(15 min read – but can be broken into 5 min chunks!)
Hi there accounting fans. This self-employment guide is for you!
Over the past almost 2 years of this blog’s existence, I have written about a range of subjects. One of which is self employment. Self-employment is a subject close to my heart. It represents my journey since I lost my job last year due to COVID. As an accountant, I have helped many of my clients start their business. I have worked with them to develop systems and structures to get their businesses up and running. I have also benefited from their wisdom, which I share with you in this blog.
This guide is for anyone looking to start a new business for the first time. It is informative and straight to the point. There are some great links to my existing articles here that will give you more information on self-employment too.
Step #1: Why do you want self employment?
An obvious one, but still important.
Being self-employed means being responsible for your own income, taxes, business systems, communications etc etc. It’s a big commitment. If you are used to working a salaried job your whole life, being self-employed is weird. Understanding your ‘WHY’ at the beginning is crucial to underlining your commitment to your business.
Here are two popular examples of Why’s:
To financially support yourself/ your family
This is why I’m self-employed. When I lost my job, I had two choices:
- Feel sorry for myself and play PC games all day long.
- Start my own accounting business.
I’m a married man with children and dreams of home ownership. I need to put food on the table and make sure my children have clothes on their back. There was no way I was going to ever achieve that playing PC games all day long. Unless I became a professional streamer. But that’s A LOT of work. So I started my accounting firm from scratch.
A lot of self-employed individuals find themselves in this boat. Sometimes being self-employed is a matter of financial survival. Not all self-employed individuals have the privilege to choose to be self-employed. If this is you, let me tell you that I have been there before. It is hard at the start, but with the help of this guide, I hope that you too will be able to support your family through your business.
You can read my entrepreneurial journey here.
To spend more time on yourself/ with your family
This is related to the first why, but different.
This why comes about when you don’t have enough time to spend with your family in your current job. You may work a job that demands long hours. You may be well-compensated for those long hours, but the trade-off is not worth it. Missing out on school plays, first words and family shenanigans can affect your mental health. Things may also be strained between you and your partner because of your work commitments. If you are single, you may even want to travel, or focus on your hobbies but can’t do so because of work.
So you start to think: Maybe if I had more time, I could do more of what I wanted to do. Yes, self-employment can give you that flexibility.
But it is important to remember, self-employment comes with it’s own set of commitments. Clients are generally more accommodating than your boss. However, you still need to set deadlines and deliver whenever it is required of you. The biggest challenge here is keeping disciplined and focused.
You can read more about why discipline is better than motivation here.
To do more of what you truly enjoy
Perhaps the rat race has you feeling bummed. Somedays you feel like you should be chasing your dreams instead of working hard to help your boss achieve their dreams. Maybe you started this career for the wrong reasons and you want to do something else.
To be perfectly honest, you don’t HAVE to start your own business to do more of what you want. You can just as easily change careers and get a new job. However, being self-employed gives you more control over what you do and how you do it. If doing your current job drains you and is affecting your mental health. Doing more of what you enjoy will help you strengthen your mental systems. Remember that self-employment does come with its own stresses. It is not all sunshine and rainbows all the way.
As long as you know what you are signing up for, you should go for it. Especially if it means doing more of what you love!
You can read more about the hard truths of entrepreneurship here.
Once you figure out your why, you’ve setup a strong mental foundation on which to build your business. This means that if you get rocked by setbacks in your business (which will 100% happen) you are mentally resilient to push on and achieve your business goals!
For more mental health articles, check out the following:
Setting healthy boundaries as an entrepreneur.
Step #2: Set up some financial systems for self employment!
Now that you’ve established your ‘why’ – let’s jump straight into finance!
I’ve met many entrepreneurs (some of whom are my clients) who have this mindset:
“I’ll do my own books and sort out my own finances on a spreadsheet because I simply can’t afford an accountant/accounting software right now,”
Well, let me tell you that financial systems are THE MOST important thing to get right when you start your business.
Setting up an accounting system
I will admit, your average accountant is beyond the price range of most small business owners. Except for those like me. However, accounting software is reasonably priced and you can find one that is best suited for your business. Here are some accounting software which I’ve used in my practice:
- Xero ($12 to $60 a month) – contact me for special pricing!
- MYOB ($18 to $40 a month) – contact me for special pricing
- Wave Accounting (Free)
- Rounded ($17 to $21 a month)
I won’t go into details about the pros and cons of each software. The point I’m trying to make is that there is a lot of free and affordable software that you can use to start accounting for your business. It is also quite easy to teach yourself how to use them. As your business grows, you can always make the choice to upgrade to a software with more features.
Setting up your business bank accounts
Arguably the MOST IMPORTANT financial system you MUST DO.
The very first thing you need to do for your business finances is to setup some new bank accounts for your business. It is very important that you keep your business bank accounts separate from any bank accounts that you use for personal purposes. Remember that your business is a separate entity and you must not mix up your business money with your personal money. When you start mixing these up, that is when you start to lose track of your business finances.
You should start off by setting up 3 to 4 new bank accounts:
- Business daily spending account – All your income from your clients and expenses spent on the business comes out of this account. Get a debit card associated with this account. This makes it easier to spend money from the account for business purposes.
- Business income tax account – This is where you put aside money for taxes. Generally speaking, you should be putting away 20% of your monthly income into this account EVERY MONTH. This money is strictly ONLY for paying the tax department at the end of the tax year, or whenever it is due (if you are paying provisional tax or AIM – NZ only)
- Business GST account – This account is optional. You only need it if you are GST-registered. This applies to countries that have similar taxes like VAT or SST. Whatever GST that you collect on your sales should go into this account (In NZ that is 15% of your gross sales). Click here to read more about GST in NZ. This account is to set aside funds to pay off your GST returns when they are due.
- Business War Chest – This account is where you put away money for long-term business growth. You should be saving 10% of your bank balance at the end of each month (after putting away for taxes) into this account. Save money in this account to buy assets (like furniture, a new computer, a new vehicle, etc.) or pay for services (like business coaching, financial planning, marketing training etc.) that can help grow your business. By putting money away in a war chest, you will have money to spend to grow your business.
With your business bank accounts setup, you have the foundation laid for an effective financial system!
Learn some basic accounting concepts for self employment!
I can’t stress this one enough! All business owners must have a basic understanding of accounting. This basic understanding includes concepts like:
Income, Expenses and profit
Income is money that your receive from clients for services/products sold to them
Expenses are what you spend on the business to keep it running.
Profit is income minus expenses.
Read about Income and Expenses here.
Learn what types of expenses you can claim for your business here.
Profit is different from cash! Learn why here.
Assets, Liabilities and Equity
Assets are stuff you buy for the business that help you generate income. This can include fixed assets like vehicles, ovens, fridges, computers and furniture. Cash is an asset as well as it helps you buy the necessary items to help you generate income!
Liabilities are a promise to pay on a future obligation. This includes business loans, credit card debt and bank overdrafts. Anytime your business owes money to anyone, that amount owing is considered a liability.
Equity is the amount that you, as the owner invest into the business. At the end of the year, profit goes into your business equity. Equity can grow from year to year if you are profitable. This increases your investment in the business. However, if you take money out of the business, equity decreases. If you put money back in, it increases.
Learn about Liabilities here!‘
How does Equity work? Find out here!
There is a relationship between Income and Expenses and Assets, Liabilities and Equity. You can read more about it here.
Understand how tax works!
You should have a basic understanding of tax. After all, as a business owner, you will be responsible for sorting out your own taxes! In most cases, I would recommend you to get an accountant. However, it is still important for you to know how tax works.
Income tax
The first thing is that income tax is calculated based on your business’ profit. This is your income minus expenses (see above).
The second thing is that it is calculated as a percentage of your profit. In NZ, for companies, this is typically 28% of your profit (or taxable income as we accountants like to call it). If you are a sole trader, you will be taxed based on your personal income tax bracket (which is usually lower than 28%, unless you’re making a lot of money!).
There is a tendency among small business owners to aggressively claim expenses to reduce their profit. This then reduces their tax to pay, since 28% of $1,000 is far less than 28% of $10,000. While it is good to claim legitimate business expenses for your business – you must be careful not to over-claim.
Goods and Services Tax (GST)
The next thing to learn about taxes is GST (Goods and Services Tax). If your region doesn’t have GST – good on you! In NZ, GST registration is a must for all businesses with income over over $60,000 a year. Note that this is based on INCOME not profit! This is your Income that you gain from sales, before expenses are minused! GST is calculated as 15% of your gross sales income.
This means that if you sell something for $1,000, you would have to add on 15% to the sales price ($150) for a total sales price of $1,150. You then have to return the $150 GST you made on the sale back to the government! The good news is that you can claim back GST that you pay to other businesses back from the Government as well.
If you are based in NZ, here are some handy tax guides to get you started:
Still struggling with GST? Find out how it works here!
Paying provisional taxes? Learn more about them here! Or better yet, switch to the Accounting Income Method (AIM)!
Wanting to file your own taxes online? Click here for the sole trader guide; Click here for the company guide.
Step #3: Think about your self employment business structure
When starting off as a self employed individual, you are running a one-person show. You are the CEO, CFO, COO, IT person, Security Guard, Marketer and Salesperson all rolled into one. It can be quite exhausting. So it is important to have a think about how your business will look like in the future from the very beginning!
Legal structure of the self employment business
Despite its name, sorting out the legal structure of the business is quite easy. When you start trading, you will usually start off as a ‘sole trader’. As your business grows, you may want to consider trading as a ‘company’.
These two legal concepts are common throughout the world – so this advice applies to you in most regions.
Sole Trader
A sole trader (or sole proprietor) is an individual that starts trading under their own name. They record all their business income, expenses, profits, assets, liabilities and equity under their own name. For all intents and purposes – they ARE their business.
A sole trader is the SOLE owner of their business. No one else is responsible for their business but them. This means that all profit earned is declared under their name. It also means that they are responsible for ALL obligations incurred by the business.
It is very easy to get setup as a sole trader. You just need to start selling things. At the end of the tax year, you need to declare your profit (taxable income – see ‘Understand how tax works! above) to the tax department. You pay taxes based on your personal tax rate. That’s it. If you are based in Aotearoa NZ, you may want to consider getting an NZBN (New Zealand Business Number). This is completely optional – but it can help you apply for grants or other types of funding.
From a legal perspective, you and your business are one and the same. From a financial perspective though, it is STILL IMPORTANT to keep your business finances and personal finances separate. NEVER mix up your business money with your personal money. Keep them in separate accounts as outlined in ‘Step #2 above’.
Partnership
Basically two or more sole traders trading together. A pretty crappy structure to be honest. You are much better off trading as a:
Company
A company setup is usually the logical progression once the sole trader individual feels like their business has legs. Setting up a company in Aotearoa NZ can be tricky, but it is REALLY EASY (so don’t pay some hack jobs to register your company for $400!). You should know that it costs money to keep a company on the companies register. In Aotearoa, we pay about $52.50 a year for the privilege of keeping our company listed on the register.
A company offers a few benefits for the budding business owner such as:
- The ability to apportion out shares in the company to other individuals/entities. This is quite useful if you want to sell shares in your business, or have your spouse as part owner of your business. Way, WAY better than setting up a partnership.
- Limited legal liability over business debt. Arguably the most important reason to set up a company. This means that if your company owes anyone money, they can only go after your company, but not you personally. Bear in mind though that if you are a director (if you are the sole shareholder – you are automatically the director, otherwise, at least one shareholder must be the director) of the company and are proven to be negligent in running the business, they could still come after you. If you are just a regular shareholder – they can’t come after your personal assets at all.
- A certain degree of tax efficiency. After a certain level of income, your effective tax rate as an individual will exceed 28%. Running your business through a company means that your tax is always capped at 28%. Throw in concepts like shareholder salary (in Aotearoa NZ) and you’ve got some wiggle room when it comes to tax time. However, DO NOT abuse the tax flexibility granted by running a company – the tax department is always on the lookout for individuals trying to pay less taxes than they should. As always, check with your accountant before you do any ‘tax planning’ for yourself.
If you want to learn more about legal structures, check this article out!
Still can’t decide between sole trader and company? Read this article to make up your mind!
Organisational structure
Organisational structure talks about how you want to setup your business in terms of staffing (or team members, as we like to call them these days). When starting out, it is natural for the business owner to do everything themselves. However as the business grows, it becomes more and more difficult to manage on your own business. At this stage, you will need to hire more people!
Setting out an organisational structure
All businesses have Five key positions that need filling:
- CEO – the head honcho, captain of the ship. This is usually you, the business owner – until you decide to retire.
- COO – chief operations officer. In charge of production/delivery of services. Initially this will be you, but as the business grows, you will want someone else handling the boring day to day stuff.
- Marketing Officer – Marketing is like oxygen for the business. Not enough of it and the business will suffocate and die. Naturally you will want someone on board to help you do this. Marketing helps get word around that your business exists and that it’s great for your customers.
- Sales Officer – If Marketing is like oxygen, Sales is the lifeblood of the business. No sales = no business. Selling is a more refined art of identifying customer needs and addressing those needs. You will find that the skills required for sales is often different than the skills required for marketing.
- CFO – Chief Financial Officer. Most business owners will try to do their own books. Many more get their spouses to do it for them. The really smart ones will hire an accountant to do it for them. A good accountant will also be helping you use that financial data to further grow your business. Finances isn’t all just about paying taxes and budgeting. It is about planning the resources required to sustain the long-term growth of your business!
How to start filling your organisational structure?
At the start, you need to establish who’s doing what role in your business. It is very likely that as a self employed individual, you will be doing it all yourself. And that’s fine. Fine until business grows and you realise you have less time to juggle all five hats. At which stage, you need to hire people!
Often the first role to get filled is that of the CFO. Typically new business owners will approach an accountant to help them with this. After that, they may start looking at hiring a Marketing person, some people to help with production, sales, etc. As the business grows, so will its complexity. You will find that there are many more roles that need to be filled in the business. Always have a review of your organisational structure every year and have a think about what roles need filling.
But before hiring your first employee – check these articles out!
Before you start paying other people to do your work, have you thought about paying yourself?
Not wanting to hire yet but wanting to maximise your productivity? Check out this guide!
Before you hire your first employee, be sure to read this guide!
Next steps for your self employment
Wow that was a long guide!
There is still so much more to cover on your self employment journey. We haven’t even scratched the surface of communications, sales and marketing. Being successful in Self employment is about having the right mindset and the right systems to support your business. This guide has done that in outlining the key steps needed to build the foundation of a thriving business.
So what’s next for self employment?
Marketing and sales strategies are a good place to start. You will want to have a think about your product, it’s unique selling point (USPs) and how you are pricing it for the market. Every product is different and every pricing is unique. What makes your product/service special and how do YOU justify its price tag?
Click here to learn more about unique selling points (USPs)
Learn how to set your ultimate pricing strategy here!
I’m still working full-time! How do I balance my self employment on the side?
I hear you! I’ve been there myself! If you’ve followed this guide so far, you are already onto a good start in terms of laying the correct foundation for sustainable self employment. Some sacrifices may have to be made and it can be a difficult journey to get your business to the stage where it can effectively replace your working income.
Check out this 3-part guide on balancing your side hustle with full time work!
Scheduling HELPS. Read here to learn how to SCHEDULE RELENTLESSLY!!
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Help! I need someone to help me grow my business!
Well, did you know that apart from accounting services, I will also help you plan and grow your business? Get in touch with me for a free catch-up and we’ll work out a plan that is affordable for you and helps you get your business to where you want it to be!
Take care accounting fans and until next time:
STAY POSITIVE!