Once I had fully committed to switching careers and pursuing my baking business full-time (you can learn more about why and how I made that decision here), my mind started working in overdrive. I had so much to figure out. My immediate concerns around starting my business were:
- How was I going to have health insurance if I was self-employed?
- How was I going to save for retirement without a company-matched 401k?
- How much would I need to save to be able to pay my taxes at the end of the year?
- Should I establish an LLC?
- What would my cash flow look like each month?
Health insurance is a tricky topic when you’re a freelancer of self-employed, but there are a few routes you can go:
- The easiest by far is to simply be married and be added to your significant other’s insurance.
- If you aren’t married, but in a serious relationship, you can request to be added to your significant other’s insurance as a domestic partner (must be in a relationship and have lived together for 6 months in the state of NY).
- If you are single, you can get insurance through the Affordable Care Act as an individual (you can enroll here). In 2018, the average cost per month for an individual was $440.
None of these options are cheap (all are at least $400/month for standard health care options), but health insurance is an absolute must in my opinion.
Saving for retirement as an entrepreneur is another concern. Assuming your business is successful and profitable, you’re going to want to continue to save for the future. While you may not have a 401k or company match anymore, there are plenty of tax-advantaged saving options. There are different rules and caps on how many pre-tax dollars you can contribute based on whichever option you pick, so I highly recommend reading through them. I plan to set up a SEP IRA next year.
Another super important part of being self-employed is withholding taxes from your earnings to be sure you can pay your taxes each April. This may sound crazy but living in NYC and being taxed by both the city and state, my tax rate is over 40%. If I didn’t set aside money from each partnership or plan accordingly to have significant savings to pay my taxes, I would be totally screwed.
It’s also something to keep in mind when negotiating rates or setting prices; know that you will only get to keep 60% (or whatever your tax rate may be) of your earnings.
Then I began thinking about the legal implications of running my own business. I had previously established Chelsweets as a sole proprietorship. It was tiny, I wasn’t making a ton of money, and I wasn’t worried about any liabilities I might face down the road. I spoke with my Dad (who is the best accountant I know) and he recommended establishing a single member LLC, to limit my liability if something ever goes wrong with my business. The requirements and price to establish an LLC vary by state, but for most it takes less than hour to do and the average costs is around $150.
And then my final concern… MONEY! I have recurring monthly expenses and income as a freelancer/entrepreneur is anything but steady. While I knew partnerships would come in waves, I wanted to make sure I had enough money coming in every month to pay for rent, health insurance, phone bill, groceries, etc. I literally made a table of cash inflows and outflows in excel – you’d almost think I was an accountant… ?
The most important thing to having steady income is to have diversified revenue streams. Each month, I make revenue from:
- Advertising on my blog
- Ads on Facebook (you can monetize videos with ad breaks if they are 3+ minutes long)
- Advertising on YouTube
- Contract with the Food Network (creating content for their social channels)
- Paid brand partnerships
- Teaching private cake lessons
Being able to earn money in different ways gives me peace of mind. That way, even if my YouTube earnings are tanking one month, my blog might be getting a ton of traffic! There are a lot of things that I can’t control about income with what I’m doing, but the more ways I can make money, the more secure I feel.
This is just scratching the surface, but I think these are some of the most important things to think through. Making a career change and becoming self-employed is definitely scary, but the idea of it is much more manageable when you feel like you’ve thought it through and have a game plan.
If any of you have made a similar switch to becoming a freelancer/entrepreneur, or are thinking about it, I’d love to hear your experience or thoughts! I’d also love to know if you have any concerns I didn’t touch on 🙂