When you first become an e-Learning Freelancer, there are quite a few big decisions you’ll need to make around legally establishing your business. Some of these choices will have big impacts on how much you get taxed, as well as how much personal risk you’re taking, so it’s important to be thoughtful, well informed, and intentional about them. In this post, I’ll be discussing what I believe are the most important ones, and highlighting the areas you’ll want to research ahead of time.
Before we jump in, please know: I am not a legal or financial professional, and the information I’ll be sharing is not a substitute for the advice of a lawyer or an accountant. Do not act on any of the below without doing research on your own or consulting a professional—the laws and best practices will vary from state to state, and in some cases, city to city. My intention here is to get you thinking about the kind of questions you’ll need to answer, and at the risk of beating a dead horse: Nothing beats the advice of a trusted professional.
Making the decisions about how to structure your business can be overwhelming, and frankly, boring, but remember that by investing time into making the right decisions for yourself, you’ll be saving yourself hours of your own time down the line and avoiding potential risks that could have pretty dire consequences. If you’ve been reading this blog series up to now, you know that my aim is to help get you through all of the red tape and minutiae so that you can focus on your creativity—and in that spirit, this post has some can’t-miss information!
There are three key areas to consider:
- Separating your business and personal finances;
- Selecting the right legal business structure;
- Establishing the most beneficial tax payment practices.
1. Transactions: You’ve Got to Keep ‘Em Separated
First and foremost, you need to make sure that you’re separating your business transactions from your personal ones. While this might sound obvious, tracking your money separately is an easy practice to lose sight of, and if you fail to do so, you could end up in a heap of trouble with the IRS—especially if you get audited. What’s more, depending on the business structure you choose (more on that in a moment), there may be a legal requirement to separate them.
Solving Separation Anxiety: Finding a Bank You Trust
The first step to keeping your business finances independent is to set up a business account with a bank. Choose carefully, because how your bank operates will have an impact on your day-to-day operations. When I was picking a bank, I thought about several key considerations:
- Location and customer service. I need to know that if there’s a problem, I can speak with a bank representative in person about it, and not spend time on the phone waiting for a call center to work with me.
- Availability of e-deposits and wire transfers. Many clients pay me by check, and so I opted to find a bank that would offer me free e-deposits. In addition, I work with some international clients, and accepting wire transfers was key for me.
- Paper checking. I’m always trying to go paperless when I can, but when it comes to my business, I feel more comfortable when there’s an audit trail for every transaction, so I made sure that the bank I selected would support this.
You may have your own requirements for the bank you choose, so take a moment to write a list of the things you’ll need, and then start researching which institutions will (or won’t) meet those needs. Don’t hesitate to call the bank to ask! Calling ahead is important, because the bank you pick may require you to produce specific documents for a small business account, and you’ll want to know what those are ahead of time.
Once you’ve selected a bank, go there in person, and try to establish a personal relationship with a representative. While you may not always be able to talk to the same person, it never hurts to make contact with someone at the bank who can help you navigate the decisions you’ll be making. Also, consider that your business needs may change over time as it grows, and it can be helpful to have someone at the bank who has been familiar with your situation from the beginning.
2. Architecting Your Business Structure
With your account set-up out of the way, it’s time to move on to determining the right legal classification for your business. (Also—before you decide which classification to go with, make sure you’ve decided what your business is going to be called. You’ll need it for all of the paperwork.)
Generally speaking, there are three business structures you should consider:
- Sole Proprietorship;
- Limited Liability Corporation (LLC);
- A Subchapter S Corporation (S-Corp).
To fully understand the pros and cons of each type, spend some time on the United States Small Business Administration website. Things like your location and projected revenue will have a strong influence on the downstream impacts of your choice, so do your homework ahead of time.
Not All Structures Are Created Equal
Each of the different business structures treat taxes, fees, and liabilities differently.
For example, if you’re a Sole Proprietorship, you are personally liable for any damages that may occur. So if a client sues you (and wins), your personal assets—your home, your car, and so on—may be at risk. Likewise, if your Sole Proprietorship borrows money from a bank and you default on a payment, your personal assets are at risk.
If you choose to be an LLC, it will give you a liability shell (meaning, your personal assets will be protected in the event of damages), but an LLC will likely mean paying additional fees and taxes. Taxes for both Sole Proprietorships and LLCs pass through your personal income tax returns.
S-Corps, on the other hand, are businesses that exist entirely separate from their owners. Like LLCs, S-Corps protect you from liabilities, but they are unique because they can exist in perpetuity—Sole Proprietorships and LLCs must close if the owner dies or leaves the business. S-Corps require even more paperwork and accounting (which of course means additional fees and complications), but they offer the benefit of added credibility: Many high-end clients prefer to work with businesses and contractors that end with “LLC.”
Of course, it’s important to do your research on this decision, but if you’re still not sure after having investigated, talk to an accountant or a lawyer who can give you insights about what best fits your situation. Be prepared to discuss how much you think you’re going to be making, and what your exposure to liability is. (Admittedly, e-Learning freelancers are exposed to less risk than, say, a construction company, but if you work with industries that are highly regulated and have compliance requirements, you’re still exposed to some level of liability and risk.)
License and Registration, Please
In terms of the business structure you select, also make sure you’re aware of any licensing and fee requirements in your area. Some states will have one or more licenses you need to purchase to legally run your business, depending on the business type and where you are. Where I live in Oregon, if you start an LLC, you’re required to pay multiple annual fees: a business registration fee of $100, a Portland business license fee of $75, and taxes for our local transit authority, TriMet. If you’re wondering what kind of business license you’ll need, start researching—another good reason to consult a Certified Public Accountant (CPA)!
3. The Tax Man Cometh
Last but not least, as you’re setting up your freelance e-Learning business, you need to make sure you’re aware of all of the tax implications.
The most important thing to know about taxes as a freelancer is that you’ll need to be paying estimated quarterly taxes. This means that each quarter, you’ll need to submit money to the IRS that is equivalent to 25% of your yearly total of tax money that’s due. Quarterly tax payments are due in April, June, September, and January of the next year—but these dates can vary based on holidays, so do some research before you begin.
Here in Oregon, I’m required to pay both my state and federal taxes every three months. The amounts that I pay throughout the year are then counted when I submit my yearly taxes. More importantly, if I don’t pay quarterly taxes, I’m subject to interest penalties, which can hurt my bottom line!
To help reduce the stress of quarterly tax payments, I recommend that you put away a certain percentage of your income as you get paid by clients. This can definitely be complicated—as a freelancer, the first big question is of course, “How do I estimate my taxes if I get paid sporadically and inconsistently?” Thankfully, the IRS has a worksheet designed to help you make accurate estimates—or you can always work with your CPA to make a realistic estimate.
Don’t Forget Self-Employment Tax!
In addition to income tax, you’ll also be responsible for paying Social Security and Medicare taxes (a.k.a. “Self-Employment Tax”). If you were previously working for a company, you probably were paying around 6% for Social Security and 1.5% for Medicare—and your employer was matching the same on your behalf. As a freelancer, you’re responsible for the entire amount—around 15%. It’s critical that you account for Self-Employment Tax as part of running your business, as these taxes will be part of your tax filings.
I know that everything in this article may seem a little tedious, but setting up your business properly will be critical to your success as an e-Learning freelancer. Remember: The more you invest in the beginning of your journey, the more you’ll be able to spend time doing the work you’re most passionate about—creating compelling e-Learning materials.
As you’re making these considerations, I invite you to join my e-Learning Business Basics Facebook group to share your questions, successes, and learning opportunities. I look forward to you sharing the insights you pick up along the way!