Listen and Subscribe Here
Moving from employment to full-time self-employment comes with new tax responsibilities. Tax questions, bookkeeping, and business setup can keep you from making sales and growing your business. In this episode of the Sunlight Tax Podcast, I’m breaking down the tax basics every new self-employed business owner needs to understand, including business deductions, self-employment tax, bookkeeping systems, quarterly estimated tax payments, and choosing the right business entity.
The right tax and business systems can help you stay compliant, avoid costly mistakes, and feel more confident running your business. I’ll also introduce my 2-Day Business Setup Intensive, where I help solo business owners get their tax, bookkeeping, and legal setup on solid footing so they can stop second-guessing their business and focus on growing it.
Also mentioned in today’s episode:
00:12 Tax uncertainty can put the brakes on sales
01:35 Why getting your business setup locked in matters
03:49 How payroll helped Hannah double revenue
05:37 The transition from corporate work to self-employment
07:22 Business deductions and first-year startup expenses
09:53 Bookkeeping, tax planning, and self-employment tax
11:06 Why self-employment tax is 15.3%
13:24 Quarterly payments, retirement, and entity questions
15:39 Inside the two-day business setup intensive
17:29 Cohort dates, pricing, and final encouragement
If you enjoyed this episode, please rate, review and share it!
Every review makes a difference by telling Apple or Spotify to show the Sunlight Tax podcast to new audiences.
Episode Links:
Check out my 2-day Business Intensive
Order my book: Taxes for Humans: Simplify Your Taxes and Change the World When You’re Self-Employed
Get your FREE visual guide to tax deductions
Transcript:
Hannah Cole (00:07)
Hello my friend. I hope you are having an awesome day today and enjoying this gorgeous fall weather. If it's gorgeous, wherever you're listening. I wanna talk to you today about the idea of taking your business seriously as a bit of a mental unlock to be the moment where you suddenly start making sales, you start bringing in real income.
This is something that I've just been noticing as I've talked to clients, honestly just for myself, I have my own story of this, but I've definitely been noticing how much when you feel a fear that you don't have a good tax setup, that you're not quite sure if it's legal for you to get an invoice paid or if you should be collecting sales tax.
And if you are breaking the law accidentally by accepting money, that can become an incredibly real mental hurdle. And you might sort of let it go and let it just be a quiet voice in your brain. But I think a lot of people allow that to just stay there for a long time and actually hamstring their business. I've really witnessed this. And I also am here to say I've seen the other side of it as well, which is.
When someone makes a decision to get the setup locked in, right? To actually tick those boxes, dot the I's and cross the T's, know that their sales tax is set up correctly, their corporate entity is set up correctly, they have the right legal structure, tax structure, and also that all your tax documentation is in place, right? That suddenly unlocks your ability to hit the gas.
when it comes to making sales.
So I have seen this over and over and over again. It's a lot of what I'm seeing as I begin running my first cohorts of my business setup intensive. I've had multiple people come to me saying like, hey, I've actually had this business for a while, but I've really not felt comfortable making sales because I didn't trust the setup. So I think it's just a thing to think about that's really important.
I will tell you from personal experience, I also have had this happen, right? So for me, the moment where my business just suddenly accelerated dramatically, it was the moment that I ran payroll. Running payroll is a huge hurdle. It's not a fun thing to set up, and it's very technical. Like you are really engaging with the law and getting yourself on the hook.
And it can feel a little scary, but when I did set up payroll in my business and paid myself an actual salary, it became suddenly very simple to hire my first employee, right? because payroll was no longer the barrier to hiring an employee. And so suddenly I was like, well, that wouldn't be so hard. And actually within a month of setting up payroll for the first time, I hired my first employee.
And what happened after I hired my first employee? I doubled my revenue. It's pretty interesting, right? These things are related. and I'm gonna tell you, this first employee I hired was not great. It was a terrible fit. And I actually ended up letting her go after just about four months with me. Even with that employee being not a good fit, I still doubled my revenue.
Right, because it actually just opened me up to all of the delegation and structure and just going all in on those revenue generating activities of the business, that I had somebody handling the other things, and that I was able to hire that somebody because I locked in this one particular tax item setting up payroll. So what I want to talk to you about today.
Is A specific transition that I see can feel really frightening to people. And I know it is happening to a lot of you out there. And if you are new to the Sunlight Tax Podcast, welcome. but it is the idea of moving from a corporate job from full-time employment into full-time self-employment, right? There are some real tricky hurdles that happen in that transition. There is a
Big steep learning curve, especially on the side of managing your taxes. But I will tell you when you set up the taxes correctly, it unlocks your ability to lean into that newfound freedom, to lean into all those tasks you have of running your own business and doing that beautiful work that you were meant to do. So it's got a really wonderful side to it. So what I thought I would do today is outline.
What those specific challenges are for people who are leaving corporate work, leaving full-time employment. I want to outline what those challenges are, and I want to solve one of them for you today in this episode. I want to talk to you a little bit about what you need to know to be prepared. Okay? Let's get into it. So you're about to take the leap.
You're about to quit your job, or maybe you already have taken the leap, or maybe the leap was taken for you. Maybe somebody pushed you out. You know, it is possible that this is happening to you because of a layoff, even an illness. there can be, of course, this can be an unvoluntary thing. But if you are leaving a corporate position or a full-time employment, here are the things that I see that you need to learn how to handle. Okay.
Of course, when you have an employer, they are withholding taxes for you the whole time. W-2 income is the most simple, straightforward way to report for your taxes because automatically you've got your taxes paid every year, including your Medicare and Social Security. And so you don't have a lot to actually do. The other interesting thing there is that when you are self-employed, you now have the right.
To take expenses, to deduct the ordinary and necessary expenses of running your business, and not pay tax on the money that you spend on those expenses. So, in other words, if I bring in $100,000 of income, but I spend $80,000 on paying for my home office, on buying software, a laptop, outfitting the office to be functional, right? Buying a desk and a chair.
All of the things, right? possibly I might hire a couple contractors to help me maybe build out a website, maybe make some custom software, whatever it is that you are doing those expenses, right? So let's just say I'm sending $80,000 setting that up. Well, that will mean my profit is $20,000. I only pay tax on the profit, not on the full $100,000 that I brought in the door, right?
So getting to take your business deductions is a massive tax benefit. Just massive. And really important for you to know: in your first year when you've left your employment and the first year where you start to freelance, you have access to a special category of deductions called startup expenses. It's also a year where you have.
A lot more likelihood of having a loss. And a loss is actually a tax shelter. A loss is a tremendous valuable tax benefit that gives money back in your pocket to help you weather that early, delicate, difficult startup phase. So this is an area to really dig into and understand because you have actually a lot of benefit given to you in that first year that you freelance.
that you might not be aware of and waiting is not gonna help you because you might simply miss the year. Okay. So that's a really key thing to know.
Second, so tracking deductions also becomes extra important, right? bookkeeping is something you are now going to have to set up. That's really important because that's how you track those deductions. It's also how you know what your profit is, and it's also how you know what your tax is because that is based on profit, not your gross income.
It's really important to know how much money you need to set aside for your taxes in a world where someone is no longer withholding the proper tax amount for you, right? So you wanna know how your taxes actually work. I think a lot of us intuitively understand federal income tax, although I'll be honest, people think tax brackets are really
Big deal and get worried. There's a lot of misinformation and misunderstanding of tax brackets. They're more gentle than you think. But I think most people think of federal income tax and they actually never got any education in self-employment tax. So let me help you with that one today. Self-employment tax is usually a much bigger factor in your tax bill than you realize. It is where I see most self-employed people underestimate their tax bill.
So, what's self-employment tax is? It's you paying in to your self-employment, to your Medicare and Social Security. Okay? Everyone who does labor pays into Medicare and Social Security, but you might not realize you do. When you are an employee, you see that FUDA and FICA number coming out of every paycheck. That's Medicare and Social Security. And that is a total amount of 7.65% of your pay.
When you're an employee. What you don't see there is that your boss is actually matching that amount and paying 7.65% of your pay, but not out of your pocket. They're paying it out of their pocket into your Medicare and Social Security as well. Well, when you transition from working for someone else to working for yourself, you add a new hat to yourself. So not only do you have to continue paying that employee side 7.65%.
Of your pay into Medicare and Social Security, you're now the boss who has to pay the payroll tax side of it. So you also have to pay the 7.65% that the boss had been paying when you were an employee. Because when you're self-employed, that reflexive word right there tells you you're the two things at once. You're the employee and the boss at the same time. So the bad news is that's a much higher tax than you think. That is
15.3%, right? That's higher than most people ever realize, and it tends to hit people hard. But the good news is if you're tracking every single deduction, that 15.3% is off of a much lower number than you might be estimating. The key here is tracking all your deductions, capturing them legally in the way that the IRS requires.
That will allow you to pay that higher tax, 15.3%, and federal income tax and state income tax on a much lower number because you pay that on your profit, not your gross income. Okay? So I hope that kind of settles the issue for you. It's sort of like, whoa, my taxes are so much higher than I thought. but they're on a much lower number than I thought, right? So there's a bit of a leap you go one direction and the other at the same time.
Okay, I hope that was helpful in just kind of laying out the tax side of why moving into self-employment is tricky. Okay. But if you understand the information, it can feel a lot clearer and better. All right. So knowing how much tax you need to set aside, getting the system set up so you've got tracking going on, and knowing that you've got bookkeeping in place. The other thing is you want to set up quarterly tax payments.
Estimated quarterly taxes are the alternative method of paying taxes through the year that you now are going to be required to use. So you have to learn about estimated quarterly taxes and know how to make that calculation. Again, that can feel kind of tricky. You no longer have a boss pulling tax out of every paycheck. You are going to have to get into a rhythm of every three months making a tax payment. On top of that,
Of course, you want your savings in place as well. And so setting up retirement savings is a really smart financial decision. And it's very, very possible when you're self-employed. I have a lot of tips and tricks about it. But that is a really wonderful element. It's just taking advantage of setting up retirement savings for yourself. That's an important thing to not forget as you make that transition.
And lastly, answering your own questions on LLC versus S-Corp, like those sort of business entity, tax entity, legal entity questions, those can feel really complex and you might feel like you're being ping ponged between lawyers and accountants who don't really understand each other's language. So that is a particularly frustrating issue. And I know a lot of people get worried, like they can't even accept their first invoice payment. They can't even send invoice number one.
Because they're so worried about am I collecting money legally? Like, am I allowed to even take in this money? Okay. So I want to be here to reassure you that you can follow the law. It is not that horrible. And this is really the purpose why I have been putting so much energy and focus into creating a really wonderful program to help guide you through.
These setup issues. So, what I want to announce today that I've opened a new cohort of my two-day business setup intensive for people transitioning to full-time self-employment work. So whether you're leaving corporate, maybe you haven't taken the leap yet, or maybe you have, maybe you've had a side hustle and now it's becoming more of a full-time hustle. Whatever it is, moving into
Full-time self-employment, that is a scary transition. So I've built a special cohort for December. It's December 9th and 10th, 11 to 5 p.m. East Coast time, 8 to 2 Pacific, where I will be with you building out your system so that you have all of these things in place I am there with you the whole time, you get every single question answered. I am capping this cohort at 10 people. It will be a group of
Peers, you'll get to know, and you will get every single question answered. I also want to say this comes with two private sessions with me. So you get a one-on-one session with me that's fully private. You can bring tax numbers, you can bring bookkeeping, you can bring anything you feel insecure or self-conscious about, things you feel like you should know, but you don't. This is an absolutely safe, judgment-free space. And you also get a private session after the two-day intensive.
so that if there's anything that you want to follow up on or that feels like it became a snag after the fact, we can troubleshoot. Okay. So it's a really wonderful program meant specifically to help you through that transition into full-time self-employment work. So December 9th and 10th, if you're interested in that cohort, the cost is $1,850 paid in full, or you can make three payments of $650.
it's a really wonderful value. You also get to leave with a full tax library, searchable tax library where you can ask forever to keep all your tax questions. and these are from content that I have made, I have put my seal of approval on as a tax professional. So it's a place you can actually trust the information. So if you're interested in that, full-time self-employment transition
special cohort, you can go to sunlighttax.com/intensive and click the button about choosing your cohort and join the leaving corporate or the full-time self-employment transition group in December. If this isn't quite the group that you're in, maybe you've always been self-employed. I also have a cohort in November 16th and 18th.
11 to 5 East Coast Time, 8 to 2 Pacific. and you are invited to join that cohort as well, if that timing works better for you. So I'm really excited about this program. It's really built to solve a need I see out there and help you bust through those mental roadblocks that really prevent you from bringing in money. Because what I want you to do.
Is remember that original vision, that powerful work that you do, and get all of these little T's crossed and I's dotted so that you can step on the gas and bring in the sales. So sunlighttax.com/intensive and I hope to see you in the full-time self-employment group, which is happening December 9th and 10th, or in the I've been self-employed a long time group in November 16th and 18th.
So sunlighttax.com/intensive to learn more and I hope to see you inside.