comp claim against yourself but you will still be required to purchase workers comp insurance.
I have been purchasing my workers comp insurance from State Farm. Their prices seemed reasonable to me.
Commercial General Liability Insurance
If you are signing contracts with your clients you will be required to purchase Commercial General Liability Insurance. Most of the time my clients require 1 to 2 Million dollar General Liability insurance policy. I currently use State Farm for my general liability insurance. They were cheaper than most other providers.
Professional Liability Insurance
There have been times when I was asked to purchase Professional Liability Insurance. This is typically a lot more expensive than General Liability Insurance. I don’t have a recommendation for a specific provider. You should try to avoid an annual contract for your insurance. Pay your premium monthly so you can cancel this policy if it is no longer necessary.
If you use your car for a business related activity you will be able to charge some of these expenses to your business. You should talk with your CPA to determine the option that works best for you. Here are a few options:
1. Purchase or Lease the car for your business
2. Use your personal car and keep track of miles you are driving for business.
Mileage Tracking App
I recommend MileIQ https://dashboard.mileiq.com application as it makes it super easy to keep track of business-related driving.
If your spouse is employed your best bet is to get your Health Insurance benefits from her employer. This may be less expensive than purchasing health insurance in the open market.
Even if your spouse does not work you will be able to purchase quality health insurance as a result of Obamacare. You can shop for plans here: https://www.healthcare.gov/
I highly recommend purchasing a quality disability insurance. There are many types of disability insurance policies and options. Disability insurance can expensive so you need to do your research. Your cost of insurance goes up as you get older. I recommend working with an independent agent and purchase a disability insurance policy that will meet your needs. I purchased my disability insurance from Guardian. They are used by physicians and IT consultants I know. I purchased my disability insurance more than 10 years ago so I don’t remember all the features I looked for but here are a few things to keep in mind:
- Select a Policy that allows you to define your “Owner Occupation”
- Cost of Living Adjustment Rider is worth pay for
- Make sure your disability insurance kicks in after your employer based short term disability stops
- Since you are paying your disability insurance premium with after tax dollars you will get payments that will not be taxable.
One of the best parts of being self-employed is to be able to contribute more to your retirement. If your self-employment income varies greatly you have the option not make any payments into your retirement plan until the 4th Quarter of calendar year. A few different type of retirement plans is available for self-employed folks. Two of the best choices are:
Both of them don’t require a lot of paperwork. I like Solo 401K more because it allows me to contribute more per year as compared with SEP Plan. There are two types of contribution in a Solo 401K Plan:
- Employee 401K Contribution: For 2015 an employee can defer $18000 of their income into their Solo 401K plan
- Employer 401K Contribution: Employer can contribute up to 25% of your annual income to your 401K.
The total annual contribution into a Solo 401K plan for participants 50 years and younger in 2015 cannot exceed $53000
IRS website provides a good overview of these plans: https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
There are a large number of financial institutions that offer Solo 401K plans. Here are a few good options:
I have used all three but my favorite is Vanguard because of their low costs.
You will most likely need business cards and letterheads. There are a large number of inexpensive choices available. Here are two options worth considering:
Messaging and Collaboration
Cloud Software as a Service(SAAS) offerings will be your best bet. They are inexpensive, don’t require large upfront investment, easy to setup and can grow with your needs.
Office 365 is a SAAS is by far my favorite service for messaging and collaboration. They have plans starting as low as $5 per employee per month and it includes:
- SharePoint Online for Collaboration
- Skype for Communication
- One Drive for secure file exchange.
Office 365 allows you to host a public website but they are deprecating this feature. There are many great options for hosting your public facing website. Some of these are:
Content Management System
There are many great options here as well. WordPress is by far one of the most popular content management systems. There are dedicated WordPress hosting providers. More technical folks may install WordPress, MySQL in a VM for most of you may be better off selecting a provider that spins up a website for you and allows you to manage your content.
Customer Relationship Management
This software helps businesses manage customer data and customer interaction, access business information, automate sales, marketing and customer support and also manage employee, vendor and partner relationships. In the past CRM software was primarily used by larger enterprises. With the advent of Software as Service applications now any sized business can use this type of software. Two of the best CRM products are:
- Sales Force
- Microsoft CRM Online
Both of them are easy to set up, require no upfront investment and will grow as your business grows.
Once you are self-employed your continued employment will depend on your brand and your network. You will find numerous resources on the web that will cover this topic. I will share a few suggestions:
- Leverage Social Media: Twitter, LinkedIn, and SlideShare
- Join professional organizations to connect with your peers
- Participate in Meetups and local events
- Plan to spend 20% of time training and business development
- Participate in the relevant communities like StackExchange for developers
- Blog consistently and publish it in LinkedIn, personal/business website
- Find a Mentor
- Give back and help others
I hope you found some of these resources helpful. I wish you the very best in your self-employment journey.