The Joy of Self Employment
When I retired from real work about five years ago, I inadvertently crossed a very interesting divide in our society. It was the canyon that separates the People with Real Jobs from the Self-Employed.
As it turns out, I was entering a sparsely-populated area. Only about 1 in 9 workers in the US is self-employed, a figure that is lower than Canada and most European countries. Those numbers surprise me since we’re supposedly an entrepreneurial country with over 60 percent of all new jobs coming from small companies with under 500 employees.
But yet now that I AM self-employed, I seem to hang around with and meet almost 50% self-employed people. Maybe it’s my neighborhood, which is a bit of an earthy and less rat-race oriented clump of historical housing. Or maybe it’s just the tendency of entrepreneurial people to select a like-minded group of friends.
But by joining this minority, I’ve gained a very interesting new perspective on what it means to have a job and to earn money in exchange for “work”.
When I had a job, I always thought it was a pretty special thing.
“Ooo, I wouldn’t want to lose my Job. What if I could never get another one?”.
“These job thingies sure are mysterious.. I show up for work each day and type on a computer, and they magically deliver great gobs of money to my checking account. How do they do it?”.
“I wonder how jobs even get created? I don’t really know, since all I’ve ever done is take jobs rather than make them.”
As a member of the plain old Employee class, I was always curious about the mysterious world of the Self Employed Business Owners.
“Imagine, being your own boss!”, I would think. “Why, you could set your own working hours, or even your own working Seasons!”. “Man, the first thing I would do is strike Mondays entirely from the work schedule.”
So I started checking out library books about starting one’s own business. They dealt with the tax laws, the trade-offs between Corporations and simpler partnerships like the LLC. It sounded fairly complicated at the time but I soaked it all up and when it came right down to it, starting a business really only required these two steps:
- go to the IRS website and apply for an employer identification number (EIN)
- go to your state’s website and register your business with the state. This may involve submitting a signed document or two and a small fee (it was $50 here in Colorado).
- for your first business, you probably just want to use the LLC organization style .. it is flexible, simple, and you can change it in the unlikely event that you ever need to.
Boom, you have a business! You can use the new EIN to get a bank account in the name of your business, to file business tax returns at the end of each year, and things can grow as much as you like from that point.
So I followed the steps and started my own business, just before retiring from real work. Initially my new company seemed just an imaginary concept. But then a sense of reassuring power started to seep in. People started asking me for help with things, and then asking “how much do I owe you?”. And at that point, I would create a quick spreadsheet telling the person how much money I wanted them to give me, and they would give me exactly that amount!
It seemed amazing to me that I could hang around in someone’s house to set up a computer network, or play with advanced power tools in the garage to build eco-friendly coffins for a local company, or even answer questions about the power consumption of an electric vehicle, and receive real money for these services – valid money which I could then trade for groceries.
At this point, I realized I would never go hungry. If I really want the amazing firehose of cash that full-time professional employment provides, I can go get one of those jobs. If I just want occasional boosts of cash and/or self-esteem, I can crank up or down the self-employment schedule as needed. Since I don’t have much need for regular income, the self-employment gig is really just a reassuring companion. Self-employment is a big muscular friend who follows you around and smiles a lot, but cracks his knuckles and lets out a very loud 30Hz growl if Life ever attempts to get up in your face.
My amazement at getting paid for doing random fun projects around the town continues to this day. But yet I do not have any of the burdens of a real job. When I wake up every morning, my only obligation is to the coffee machine and the frying pan, to make the family a nice breakfast while they play in the living room or the garden. When it rains or snows, I laugh heartily and grab a good book or a vacuum cleaner and watch the storm through the comfort of double-pane windows. When the sun shines upon the Rocky Mountains the other 300 days of the year, I take great pleasure in mixing bicycle errands and completely random local work into my mostly full-time parenting schedule.
Meanwhile, almost everything in life has become tax-deductible. The main things I spend money on besides groceries are: tools, a good computer or camera occasionally, and cell phone and internet service. All of these are required by the business, so the business pays for them. With this newfound additional blog writing hat in the closet, I might even be able to write off some travel expenses in the future.
And all the while, there is nobody sitting in their corner office clucking their tongue and checking their watch and wondering when that Money Mustache lad is ever going to get to the office.
If you already have worked for yourself, you know what I’m talking about. But if you’ve only ever been an employee, you might have an unnecessarily fearful view of your financial future. An employee does not have complete control of their income stream, and for most of us, lack of control causes fear.
Mr. Money Mustache’s neverending prescription for curing fear is gaining more control over all aspects of your life. Spending less money instantly increases your control. Building up investments that provide passive income gives you even more control. And starting your own business, even if it’s just for some learning and dabbling on the side while you keep your day job, brings you even more of that happy, coffee machine and frying pan, laughing on the back patio with a giant homebrew, Control.
Article: How To Start a Blog
Where to next? Check out a Random Article
|
Stay in Touch: Subscribe to posts by e-mail, RSS Feed, or follow MMM on Twitter and Facebook.
Join the Conversation: Learn from Like-Minded Mustachians in The Money Mustache Community |
Mr. Money Mustache is a family man living in the United States who retired from work, relatively wealthy, at about age 30. After several years of retirement, he noticed that his still-working peers were envious of his lifestyle. They were making more money than he ever had, yet they were somehow still broke. So he decided to write this blog to educate the world on how it is done.
Health insurance benefits are not tied to employment in Canada, thus the risk of starting your own business is greater in the US. People work for companies they hate here in the US for that reason.
Yeah..the US healthcare system sucks!
However, you can get reasonable insurance by buy a high deductible insurance policy and fund a Health Savings Account (HSA).
those with pre-existing condition have problems getting insurance without getting the group coverage from a large employer.
We have an EIN from being an employer for our nanny/CNA. Is that the same EIN we could use for a business of any kind or would it require a new one in the name of the business? Right now it’s just in our names. My dad was/is self-employed my whole life, and it was a really fun childhood, actually. At times it was riskier or lean, but he loved what he did/does, and sometimes there was more, but now I certainly see the advantages!
Jenny,
Maybe this will help?
http://www.irs.gov/businesses/small/article/0,,id=98011,00.html
Excellent article as usual MMM. I just wanted to add the following,
1. An EIN is NOT required. It’s only necessary if you think you’re going to be hiring employees. Otherwise, you can just operate as a sole prop. under your SSN.
2. While you can write off lots of stuff, make sure you turn a profit on the business or the IRS will call it a hobby and disallow the expenses.
As long as you aren’t hiring employees (contractors are ok) the only paperwork you need to file is a “doing business as” fictitious business name, and a local business license.
Agree with both of these. I was going to mention #1, but you beat me to it!
Also, in most states, if you’re the sole owner of the LLC it is treated as a “disregarded entity” for tax purposes and you simply file either a Schedule C, E or F with your individual tax return.
I’m a lifetime employee (13 years anyway) who has recently realized many of these things you talk about. I’ve started hanging around some entrepreneurs and it is pretty fun. Just being in the room and hearing them talk about their businesses is infectious. If I didn’t have kids and a mortgage I’d probably have started my own business a couple years ago. For now it happens during my free time. It does take awhile to re-train your brain.
If you treat the LLC as “disregarded entity”, do you still get the personal liability protection that normal LLC provides?
Yes, it doesn’t change the entity itself, just how it is taxed.
Good to know – thanks for the info everyone! I had to look into this to learn more.
MMM and I are a partnership LLC, which requires us to have an EIN.
However, it seems that a single member LLC or a sole proprietorship does not require one unless: (1) you pay wages to one or more employees, or (2) you file pension or excise tax returns. If neither of these conditions apply, you can use your SSN as your EIN.
Thanks Robert! Mr. Money Mustache ALWAYS turns a profit ;-)
I think as a self-employed person you’re only supposed to deduct things like the camera, laptop, etc to the extent that you use them for business purposes. So if you use your camera for business 80% of the time and 20% for personal you deduct 80%. Do deductions work differently for a business?
It seems that the main distinction is whether the business is truly a business or simply a hobby, as Robert pointed out. See: http://www.irs.gov/irs/article/0,,id=186056,00.html.
Once you’ve established you’re a business, it’s still not that clear. I guess technically you’re supposed to deduct by the percent of use, as you point out, per this IRS document: http://www.irs.gov/pub/irs-prior/p535–2010.pdf.
We certainly do this for big expenses like our car and home. However, other web sites seem to indicate that if you’re a photographer, for example, you can deduct the full amount of a new camera, provided your business is not a hobby.
I recommend be-friending an accountant if you plan to become self-employed. :)
Or just ask me. (I’m a CPA.)
In general, stuff like homes, cars and computers are tricky because they can be easily transferred between business and personal use. The best thing you can do is KEEP GOOD RECORDS to document your use if you think you can deduct something. If you try to use an auto for business and deduct mileage but don’t have a mileage log to back it up, you won’t be able to claim anything.
Excellent!! Thanks Kevin. Want to be my new best friend? ;)
Sure, if MMM takes me on as his apprentice (he’ll know what I’m talking about).
I’ll be self employed in 1.5 weeks and will definitely follow the steps for EIN etc. Thank you for posting! Great read :)
You can also use your EIN to set up a solo 401k which allows you to save more than either an employer 401k or a SEP IRA.
awesome! will do! thanks
I think you may really enjoy a book called “Unjobbing: The Adult Liberation Handbook” by Michael Fogler if you have not already read it, a must read for fresh perspectives for anyone wanting to leave the 9-5 world .
here is a cash tip to make thousands in a weekend … drive a pedicab at a big event such as the superbowl or a big music festival … i speak from experience :)
Or you can get a bike with a cooler on it and sell popsicles and drinks. I know someone who does that at festivals.
MMM, I might have missed this in one of your earlier posts, but what exactly is the nature of your business? Your description makes it sound like some sort of a handyman enterprise.
Hi G.L. Thanks for asking!
The article you just read sums it up as best as I can. I do assorted fun things around town and occasionally get paid for them. The most common activity is renovations – building kitchens and bathrooms for people. But I also have been known to make coffins here or there for a local green burial company, and occasionally get to dust off the computer/electrical engineering skills for some contract work. I’m also writing this blog, which thanks to occasional clicks on the Google Adsense ads, is now providing a few dollars a week and perhaps more in the future ;-)
I’ve only ever had one full-time job. I’ve had my business for about twelve years, but you make it sound so easy. I am my own boss and I’m just as strict as my old one from years ago! One correction to your article: you’re required to register a business entity and file articles of organization with your state first before you get an EIN number for a corporation or LLC.