Are lifestyle coaches independent contractors or employees? They can be both!
But while working full-time for an employer such as a fitness center is certainly an option, many lifestyle coaches choose to be employed on a contract basis, working directly with their clients to provide their services.
This isn’t surprising. Being self-employed is a dream come true for many. The freedom and flexibility of working for yourself are what draws many people in. Between setting your own schedule to avoiding office politics to working side-by-side with your fur baby in your home office, being self-employed is very alluring to many.
On the other hand, it can at first be a little overwhelming. There’s a lot to manage, including how to schedule your time, pay taxes, and navigate health insurance. And if things go wrong, there’s no safety net to fall back on or anyone else to blame.
This means more and more people are asking themselves, “How do I (or should I) become my own boss?”
There are a lot of unknowns when it comes to stepping out on your own as an independent contractor. That’s why it’s so important you know exactly what you’re getting yourself into. In this article, you’ll learn about paying taxes, finding the right insurance for your business, managing money, and more as an independent contractor.
What is an independent contractor?
To begin with, let’s lay out exactly what an independent contractor is.
Sometimes called ICs, freelancers, or simply contractors, independent contractors are one of two categories the IRS designates to workers.
Sometimes ICs are referred to as 1099 workers because 1099 is the tax form you’ll use instead of a W-2. This paperwork is fairly straightforward, but you’ll need some instruction if you don’t know how to fill out a 1099 form.
One way the IRS designates ICs is is that the person hiring you isn't in charge of the way you do your work. They’re paying for the results, not the process that brings about those results.But this isn’t always the most accurate description of what an IC is.
Just know that as a contractor, you set the terms of your work, including when you perform it. You decide how you’ll perform your services, whether it's the type of training you get, how you combine it with other complementary services, whether you do it in-person or virtually, and how often you meet with clients.
Of course, you’ll need to follow any guidelines around what you can and cannot do legally as a lifestyle coach coach (like receiving your National DPP certification to lead CDC-approved sessions) but ultimately, you answer to your clients. If you want business, you’ll need to work around their schedules and meet their needs. Essentially, your clients are your bosses.
Deciphering Business Taxes and Expenses as an Independent Contractor
The biggest challenge to working as a freelance lifestyle coach is undoubtedly managing money. From paying taxes to preparing for lean times to saving for retirement, you’ve got a lot to think about financially.
Thankfully, with a little extra work, and possibly some help of a trusted financial advisor, becoming managing your money as an independent contractor doesn’t need to be an overwhelming process.
Understanding Self-Employment Tax Rates and Quarterly Estimates
Taxes can be tricky as a self-employed person. If you’re used to getting a regular paycheck with deductions already included from an employer, you’ll find that paying taxes as a contractor is more complex. What’s more, freelance tax deadlines occur every quarter, so you’ll likely have taxes on your mind on a regular basis.
However, filing freelance taxes is simply a matter of education, preparation, and good money management. Plenty of people pay freelance taxes successfully, and you can too!
The first aspect of your tax responsibility is income tax. This won’t be deducted from any payments you get, which means you'll have to set aside that money yourself. It’s helpful to put tax money into a separate account linked to your business account, so you can separate it easily.
In addition to income tax, you’ll also need to pay self-employment tax, which is 15.3%. That breaks down into 12.4% for social security tax (consisting of old-age, survivors, and disability insurance) and 2.9% for Medicare (consisting of hospital insurance). This tax rate may seem steep, but it’s because you’re paying double what you’d spend on these taxes as an employee, as employers are required to pay half.
Each quarter, you’ll need to estimate and pay the amount of taxes you owe. If you underpay, you’ll receive a bill come April, and if you overpay, you’ll end up with that money back. To avoid any surprises or give away money that you could be using throughout the year, make your payments as accurate as possible
And it’s important to stay on top of the quarterly filing deadlines. If you miss one, you could face fees and penalties come April.
Tax Forms and Deductions as an Independent Contractor
When preparing your taxes, you won’t be using the W-2 form you’ve been used to as an employee. Instead, you’ll need an 1099-Misc form for each client you work with.
With such high tax rates, you want to be extra vigilant about recording your tax deductible business expenses. Some of these include:
- Home office space
- Vehicle expenses
- Travel expenses
- Internet and phone bills
- Health insurance
- Office supplies
- Hardware and software
- Advertising materials
- Legal or professional services
- Contract labor
- Licenses and taxes
Paying taxes as a freelancer is a complex topic, so it’s important to research it thoroughly. Many people also opt to hire an accountant, which is well worth it.
Setting Rates
To offset the higher tax rates as an independent contractor and properly reflect your value, you want to set your rates appropriately.
When you sit down to consider your rates, it’s important not to think purely in terms of hourly pay. This is because you need to be making enough money to cover the things you do when you’re not specifically working. In a full-time salaried job, you would be getting a lot more in terms of benefits than you do as a freelancer. Your rates should reflect that.
As an independent contractor, you will not accrue sick days, personal time, and vacation time. You also won’t have an employer making contributions to your retirement fund or providing you with health insurance. If you want to have money for the usual benefits provided by an employer, you’ll need to set resources aside for them, which means you need to make more than you need for day to day living expenses.
You also need to take into account the time you spend marketing, doing outreach, reading emails, going to networking events, and staying in contact with clients. Plus, you won’t necessarily have steady work all year. Feast or famine is a real thing as a freelancer. To prepare for lean times, you’ll want to have some savings set aside.
All of this can be pretty challenging to determine right away, and it’s not something you can necessarily figure out ahead of time. To determine your rates, you’ll want to carefully track where all of your time is going outside of client sessions.
Carefully pay attention to how much time you’re spending on emails and marketing every week. Add that to the money you need for savings, health insurance, and other expenses, and you’ll get an idea of what you really need to make.
Then, set your rates accordingly.
Understanding Insurance, Managing Money, and Preparing For Retirement as an Independent Contractor
As you hone in on what your rate should be, consider where you’re money will be going. You’ll need to ensure you can comfortably get health insurance that works for you, save for the future, cover sick days, and stay financially balanced even during lean times. And don’t forget about vacations, which as a lifestyle coach, you undoubtedly deserve.
As an independent contractor, you have an amazing opportunity to take control of your work life, and that also means you get to choose which health insurance to use. But it can be a little tricky, at first, to figure out which plan is best for you without the help of an HR advisor.
Luckily, you have plenty of options to choose from.
Start with the government Healthcare Marketplace to shop for plans. Follow the prompts on the site for information about enrolling that’s specific to your needs. It’s a helpful site, and they do a good job of breaking down your options. You can also apply for coverage throughout the year, even if it’s not currently the open enrollment period.
You have a lot to think about when it comes to choosing a plan. Consider your personal needs and level of health. So if you’re young and healthy, you probably don’t need as much coverage as you do if you have a health condition. Think also about the benefits you want, from coverage for prescription drugs to mental health support.
Considering how many options there are, it’s also best practice to check out reviews from reputable sources.
Managing savings
Besides health insurance and taxes, you’ve also got to think about sick days, vacation time, retirement savings, and more.
To make all of this less stressful, be proactive and think ahead. Try setting aside money in separate accounts so you can draw from them during weeks when you’ve had to cancel appointments or then you return from a relaxing trip away from home.
A great way to do this in an organized way is to open up multiple accounts with one bank. Capital One 360 is an online bank that lets you open up to twenty five savings accounts for free, and link them all. You can name each individual account, which is handy for keeping sick pay, emergency funds, and vacation funds clearly separated and marked.
Choosing the Right Retirement Fund for Independent contracting
Now let’s talk about retirement.
It’s likely that if you worked for a company for years, your retirement planning was on autopilot. Maybe you had employer matching. Maybe you had an advisor to talk to. Or maybe you’ve only worked part-time jobs, and you’ve never set up retirement savings. In that case, it’s never too late to start.
If you’re managing retirement without the help of an employer, you’ll need to be proactive in how you approach your savings. Factor retirement into every paycheck. However, it’s best practice wait until you have some emergency savings (three months of living expenses) before you start.
As a freelancer, you have a few options for maximizing your retirement savings.
You can opt for a Roth or traditional IRA, or you could try something more specific to freelance workers: Simplified Employee Pension Plan Individual Retirement Account (SEPIRA) are basic individual retirement accounts similar to traditional IRAs that are tailored for independent contractors. Contributions up to $61,000 are allowed as of 2022, and are tax-deductible. They are easy to set up and run, and you pay no taxes on the account until retirement.
Learn More About Getting Referrals With Realizing DPP
Becoming an independent lifestyle coach has undeniable benefits. Not only do you get to help change people’s lives for the better, but you can also work on your own terms and balance work and personal time in a way that works for you. To make this career viable, however, you must be proactive about your finances, health insurance, and tax planning.
It’s one thing to read about how to do something and another to put it into action. As you go about managing your independent contracting life, you will undoubtedly have questions that need answering and dilemmas you can’t figure out on your own.
At Realizing DPP, we have a robust community of past and current lifestyle coaches that can support you in your self-employment journey. When you can draw on the wisdom and experience of other coaches, you’re more empowered in your own practice.
Don’t take your lifestyle coaching journey on your own, let the Realizing DPP community start supporting you today!
