Tips for Moving from Employed to Self-Employed

More and more people are starting businesses, taking on consulting projects, or selling products online.

If you’re one of them, here are the key tax differences between being an employee and being self-employed.

1) You need to Track your Income and Expenses

When you are an employee, your employer is responsible for tracking your taxable wages. At the end of the year, you receive a W-2 to summarize your income.

When you are self-employed, you are responsible for tracking your income and expenses.  This means keeping records of both income and expenses. I recommend using an accounting software, such as Quickbooks Online, but even an Excel spreadsheet can be sufficient.  

All income is taxable unless there is a specific exclusion. Some clients may issue you a 1099-NEC if they pay you $600 or more, but you still need to report the income even if you did not receive a form.

2) You need to pay taxes throughout the year.

When you are an employee, taxes are automatically withheld from each paycheck.

When you are self-employed, you need to pay quarterly estimated tax payments.  

If you also have a job as an employee, in addition to your self-employment earnings, you can choose to withhold additional taxes to cover your required amount due for the self-employment income.  

3)  You need to keep saving for Retirement.

Employees typically have access to retirement plans at work.

Self-employed individuals need to be pro-active to ensure that they do not fall behind with their retirement savings. A Traditional or Roth IRAs is a great place to start, but the contribution amount is limited. As your income grows, consider exploring a Solo 401(k) or SEP IRA, which will allow for much higher contribution limits.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout Virginia Beach, San Diego county, and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in Virginia Beach, San Diego, and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.