A Guide to Self-Employment
Advice for recently laid-off workers considering going into business for themselves
By John Tozzi
John Tozzi covers small business for BusinessWeek.com. Before joining BusinessWeek, he worked as a freelance writer and newspaper reporter. He is a graduate of Boston University.
January 23, 2009, 1:07PM EST
If you’ve been laid off into the dismal job market, working for yourself may be the best path out of the unemployment line. But the idea of self-employment can also be daunting if you’re used to a corporate job. Where will you find health care? Can you deduct home office expenses on your taxes? How much should you charge for your work? We break it down here with 20 steps to get you from unemployed to self-employed, with links to in-depth articles on each step.
But now, laid off into a recession and the worst job market in decades—2.6 million Americans lost jobs in 2008, with 524,000 eliminated in December alone—you may be thinking self-employment sounds like the best path out of unemployment. Rather than try to land one of the few open jobs out there, maybe you could work as a freelancer or consultant, at least until the job market recovers. You’re in good company: There were nearly 9 million self-employed workers in December, according to the Bureau of Labor Statistics. But if you’re among the thousands of unemployed now trying to go it alone, where do you start?
First, step back. Decide what your goals are and how freelancing will help you achieve them, says Pamela Slim, author of the Escape From Cubicle Nation blog and a forthcoming book of the same name. “It’s obviously very easy at the point of being laid off to really come from a position of fear and desperation,” she says. Thinking about long-term goals from the start will keep you grounded and help you determine how to proceed. Once you’re clear on your goals, Slim says, you should ask: “What are the specific skills, knowledge, money, resources, information, and contacts [you] need to bring that picture to life?”
There are plenty of nuts-and-bolts concerns that can overwhelm first-time freelancers, especially those who suddenly lost steady jobs. Chief among them is health care. The health insurance system does not accommodate independent workers well. If you can’t get coverage through a spouse’s plan, you can continue your old employer’s plan at your own expense under COBRA. You may also be eligible for group health insurance through a group like New York-based Freelancers Union, which launched a health insurance company last year offering plans in 31 states.
Freelancers Union’s executive director, Sara Horowitz, suggests checking with local chambers of commerce to see if they offer plans for sole proprietors. She also points self-employed workers to local health insurance information on a site run by the Actors’ Fund called Access to Health Insurance/Resources for Care. Whatever option freelancers choose, Horowitz says they should avoid going uninsured for even a month, even if they buy high-deductible plans. “So many states have preexisting-condition clauses. If you go and buy the most catastrophic plan, you will not have a break in coverage—and if you get another plan it will all be counted,” she says.
Another hurdle for any new freelancer is how to land your first gig. Slim suggests looking to former employers, even if you have been downsized. “Many times, strangely, the same companies that lay people off do hire them back on a contract basis,” she says. You can use that first client to show others that you’re capable of delivering value as an independent contractor.
In addition to maintaining ties to your old company, you should prepare to make networking a full-time job. But realize that the people who can help you succeed may be different from the contacts that helped in the corporate world. “Freelancers, it’s kind of an underground culture, and once you tap into it, people know everything about where to go for what,” Horowitz says.
One of the most important referrals you can get is for a good accountant. Knowing what to write off as business expenses can save enough on your tax bill to make hiring an accountant worth it, Horowitz says. Still, be prepared to write hefty checks to the IRS. Since your employer isn’t withholding taxes anymore, you’ll need to pay estimated taxes four times a year. You’re also on the hook for the employer’s contribution to Social Security now. Horowitz says freelancers should set money to pay taxes aside in a separate bank account. “Nobody ever puts away enough,” she says. “That’s the biggest way that people get themselves in a hole.”
Besides paying taxes, finding health care, and landing clients, self-employed workers face another big challenge: motivation. It’s easy to procrastinate when there’s no boss looking over your shoulder. Slim suggests freelancers establish a schedule and put themselves in environments where they know they’ll do their best work, whether that’s having a clean home office, going to a co-working event, or plugging in at the local coffee shop. Regardless, she says, the newly self-employed have a powerful incentive to deliver, particularly in a tough economy: “There’s nothing more motivating than knowing that if you do not complete your work you will not get paid.”
Flip through this slide show for a 20-step checklist for recently laid-off workers considering going into business for themselves.
Step 1: Vet Your Idea
You may be able to do the same thing you did in your old job on a freelance basis—Web designers or accountants, for example, can shift from working for a single employer to serving many clients. But some professionals will need to find new ways to market their job skills in the open market. Make sure you offer something clients need.
Step 2: Get Motivated
For those who have recently suffered the trauma of losing a job, the biggest challenge of self-employment can be getting motivated to work without the structure of a regular workplace. Build routines into your day to keep yourself on track, meet others for coffee to stave off isolation, and start thinking of yourself as a business owner, not an employee.
Step 3: Prepare a Business Plan
Even if you don’t need a formal business plan with benchmarks for growth, you do need to know how much cash you have to bring in to cover expenses. Write this down and be realistic about what you need to earn to make self-employment sustainable.
Step 4: Create a Workspace
Whether it’s a corner of your studio apartment, a basement office, or a local coffee shop, find a place where you can work effectively. Consider attending co-working events to meet other independent workers.
Step 5: Choose a Legal Structure
Many freelancers work as sole proprietors, a default that saves you from having to form a separate entity. But those who need to limit their personal liability may want to form limited liability companies or S-corporations.
Step 6: Pick a Name
Not every freelance business needs a name distinct from its owner. But choosing a name can help you define your business and let others know that you’re serious about it.
Step 7: Get Health Insurance
The insurance system isn’t friendly to independent workers, but there are options to get covered. If you can’t get insurance through a spouses plan, consider freelancers insurance, COBRA, or seeing if local business groups offer plans for sole proprietors. Even if you buy a high-deductible “catastrophic” health plan, you can avoid having a gap in coverage that could haunt you if insurers later deny coverage for a pre-existing condition.
Step 8: Set Price
Determine what value your services will bring to clients, and set your rates accordingly.
Step 9: Get Online
Most freelancers will want some kind of Web presence, even if its just a professional profile on LinkedIn. Make sure people looking for you can reach you.
Step 10: Get Business Cards
Yes, you need them, and not the leftover ones from your old job. Invest in professionally printed business cards that show you’re serious about your business, or get a creative design if it suits your business.
Step 11: Build Your Network
Without the resources of a company behind you, your freelance success will hinge on the strength of your network. The connections that will help you thrive as a freelancer may be different than those you needed corporate life. Meeting with contacts informally will also keep you sane and break the monotony of working alone.
Step 12: Choose a Credit Card and Bank
Separate your business finances from your personal finances with dedicated credit-card and bank accounts that you use for work alone. This will help you keep track of business expenses you want to write off.
Step 13: Secure Financing
Many freelancers will be able to bootstrap without outside funding. But if you need to invest in equipment or other necessary expenses, you can look for loans or credit lines from banks, microlenders, peer-to-peer loan sites, or loans from friends and family.
Step 14: Sell Your Service
Whether or not you were in sales before, you are now. Expect to spend as much time selling your services as you do actually practicing them, especially early on.
Step 15: Get Paid
Make invoices, bill your clients promptly, and be diligent about collecting payments. Be prepared to follow up on invoices to get paid, and factor the time you spend tracking down payments into your pricing.
Step 16: Track Your Finances
Consult an accountant and set up an system to track your revenue and expenses. You can find free or cheap software online.
Step 17: Pay Taxes
Prepare to make estimated tax payments to the IRS four times a year, and set the money aside in a separate account. Remember that you have to pay the employer’s contribution to Social Security as well. Talk to an accountant about what , like the deduction for a home office.
Step 18: Build Your Brand
Understand what distinguishes your work, and create a brand that communicates that to others. As a freelancer, everything you do reflects on your personal brand.
Step 19: Use Outsourcing Sites
List your services on freelance marketplaces like Elance, Guru.com, and GetAFreelancer.com so clients looking for an extra set of hands can find you.
Step 20: Look Ahead
Whether you want to parlay freelance work into a full-time job, expand your venture and hire employees, or just sustain your self-employed lifestyle, know where your business is going and make a plan to get it there.
Tozzi covers small business for BusinessWeek.com.