From Employee to Self-Employed

Resources to help freelancers and sole proprietors stay in compliance and out of trouble.

Laura Adams, MBA
5-minute read
Episode #129


Have you ever thought about starting your own business? It could be work you do on the side while you keep your full-time job. Or you could become a full-time freelancer—like Michael, who wrote:

Hi Laura! I'm just getting into freelancing. I have no regular job and all my clients pay by check. I have no idea where to start on the whole self-employment tax and what is allowed to write off. Do you have any resources or applications that will help?

Michael, thanks for the question; and congratulations on making the leap into freelancing!

Becoming self-employed can be very exciting and financially rewarding. Whether you call yourself a freelancer, independent contractor, or sole proprietor, you’re actually becoming a small business owner … and yes, there are plenty of issues that can overwhelm you. But I’ll give you some resources and information to cut through the confusion.

Find a Professional

When you become self-employed, you start wearing many different hats. All of a sudden you’re the sales, operations, legal, and financial departments all wrapped up in one person! I can tell you from personal experience that when you go into business, one of your new best friends should be an accountant. I recommend that you find someone who’s local so you can actually have a face-to-face meeting. Make it a point to speak with a couple different people to briefly discuss your business. Then choose someone who listens well and seems to understand the kind of work you’re doing. A good accountant can save you money by making sure you plan accordingly for taxes and write off as many business expenses as possible.

Be Prepared for Your Tax Bill

When you start working for yourself, one of the most important tips I can give is to be prepared for what you’ll owe in taxes. Michael mentioned the self-employment tax. The self-employment, or SE, tax is how you pay into the social security system when you’re a sole proprietor; and it can take many new entrepreneurs by surprise. Here’s why: When you work as an employee, you only pay for half of your social security and Medicare taxes. Your employer pays the other 50%. Many people work their whole lives and don’t realize that their company actually had to foot half the bill for these benefits. When you become your own boss, you have to pay 100% of these taxes. And it can be a lot more than you think it will.

Self-Employment Tax

The self-employment tax for 2009 is 15.3% of net earnings. That amount is a total of 12.4% for social security plus 2.9% for Medicare. You only have to pay the social security portion on the first $106,800 that you earn. Once you’ve earned that amount, you don’t have to pay any more social security tax for the year. However, you must pay the Medicare portion of 2.9% no matter how much you make. You file self-employment tax on Schedule SE with your Form 1040. Remember that if you don’t report all your self-employment income, your future social security benefits will be reduced.

Federal & State Income Tax

In addition to self-employment tax, you’ll also have to pay federal and state income taxes yourself, since an employer isn’t withholding and paying them for you. You generally must pay estimated taxes four times a year based on how much you think you’ll earn, even if you’re just working part-time at your business. That helps you stay on track with tax payments, so you don’t spend money that really isn’t yours. Otherwise you could find yourself unprepared to pay a huge tax bill at the end of the year. An accountant can help you calculate the amount you should pay in estimated quarterly taxes.

Business Tax Deductions

Even though you have to pay more in taxes when you’re self-employed, you’ll have the benefit of being able to deduct qualified business expenses. Those are all the common and necessary costs of running your business, such as office supplies, computer software, liability insurance, entertaining, or travel, for instance. You can deduct all or a portion of them from your taxable business income, which reduces the amount of tax you owe. I’ll put a link to IRS Publication 535, as well as lots of other resources, in the show notes for full details about business expenses that are deductible. And if you work from home, be sure to listen to Money Girl show 107 which is about taking home office deductions.

Business Resources

There are many programs, as well as online services, designed to help you keep up with expenses and tax deadlines so your business runs smoothly. QuickBooks is a fantastic desktop accounting software that can be used for small or large businesses. If you prefer to work in the cloud, there are some innovative online bookkeeping services. QuickBooks Online and FreshBooks both offer a basic version that you can try out for free. Then you can move up to more comprehensive plans for a monthly fee when you need advanced functions, like time tracking, budgeting, and integration with online banking, for instance. Outright is a free online bookkeeping service that shows you when taxes are due and which expenses you may be able to deduct.

The Big Picture

Successful entrepreneurs know how to leverage their unique skills and abilities. If one of your strengths isn’t keeping up with detailed financial matters, leave it to a professional accountant or bookkeeper. Don’t try to do everything yourself—spend time exploring and mastering your talents, so you can grow your business.


Now you can share the podcast by putting up the Money Girl widget on your blog or website. That’s exactly what Janine did at factorfictionnutritionblog.com. Thanks Janine! You can get the code too, as well as all my contact information, at moneygirl.quickanddirtytips.com.

I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

More Resources:

Who is Self-Employed?

Independent Contractors vs. Employees

IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses

IRS Publication 334: Tax Guide for Small Business

Social Security Online

Publications and Forms for the Self-Employed are a collection of forms and publications related to understanding and fulfilling your filing requirements.

businesslaw.gov is the official business link to the U.S. government

nase.org is the National Association for the Self-Employed

Image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.