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According to a Bankrate survey, only 28 percent of Americans feel financially secure in this economy. In times of economic hardship, many turn to self-employment as a way to increase their income.
Self-employment has many perks. You can set your own schedule and salary, plus choose who you work with. But if you ever find yourself in a tight financial spot, and it is your only source of income, borrowing money can get tricky. Lenders typically require copies of paystubs or W2s to approve you for a loan — something you may not have when you work for yourself.
That said, there are still options. Some lenders accept bank statements and tax returns as proof of income, making it easier for self-employed persons to qualify for a personal loan.
Small business loans are another alternative. However, these are more restrictive, as you can only use the funds to cover business-related expenses, such as buying new equipment or upgrading your workspace.
- There are over 15.8 million self-employed persons in the U.S.
- Self-employed individuals account for 10.1% of the country’s workforce.
- The average national salary of a self-employed person in the U.S. is $84,305 a year or about $40 per hour.
- New York, Washington D.C. and Atlanta are the three top paying cities for self-employed workers, with average annual salaries of over $70,000.
- Engineering, IT and marketing are the top three paying industries for self-employment in the U.S.
Self-employment by demographics
Self-employment rates vary based on demographic factors. Here is a breakdown of the top cities for self-employment and self-employment by age.
|Cape Coral, FL||16.2%|
|Los Angeles, CA||15.9%|
|Age range||% Self-employed|
|19 to 24 years||3.2%|
|25 to 34 years||6.2%|
|35 to 44 years||10.2%|
|45 to 54 years||11.8%|
|55 to 64 years||13.1%|
As shown above, four out of the five cities with the highest rate of self-employment are located in Florida. Likewise, older Americans are more likely to be self-employed than younger.
Self-employment by industry
Self-employed individuals work across many industries. However, the following sectors have the largest concentration of self-employed workers in the U.S.
Self-employed salary and tenure
The amount of time self-employed individuals stay at one job varies significantly. Twenty-one percent of self-employed individuals stay at a job for only one to two years, while 25 percent stay at one job for more than 11 years.
The average self-employed person in the U.S. earns a little over $84,000 a year or about $40 per hour. However, salaries fluctuate based on factors, such as industry and location. For instance, the average salary of an independent consultant is $97,500 a year, but those living in California often make well over $110,00 a year.
But consulting isn’t the only lucrative sector for self-employed workers. The table below shows the top-paying industries for freelancers, contractors and other self-employed persons.
|Self-employment industry||Average annual income|
Self-employed tax deductions
Self-employed individuals typically receive multiple 1099 forms from businesses or individuals to which they provided services throughout the year. These forms, along with copies of invoices and quarterly Social Security and Medicare payments are what most self-employed individuals need to file their taxes.
Besides that, self-employed workers can claim a series of deductions most W-2 employees can’t claim, including the following:
- Insurance costs (both business and health)
- Travel and meals
- Home office
- Equipment and supplies
- Continued education and certifications
- Phone and internet bills
- Interest paid on credit cards and personal loans used for business
When combined, these deductions can cut down thousands of dollars from a self-employed person’s tax bill. Not only that, but it’s essential to keep copies of these, as well as any tax forms and tax returns, as these could be useful when applying for a loan as a contractor. That’s because many lenders require additional documentation for contractors to get a loan, as their income tends to fluctuate more than that of regular employees.
How to prove income when self-employed
Before you apply for a personal loan, you should know what types of income documentation the lender may consider.
One of the first and most important steps in applying for personal loans is to produce documentation to verify stable, consistent income. This is a straightforward process for someone who works for an employer, as they would usually need to provide copies of recent pay stubs. Some lenders can even verify income electronically through an employer’s payroll system.
However, would-be borrowers who aren’t on an employer’s payroll will need to produce other documentation to prove their income, according to Mary Monroy, a credit counselor with ClearPoint Credit Counseling Solutions.
“The lender will likely require the most recent two years’ tax returns, a profit and loss statement and bank account statements to verify the income is seasoned. If it isn’t, then sometimes copies of deposited checks are required,” Monroy says.
Chris Dervan, senior vice president and product manager at PNC Bank, says that income verification is a standard requirement for all loan applications, regardless of income sources.
“We require income information and documentation for all applicants, so in that respect, there’s no difference for self-employed borrowers. The variation would be in the type of documentation involved with those who don’t have a pay stub.”- Chris Dervan, senior vice president and product manager at PNC Bank
Business loans and health insurance
If you’re having trouble qualifying for a personal loan due to your self-employed status, you should consider applying for a small business loan.
A business loan is a loan specifically intended to cover business expenses. You can typically get approved for higher loan amounts than you can with a personal loan. However, you must use the funds for business purposes and the application is lengthier. Plus, the lender could request business financial statements, proof of income, profit and loss statements, projected financial statements, tax returns and any loan application history, if applicable.
Like a personal loan, you’ll also need good or excellent credit to qualify for funding. If your credit score is low, you may still be approved, but with less favorable loan terms. And if your business hasn’t been established for an extended period, you’ll generally have to provide a personal guarantee for the loan. You’ll be liable for the outstanding balance if your company falls behind on payments.
If you need funds to cover health-related expenses that you cannot cover with a business loan, it could be worth looking into self-employed health insurance.
If you are self-employed, you can treat your health insurance as a business expense. This allows you to deduct premiums from your adjusted gross income on your taxes, thus reducing your tax bill and increasing your refund.
Health insurance can be accessed through federal and private programs, although federal plans are generally safer and more affordable. When searching for healthcare providers, you should look for an affordable plan with decent coverage and low premiums and deductibles.
Frequently asked questions
Ideally, you should be self-employed for at least two years before applying for a personal loan. This allows lenders to see a consistent income history before deciding whether to give you a loan.
A 1099 employee is someone who works under a contract versus someone who works as a full-time employee for a company. Examples of 1099 employees include freelancers, self-employed individuals and independent consultants.
The gig economy is a labor market wherein a large percentage of the population does freelance work and takes on short-term contracts instead of having permanent jobs.
The self-employment tax rate is currently 15.3 percent; 12.4 percent for social security and 2.9 percent for Medicare.