Five Mistakes to Avoid If You're Self-Employed

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If you or another member of your household is self-employed, you may face a set of job challenges very different from those of traditional, salaried employees. While you may have the freedom to control your own time, or the right to turn down clients you don’t want to work with, you also miss out on paid vacation time, sick pay, bonuses and other benefits. More than that, freelancing requires you to work on your own, often without the safety net of a larger organization to guide you.

Here are five of the most common mistakes self-employed workers make (and what you can do to avoid them).

1. They don’t obtain the proper licenses. It can be hard to stay on top of all the licensing and administrative obligations required of small businesses and freelancers, but going without can lead to unsatisfied customers and hefty fines. If you work in a field that requires some kind of license, call your city clerk’s office and your secretary of state’s office (or explore their websites) to find out what licenses you need and where you can file to obtain certification.

2. They don’t know what to expect come tax time. If your business sells a taxable product or service, you’ll likely need to register with your state sales tax department. If you employ workers other than yourself, you need to collect their IRS and state taxpayer identification numbers. Freelancers and other independent contractors also face unique tax challenges because, unlike traditional employees who have state and federal taxes removed from each paycheck, they receive income tax-free and are responsible for paying quarterly estimated taxes.

3. They don’t understand the difference between employees and independent contractors. If you own a small business that requires a lot of your time and energy, you may consider hiring an extra pair of hands. Due to the complexity of dealing with payroll tax issues, many small businesses treat everyone who works for them as an independent contractor. The paperwork up front is easier, but misclassifying employees can turn into a costly problem. If workers are let go or leave and file for unemployment benefits they feel entitled to, you may be in for a very unpleasant audit.

The solution is to classify all individuals properly in the first place. Review your human resource needs and analyze the time your employees and freelancers spend working for you. Decide whether they are traditional employees (you control the work they do and how they do it) or independent contractors (they control the work they do and when the work is performed) and make sure they’re classified and paid accordingly.

4. They don’t know how to use their time efficiently. Are you making the best use of your time? If you’re a small business owner who faces inefficiencies and other time management challenges, taking on an employee may be a helpful remedy. If you could offload some of those time-consuming administrative tasks and focus your efforts on higher-value work, how much more money could you earn? Depending on how you answer that question, it may be cheaper to hire help or outsource some of the work than to handle it all yourself.

5. They don’t take the time to build a support network. Many people choose self-employment because they want to be their own boss, set their own hours and only pursue work they’re passionate about. But think about what you could be missing if you’re not picking the brains of other key people in your industry. Having a network of peers can be vital to the growth of a business, whether you run a brick-and-mortar establishment or freelance from the comfort of your home. Having connections can open doors, helping you keep up with industry-standard pricing for your work, develop referral sources and even find financing or investors for your business.

Not building such a network can deprive you the opportunity to receive advice and make connections outside of your comfort zone. Try to align yourself with like-minded individuals in your community and consider introducing them to your existing work contacts. Being your own boss doesn’t have to mean working alone.

As you continue to build your career and enjoy the freedom of self-employment, keep an eye out for these common mistakes. Thinking ahead and knowing what to look out for can help your small business blossom.