Self-Employment

CONSIDERATIONS IN SELF-EMPLOYMENT

Self-employed individuals as a whole tend to work longer (an additional 17.5 hours per week, according to one study) and harder than their colleagues who are organizationally employed. Moreover, self-employed people often operate under uncertain payment schedules and must make outlays from personal earnings for insurance and retirement. In addition, their salaries and assets are dependent on their work contributions in a more intimate way than are those of their colleagues. The entrepreneurial role is also often more physically and psychologically stressful due to the investments in energy the jobs demand.

Isolation and Networking

Isolation often proves to be an important source of psychological strain for self-employed individuals. The environment of the typical self-employed individual is quite different from the corporate environment where many professionals gain their experience. This is one reason contact with supportive colleagues becomes crucial. Mentors can provide advice regarding business aspects of a new business owner's operation. Trade and professional organizations can be an excellent way to establish contacts with peers. Tenacity in networking has been cited as a key to survival for business owners, some of whom maintain databases of thousands of contacts. These contacts are also vital in referring clients and providing market information. The role of the contact is made more important as the self-employed individual typically has no staff for marketing support.

It is difficult to exaggerate the importance of referrals to the typical independent professional. Since relationships are so vital, one must exercise the utmost delicacy in terminating employment with one's former employer or turning down a job. One's former employer can even become a good client, besides providing valuable referrals. When turning down clients, the self-employed person can protect those relationships by making referrals or even subcontracting to other colleagues in their network. Provided the work done is of quality, this can strengthen one's reputation as a purveyor of talent—whether one's own or an associate's. When the client calls back with a more appropriate assignment, the contractor has the choice of the business.

As they begin their enterprises, many self-employed individuals feel compelled to accept a variety of assignments due to sheer scarcity of work. However, specialization can help ensure their long-term survival. For one thing, corporate clients can often find a generalist's abilities in-house. Also, specialization may allow professionals to broaden their client base geographically, thus freeing their fortunes from fluctuations in the local economy. These factors can enable the specialist to earn higher fees and work more consistently. Paradoxically, one's work as a specialist can garner referrals outside one's specialty, so specialization might not be as limiting as a strict definition would imply. The self-employed should be cautioned against changing their specialties too often, as this can confuse clients and make their own operations inefficient.

Tax Implications

Self-employment entails both tax advantages and disadvantages. In terms of advantages, individuals who are classified as independent contractors can deduct work-related expenses for tax purposes. In addition, independent contractors often qualify for tax deductions for using part of their home as an office and for salaries paid to other people, while employees usually do not. Independent contractors also can claim significant deductions for medical insurance, transportation, office supplies, and a host of other operating costs.

The main tax disadvantage for self-employed persons is that they must pay the full amount of Social Security and Medicare taxes themselves and make quarterly estimated tax payments to the federal government. For those who are organizationally employed, the employer withholds income taxes and pays half of their Social Security and Medicare taxes. Although the payment of Social Security and Medicare increases the tax burden of self-employed individuals, these amounts are based on net, rather than gross, earnings. For this reason, it is essential for small business owners to keep an accurate record of expenses. Self-employed individuals also file quarterly taxes.

INCREASING THE CHANCE OF SUCCESS IN SELF-EMPLOYMENT

Self-employment, whether by choice or necessity, does not guarantee success. In fact, nearly two out of every three new businesses fail within five years. But the chances of success can be improved with careful planning, prior savings, and a sound marketing strategy. It may also be helpful to make the transition to full-time self-employment gradually. As already mentioned, one option is to "moonlight" on the new job first. Those planning home-based businesses should also take time to prepare family members for the changes that will take place.

Some prospective new business owners also try to establish one stable client relationship that will provide steady income during the search for additional clients. A particularly attractive option may be an individual's former employer, who will already be familiar with the would-be entrepreneur's reputation and abilities. For this relationship to succeed, however, it is important that the individual use an honest and professional approach when severing ties with their employer. Of course, your employer may not react warmly to such an arrangement if your new business is a potential threat to its own financial fortunes.

Although one stable client relationship can help establish a new business, it is also important that the self-employed person develop a marketing strategy to find new clients and grow. Many new business owners become so busy serving their existing clients that they do not devote sufficient time to marketing. Sending out brochures, networking, and joining professional organizations are a few possible marketing strategies.

Finally, self-employed individuals should take an organized approach to all business activities in order to increase their chances of success. A business plan, however rudimentary, is often helpful to set the path ahead with some consciousness and formality. A plan can help a self-employed person evaluate strategies, plan expenditures, and motivate him or herself. It is also important to keep careful records of income and expenses, set aside money for taxes, and insist upon contracts for all work performed.

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