Thinking of handing in your two-weeks notice to finally be your own boss? You should know that being self-employed can come with some important nuances. Read on to understand the differences about how this employment status can affect you.

What does it mean to be self-employed

You are generally considered self-employed if you are a business owner or contractor who provides services to other businesses. One example could be a fashion designer who sells their clothing in a store. You have to decide when starting a business which form of business entity to establish. Your form of business determines which income tax form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. The IRS provides assistance to new business owners who are selecting a business structure.

Insurance requirements

If you're self-employed, you need to get the right insurance to fit your unique business needs. The policy you should get depends on the nature of your work and the risks you might face. This may vary from worker's compensation, which is legally required if you have employees, to general or professional liability insurance if you're an independent contractor.

For instance, if you're a freelance graphic artist, you may want to insure the tools of your trade, such as your laptop. Getting professional liability insurance is critical if you have to travel to your client's home or have customers come to you. Don't rely on a homeowner's or renter's insurance policy if you have a home-based business; they usually don't cover any claims associated with property or equipment used for business purposes. Not having the right insurance policy could be devastating for your business and leave you on the hook for extensive damages and legal bills.

Tax implications

Understanding your employment status and defining it accurately at tax time is important for legal and financial reasons. While employees don't have to worry about social security or Medicare taxes since employers pay them, self-employed individuals — including independent contractors — must be mindful of their extra responsibilities.

Federal Insurance Contributions Act

All self-employed individuals are responsible for paying their own Federal Insurance Contributions Act (FICA) taxes. Since you receive your compensation without any deductions, you will have to make quarterly payments based on an estimate of the taxes you owe.

Social Security and Medicare Taxes

Self-employed individuals generally have to pay a self-employment tax. This includes both Medicare and Social Security and is in addition to income tax.

Avoid penalties for misclassifying employees as contractors

It is critical that you appropriately determine if the individual you are working with is an employee or independent contractors. Generally, for employees, you should withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid. Conversely, you do not have to withhold or pay any taxes on payments to independent contractors. Check to see if you tick any boxes on the Internal Revenue Service's 20-point checklist.

Keep track of eligible tax deductions

It's important to keep track of your business-related expenses to reduce the amount of tax you are required to pay as a self-employed individual. Some expenses you can claim at tax time include but are not limited to your car, travel, cell phone, home office and any business insurance policies.

Understanding your employment status will affect how you register your business, what types of deductions you can claim and the liability you assume while working. Having the right insurance coverage as a self-employed individual can make a significant difference in your finances and day-to-day operations. For the most cost-effective solutions and to ensure peace of mind, consider getting the help of an independent insurance agent. Connect with us  to find what works best for you.