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Self-employment is an attractive option for a lot of people. In fact, according to a 2014 report from CareerBuilder and Economic Modeling Specialists Intl, roughly 10 million Americans are currently self-employed. Given the schedule flexibility and the potential financial upside of working for yourself, it’s easy to see why the practice has become so popular, but self-employment is not without its pitfalls either. Below are some of the most common mistakes that self-employed individuals make along with tips for how to avoid them.
1. Not Managing Time Appropriately
While having your own business can certainly offer some flexibility, you still need to manage your time appropriately. Even though it can be annoying to have a boss peering over your shoulder, this kind of supervision is a spur to productivity. So when you work for yourself, it’s important to be a self-starter and make sure you’re working at optimum efficiency. Conversely, it’s crucial to maintain a clear separation between work life and home life. If you work out of your house, it can be tempting to respond to client emails or calls at all hours of the night. However, establishing a firm stopping time for each day will help keep you from getting burned out and allow you to spend quality time with family and friends.
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2. Not Tracking Revenues and Expenses
For most people, their small business is a reflection of the things they’re passionate about, and that passion probably doesn’t include pesky tasks like bookkeeping. Unfortunately, keeping an accurate record of revenues and expenses is a must for any entrepreneurial endeavor. Don’t just scribble your travel mileage down onto an old receipt or assume you’ll remember how much a client paid, either. At the very least, you should keep track of all this information in a spreadsheet, and most self-employed individuals invest in some type of accounting software to properly track their business finances.
3. Assuming a Contract Will Be Honored
Once you’ve gotten a client to sign on the dotted line of a contract, you can rest assured knowing the deal will go through, right? Well, maybe not. If you’re dealing with established corporations, especially larger ones, then it can be remarkably easy for them to renege on a contract. This lesson is one that many small business owners learn the hard way, and since self-employed persons don’t typically have a corporation-sized legal team behind them, they’re often left without a viable recourse.
The best way to counteract this problem is to build solid relationships with all of your clients. After all, customers are less likely to back out of deals with individuals they have met and know personally. Additionally, it’s a good idea to maintain an open line of communication with all of your clients to make sure their expectations are being met. By keeping in constant contact, you can hopefully handle small problems before they snowball into relationship-ruining catastrophes.
4. Focusing Only on the Bottom Line
Some people pursue self-employment with stars in their eyes, looking forward to the vast amounts of money that their business will bring them. Sure, money is important, and it’s entirely possible that you could make a lot of it. However, the most successful entrepreneurs seek to create long-term value for their businesses, not simply earn short-term profits. A great way to add value is through branding. Figure out what your company does that nobody else can do and then create a business identity that highlights this uniqueness. By creating an identifiable brand, you can ensure your clients start to see your small business as an individual, a fact that can boost loyalty for the long haul.
5. Not Getting Your Taxes in Order
It’s no secret that tax time is no one’s favorite part of the year. Unfortunately, when you start a small business, your tax headache only increases, and many people find the tax complications that come with being self-employed particularly maddening. Fortunately, the IRS has a specialized tax center on its website devoted to all the ins and outs of being self-employed. This resource can prove invaluable as you create your company and manage its day-to-day finances.
When it comes to taxes, a lot of self-employed persons make two big mistakes. For starters, they forget to account for the dreaded 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. Secondly, people who are self-employed are often not aware of all of the available tax deductions. For example, money spent on travel, permits, marketing, Internet, and phone is deductible, so you should be sure to take advantage when tax time rolls around.
Going into business for yourself is an exciting and challenging endeavor. Without question, there is a steep learning curve, and while you’re certainly going to make mistakes along the way, with proper care and planning you can avoid the most common pitfalls.
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