People become self-employed in Minnesota for a variety of reasons. For some individuals, it’s an opportunity to control their destiny and have more choice and flexibility in their careers. Others embrace the idea of directing their earning potential themselves. Still others, especially those who worked remotely during the height of the pandemic, see self-employment as an opportunity for a better work-life balance once they’ve established themselves.
If you plan on going into business for yourself, there are different forms your new enterprise can take:
- Sole Proprietorship: A sole proprietorship may be an attractive option for entrepreneurs who plan to work on their own (without partners or employees) and offer a specific service, such as copywriting, graphic design, or consulting.
- Partnership: Partnerships are businesses where two or more owners share responsibility and management. Partners share profits and losses in this type of business structure, which is often preferred by medical offices, law firms, and real estate groups.
- Limited Liability Company (LLC): Owners of LLCs have limited liability and are not personally responsible for the company’s debts. For small businesses that offer a wide range of goods and/or services or are more complex than a sole proprietorship, this can be a good option.
While self-employment can be hugely rewarding, there are big differences between being an employee and an entrepreneur. In this blog, the team at Pridgeon & Zoss, PLLC, reviews the various things you should know about becoming self-employed in Minnesota, including cash flow management, the need for health and business insurance, and an obligation to pay self-employment taxes.
You’ll Constantly Monitor Cash Flow
When you’re working for yourself, you need to remain acutely aware of your financial position. Rent, business insurance, equipment upgrades, and other expenses formerly covered by your employer are now your responsibility. As a result, you need to pay close attention to accounts payable, accounts receivable, and other financial responsibilities while monitoring how much you take in every month.
In the beginning, many small business owners and freelancers can manage these issues using accounting and bookkeeping software. However, as your success grows and accounting becomes more complicated, working with a Minnesota tax attorney is the best way to ensure that you remain in compliance with the ever-changing state and federal tax laws.
You’ll Need Insurance
If your spouse or domestic partner doesn’t have an employer-sponsored plan you can join, you’ll be responsible for your own health coverage. Depending on your personal situation, your options include:
- The Affordable Care Act (ACA): This act created a healthcare marketplace at the state and federal levels, allowing uninsured individuals to find a plan that meets their needs. MNsure, the insurance exchange that is part of Minnesota’s ACA implementation, has options you can review.
- COBRA: If you’ve left your job to become self-employed, COBRA, or Consolidated Omnibus Budget Reconciliation Act, allows people to keep their employer-sponsored health insurance after leaving their jobs. Coverage lasts up to 18 months, giving you time to investigate other options if you don’t want to keep the same plan.
- Private Health Insurance: You can apply directly to private health insurance companies to see what plans they have available or find an independent insurance agent to help you choose the plan that best meets your needs.
Becoming self-employed in Minnesota means you will also want business and liability coverage, although your line of work will dictate your requirements. For example, a cafe owner may need property insurance and various liability policies, while a self-employed graphic designer who works from home will have different coverage concerns. In addition, self-employed professionals, particularly those who are licensed, will typically have to take out some form of professional liability insurance. Consult an attorney if you have questions about what type of insurance you need.
You’ll Pay Self-Employment Taxes in the United StatesMost workers pay taxes that go to Medicare and Social Security. Employers withhold a certain amount from employees’ paychecks in order to fulfill this obligation on their behalf. As a self-employed person, however, you do not receive a regular paycheck, so there is no similar withholding. Instead, you pay self-employment taxes in the U.S., which are not the same as your yearly income tax.
Self-employment tax is currently 15.3%, which is divided as follows:
- 12.4% for Social Security, which is applied to the first $142,800 of your net earnings for 2021. (In 2022, the amount rises to $147,000).
- 2.9% for Medicare, which is applied to your combined net earnings. (Note: When your net earnings exceed $200,000 for a single filer or $250,000 for a joint filer, an additional Medicare tax of 0.9% may apply.)
Self-employment taxes must be paid quarterly using Form 1040-ES- Estimated Tax for Individuals. Forms and worksheets are available from the IRS to help you calculate self-employment taxes, but as your business grows and income streams become more complicated, you will want to look at having a professional do your taxes.
You Need to Save EVERYTHING
When you are working for yourself, you will have to keep track of any paperwork related to your self-employment income and expenses. This includes forms like 1099s and receipts for rent, utilities, software licenses, office supplies, and other business-related expenses. These records help ensure that your tax returns are accurate, reducing the risk of a negative outcome should you be audited.
Speak to a Lawyer About Self-Employment Taxes in Minnesota
Although working for yourself is an excellent life and career decision for many people, the IRS and the Minnesota Department of Revenue can sometimes make things complicated. Small businesses, freelancers, and self-employed professionals are three times more likely than salaried employees to be audited, and few things are more exhausting than discussing and disputing a tax liability.
Pridgeon & Zoss, PLLC offers dedicated and knowledgeable representation to self-employed individuals facing tax situations. We can help you defend the credits and deductions you rightly claimed on your tax forms or represent you before the MNR or IRS in a tax controversy.
With offices in Edina and St. Anthony, we represent clients throughout Minnesota and western Wisconsin. If you’re self-employed and have questions about your tax obligations or need assistance, contact the firm for a free half-hour initial consultation. We look forward to assisting you.