Money-Smart Solopreneur. Laura D. Adams
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“Will I need a business license?” When it comes to being self-employed, there seem to be more questions than answers. That confusion can easily discourage you from striking out on your own.
Since I began hosting the popular weekly podcast Money Girl in 2008 and published my award-winning book Money Girl’s Smart Moves to Grow Rich in 2011, helping listeners and readers like you get answers to personal and business finance questions has been an important part of my life. My mission is to make sure you get the knowledge, resources, and inspiration you need to manage money with confidence and create a richer life.
Money-Smart Solopreneur is for anyone who is or wants to be self-employed. It will explain what you should and shouldn’t do in plain language. You’ll learn how to protect your finances as you start a business and outline a step-by-step process for getting your venture off the ground. We cover how to decide what to charge your clients, manage money when your income is unpredictable, choose the best tools, avoid common business mistakes, pay taxes, run a homebased business, and build a solid, self-employed benefits package.
If you’re an artist, consultant, freelancer, or on-demand worker who earns money on the side, you may not even realize you’re already a business owner. If you have a solo business, you’re in great company. According to the SBA, there were more than 30.7 million small businesses in the U.S. in 2019. That’s a lot of entrepreneurs! But what’s interesting is that 85 percent, or about 26 million of them, have no employees. The nickname that’s caught on for these one-person ventures is solopreneur.
Many people think you can’t start a business unless you went to business school or have an advanced degree. I have an MBA and can promise you my formal education hasn’t been required to run my solo business. I know many other successful solopreneurs who have no formal business education at all.
So it doesn’t matter what type of work you do or how much business experience or education you have. I’m glad you’re reading this book. Your questions will get answered here. I can’t promise that being a solopreneur will be easy, but I can tell you from decades of personal experience that it’s worth it.
Whether you plan to work for yourself full time or keep your day job and build a solo business on the side, the easy-to-digest information in this book will set you up for success. You’ll have the knowledge you need to help make critical decisions and create a business that works for you.
You have a lot to offer. It’s never too late to put your skills, ambition, knowledge, and relationships into an exciting new venture. And you’ll have the best boss ever: you.
PART I
BECOMING YOUR OWN BOSS
(Even Part Time)
CHAPTER 1
KNOWING WHAT TO CALL YOURSELF
When you begin your entrepreneurial journey, one of the first questions you often encounter is what to call yourself. There are many terms for self-employment, and they’re frequently used interchangeably. Are you a solopreneur, freelancer, consultant, or something else? And does your choice make a difference to the government or your customers and clients?
First, let’s address this question from the perspective of your customers and clients. I believe that what you call yourself can affect their perception of you.
Every profession has its own specialized vocabulary and jargon. The label you give your work and your business when you talk about it, describe it on a website, or create an invoice should reflect your industry’s standards.
For instance, if other people in the same line of work call themselves consultants but you call yourself a freelancer, your title may not carry the same weight. If companies in your industry are used to working with freelancers but you call yourself a founder, that could mistakenly send the message that you’re only focused on innovation or building a large company and are not available to do their work.
So call yourself whatever your clients are accustomed to, which will ultimately give you a leg up. Use the terminology they’ll understand and value.
You might also wonder if what you call yourself affects your financial issues, such as taxes. For the most part, it doesn’t.
The IRS classifies your earned income in two ways:
1. You work for someone who pays you.
2. You own a business.
The first type is known as W-2 income, which you receive from an employer. The second is any trade or activity you do to make a profit. In other words, you can be a W-2 worker, you can run a business, or you can do both at the same time. It doesn’t matter what you call yourself or your business—the income it generates is taxed the same by the IRS.
We’ll discuss paying taxes on your business income more in Chapter 12. You’ll learn the various taxes that every solopreneur must pay, which tax forms to use, and how to comply with IRS rules so you stay out of trouble.
What Is a W-2?
The IRS requires employers to report wages paid to employees on Form W-2, Wage and Tax Statement, each year. Employers must send workers a copy of their W-2 by the end of January for income paid during the prior tax year.
If you’ve had a job, you had to complete Form W-4, Employee’s Withholding Certificate, before getting your first paycheck. The W-4 indicates to your employer how much money to withhold from your paychecks for federal taxes. Depending on where you live, you may also have forms to complete for state and local tax withholding.
Accurately completing a W-4 is important so you have the right amount of taxes taken out of your paycheck throughout the year. Having too little withheld means you could have a big balance due at tax time. Having too much withheld prevents you from having more money in the bank throughout the year. When you receive a tax refund, that means you overpaid taxes during the prior year, and the IRS is giving back what they owe you.
When you earn business income, you don’t receive a W-2, because you don’t have an employer automatically withholding tax from paychecks they give you. However, you’re still responsible for paying the same taxes that employees pay.
The Lexicon of Self-Employment
Let’s break down some common terms for business owners. Getting familiar with them will help you know how to identify yourself and the solo work you’re doing or plan to do.
Business Professional
This is someone whose business activity depends on specialized training or advanced skills, such as a doctor, attorney, accountant, or financial advisor. They may have a local office that’s open to the public and work alone or with hired employees.
Example: Trudy is a licensed real estate professional who works with residential buyers and sellers. She’s affiliated with a local brokerage, where she works and meets clients. Her broker splits commissions with her 50-50 and offers a variety of services, such as training and an office assistant.
Consultant
This is someone who typically was once an employee and has career skills or advanced training that’s valuable to other businesses or individuals. They may work alone or have employees and do consulting full time or on the side in addition to their day job.
Example: Diane used to work as a COO