Being self-employed comes with a large learning curve. This classification of workers, is very important to the overall U.S. economy and it’s important that they have the resources to run their business successfully. In fact, according to the latest figures released by the US Bureau of Labor Statistics, as of January 2021, the number of self-employed people in America is 9.548 million. These hard-working entrepreneurs will ultimately help the economy recover from the 2021 pandemic.
Here are common mistakes self-employed workers make and how you can avoid them.
1. Time management stumbles
There are many benefits to taking the self-employed route. You’re the boss and your schedule is flexible. However, with that flexibility comes challenges like the 2020/2021 pandemic and needing to work safely from home.
Balancing work/life when your office is in your house can be very difficult. Procrastination comes easy to many these days with streaming movies, social media, and possibly kids at home.
Think about setting up regular hours to work and have a dedicated space in your home. Another key? Take breaks. It’s easy to work around the clock when your office is on your couch!
Read our article here to help you get organized and alleviate stress: 9 Tips to Improve Time Management Skills.
2. Not tracking revenues and expenses
When self-employed, it's vital to keep close track of your income. Since self-employment is treated as a small business, keeping track helps you to create a profit/loss (P&L) statement. A P&L statement is a financial report that shows your business revenues and expenses over a given period of time, usually a fiscal quarter or year. This report may have several different names: profit & loss, P&L, income statement, or statement of revenues and expenses. In some cases, P&L can be called an operating statement. In almost all circumstances, profit is not the same thing as cash flow. For information to prepare yours, learn more from this post on the SmartBiz Small Business Blog: Business Profit And Loss: Tips To Prepare Your Statement.
Tracking also helps you stay on top of all business-related expenses from mileage to purchasing work-related supplies. When you set up an organized system to track business expenses, it will be easier to build financial reports and measure business growth. Additionally, you’ll simplify tax time. Here’s an effective way to organize: How to Keep Track of Business Expenses.
3. Assuming a contract will be honored
In 2021, your financial focus will likely shift from growth to sustainability and profit generation. Because of this, you may be in a rush to sign work contracts and increase your revenue stream. But don’t count your chickens before they hatch – once a contract for employment is signed, you may not see its promises carried out.
If you’re dealing with an established business, especially larger ones, then it can be easy for them to renege on a contract. The best way to approach this issue is to form strong relationships with your clients and maintain an open line of communication. This can help you tackle the little problems before they impact a contracted agreement. You might also want to include a clause regarding compensation if the contract is broken.
4. Focusing exclusively on the bottom line
Your bottom line is your income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs, and income taxes. Your bottom line can also be referred to as net earnings or net profits. Most successful entrepreneurs seek to create long-term value for their businesses, not earn short-term profits. Pay attention to the shifts in your revenue over time to identify patterns that can help stop a downward trend. To increase your exposure and attract new business, try your hand at branding – an important component of small business promotion.
5. Not putting taxes in order
Shoe box accounting is not the way to go when tax time approaches. This strategy is simply throwing your tax documents into a pile to sort out later. Set up an easy-to-understand system to organize your tax forms, expenses, and deductions.
Self-employed persons make two big mistakes when working on taxes:
- First, they don’t pay attention to the self-employment tax. On top of your regular income tax, the federal government charges an additional 15 percent self-employment tax to cover the FICA money that most people have taken from their paychecks. While half of this tax can be deducted, it’s still a good idea to set aside around 20 percent of the money you take in to put toward tax payments.
- Second, the self-employed are often not aware of all of the available tax deductions. For example, travel, permits, marketing, Internet, and phone are deductible.
Not ready to prepare taxes alone? A great option is to work with a small business tax professional. Here’s a guide to help you decide: Small Business Taxes: Self File or Use a Professional?
If you’ve received or are pursuing a Paycheck Protection Program loan and have not filed your taxes, we’ve put together a step-by-step article to help you prepare: How Self Employed, Independent Contractors, and Gig Economy workers Prior to Filing Taxes.
Don’t forget about important taxes you may be responsible for. 7 Small Business Taxes you Need to Know About.
The bottom line
Set yourself up for success by avoiding the mistakes above. The SmartBiz Loans team has a regularly updated blog, Learning Center and Small Business Administration (SBA) information to help entrepreneurs stabilize and grow their business. Improving and calculating credit scores, outside funding, Paycheck Protection Program (PPP) loans, marketing, and taxes are covered along with many other relevant topics.