Millions of Americans are taking a step back and rethinking their work lives amid the “Great Resignation” and ongoing coronavirus pandemic.
A record 4.5 million people quit their jobs In November, according to data from the U.S. Department of Labor, continuing a trend of workers leaving employers in droves.
Some of those workers are deciding to strike out on their own and freelance or start their own businesses. In December, there were roughly 9.2 million unincorporated self-employed individuals in the country, according to the U.S. Bureau of Labor Statistics.
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This year through December, Americans have applied for more than 5 million federal Tax Identification Numbers needed to register new businesses, according to data from the U.S. Census Bureau. That’s already outpaced the roughly 4.3 million applications for new businesses for all of 2020, as well as the 3.5 million filed in 2019.
Deciding to leave a steady job to freelance or start your own business generally isn’t something you should do without proper planning. Here’s what experts recommend before, during and after transitioning out of a 9-to-5 job.
“If you’re thinking about making the move, I always encourage people do to do it the right way,” said Sheneya Wilson, CPA and founder of Fola Financial in New York.
Before you take the leap
Before striking out on your own, it’s a good idea to first set a business plan for yourself and your new endeavor, according to Kevin Lao, a certified financial planner and founder of Imagine Financial Security in St. Augustine, Florida.
That means writing out in simple language what the goal of your business is, who your audience is and what you’re hoping to charge, he said.
“It’s very hard to be successful if you don’t have a very compelling ‘why,'” Lao said.
You may also want to identify multiple potential income streams for yourself, said Mandi Woodruff-Santos, a personal finance expert and executive producer and co-host of the podcast Brown Ambition.
From there, you should also be open to taking on new work or revenue streams as you see fit, she said.
Once you have a vision of your next steps as a solo entrepreneur, you want to make sure you have finances in place to sustain yourself while you build up business.
The exact amount will depend on your risk tolerance and how quickly you think you can turn a profit, said Lao, adding that when he started his own financial firm, he had 12 months of living expenses and three months of business expenses saved.
Business expenses include things like the cost of establishing an entity such a limited liability company (LLC) if necessary, and paying for equipment and services like bookkeeping software or buying a new computer. You may also need to buy your own health insurance and set up your own plan for retirement savings, benefits you’d generally get through an employer.
One thing that can be helpful is to set an income goal for yourself that can help you pace your work each month and make sure you’re covering your expenses.
If you aren’t quite ready to take the leap, there are other options, such as launching your business as a side-hustle with the hopes of building it up to a full-time income source later.
When you’re just starting out
There are even more things to consider once you have taken the leap and gone solo.
The first is that you need to stay organized with your finances and be clear about what’s a personal expense versus a business one.
“You want to start creating separation between you and your businesses,” said Wilson, adding that the easiest way to do this is generally to have a different bank account and credit or debit card for your business expenses.
Staying organized will help you with proper tax planning, including maximizing deductions, she added. That’s because small business owners typically have one of the highest effective overall tax rates.
“Knowing that, you should be planning before the year’s over how you can minimize tax liabilities,” she said. This includes knowing what to write off as a business expense as well as what other credits and deductions you’re eligible for.
For instance, people who have freelanced or started businesses this year can take advantage of the home office deduction, a major tax break that’s only available to people who run their own companies from home.
To ensure you’re setting everything up correctly, it makes sense to have a few professionals on speed dial. Wilson recommends having an accountant or tax preparer who can help you file your taxes correctly.
She also recommends having a good attorney, depending on the type of business you’re launching.
In addition, it is helpful to have the advice of a financial planner who can help you with your own budget and financial goals as you transition into freelance life, said Woodruff-Santos.
Benefits of freelance life
Once you’ve made the decision to go freelance or launch your own business, don’t forget to treat it as any other career move.
“I announced it like people announce that they got engaged or they had a baby,” said Woodruff-Santos, adding it can help drum up potential business in your current network.
She also recommends keeping in touch with a network of other freelancers, small business owners or entrepreneurs who do similar work, in order to have a professional group to lean on.