Self-employment is one way that Americans are meeting the challenges of company downsizings. Millions of people are opting to work for themselves. In fact, the National Association for the Self-Employed reported that, as of 2006, more than 77 percent of small businesses in the United States were self-employed. And from 1997 through 2006, self-employed businesses grew faster than other small business segments. As tempting as it sounds to quit your job and go to work for yourself, there are legal and organizational requirements you must fulfill before you start earning a salary as a self-employed worker.

Identify Business Structure

Determine whether your business will operate as a sole proprietorship (you are the only person who owns the company) or partnership (two or more people own the firm). You can also set your business up as a limited liability company (LLC) or as a corporation. One or more people can start a LLC. Corporations are owned by shareholders and managed by senior board members.

Register Your Business

Apply to receive an Employer Identification Number (EIN). The IRS allows you to apply for an EIN online at their official website free of charge. Sole proprietors are permitted to use their Social Security numbers as their EINs. It takes approximately four to five weeks to receive an EIN from the IRS. You also need to register your business with your state and/or local tax offices. Depending on the type of business you operate and the amount of sales your company makes each month, you will have to file and pay sales taxes on a monthly, quarterly or semi-annual basis. State laws require you to file for and pay worker’s compensation insurance and unemployment insurance for employees that you hire. Most state departments of labor administer filings for these taxes.

Licenses and Permits

Contact your local or state government and apply for licenses and permits required to operate your business. For example, if you are starting a car dealership, you must contact your state department of motor vehicles, complete license application forms, and pay fees to receive your auto dealer’s license.

Record Keeping

Create and maintain accurate records. Items to list in your records are dates of customer sales or purchases, amount of the sale, taxes collected on sold items and unsold inventory. When you file your income taxes, you will list the amount of inventory you started with at the start of the tax year and the amount of remaining inventory on file at the end of the year. Keep a log of mileage that you put on your vehicle for business purposes like trips to conferences, sales events and the post office. The IRS allows you to deduct this expense when you file your tax return. As of 2010, the IRS set mileage deduction rates at 50 cents per mile. Keep receipts for equipment, services and products that you order to operate your business. You are permitted to deduct these expenses when you file your income taxes. The IRS requires self-employed workers to maintain their business records for a minimum of four years.

Self-Employment Taxes

Pay the self-employment tax on a quarterly or annual basis. If you owed $1,000 in federal taxes the previous year, you will estimate your gross wages each quarter and file the tax quarterly with the IRS. Use Form 1040-ES to estimate your self-employment taxes. If you expect to receive a refund from the federal government after you deduct office expenses, mileage and building rental fees, consider paying the tax once a year when you file your annual return. As of 2010, self-employment taxes were 15.3 percent. The tax is based on your gross wages and is a combination of Social Security, 12.4 percent, and Medicare, at 2.9 percent. The first $106,800 of your gross wages is subject to the tax.