Many people have a dream of becoming an entrepreneur or business owner and changing over to a 1099 tax schedule. Leaving corporate America behind gives people a new excitement, freedom, and a sense that they are building something bigger than themselves. Despite many people having this dream, less than 10% of the workforce actually takes this leap of faith.
Since important skills aren’t taught in school, this leaves people to either learn on their own accord or find the right experts to guide them to success. Before you leave your W-2 job as an employee, there are countless items to consider. I’ve been out of corporate America since 2017 and decided to break down the top 5 areas that are going to help you make your decision to either stay W-2 or go 1099.
1. Lock in a House.
If it’s important to you to own a home. Being able to attain a mortgage is much easier as a W-2 employee rather than a 1099 worker. This is because when you’re a W-2 worker, mortgage companies look at what your total income is from your employer. Even if you make $1 million/year and you’re spending all of your income, they don’t care.
On the flip side, if you’re a 1099 worker making $1 million/year and after your expenses, you’re showing you make no income. The mortgage companies are going to view that as you make no money. Even if you have ample cash flow, unfortunately, as a 1099 contractor, they will look at your bottom line, not your top line.
So, if you have a family or always dreamed of owning a home, the process will be much easier if you do it as a W-2 rather than waiting until after you’ve gone 1099.
2. Get Your Credit Right.
As a 1099 contractor, your income is not guaranteed. You’re going to have to work in order to generate revenues for your business. You can’t just show up to work whether you’re feeling your best or your worst and every few weeks your paycheck hits your bank account. This is what stops most people from taking a leap of faith and which is why as you’re still an employee, you need to get your credit right.
As an employee, your income is predictable, and it’s up to you to make the right decisions when it comes to your spending habits. One of those habits, is ensuring that you pay your debts (student loans, car notes, mortgage, etc.) on time every single month!
Also, as you start to build more wealth you want to increase your credit lines as much as possible. For example, before leaving corporate America, I had at least 2 credit cards with a $30,000 credit limit with a credit score of over 800.
Setting the foundation before taking a risk of venturing away from the conventional W-2 environment, will make it much easier when you hit bumps in the road as a 1099 contractor.
3. Save Up as Much Cash as Possible.
Everyone has their own opinions on how much cash you should save. Some recommend 3-6 months, some recommend a year’s salary. If you’re about to switch gears from a normal job, you want to make sure you have as much cash as you feel is necessary in order to ensure you will be successful.
That may be 6 months of bills. Or even 1 year or more! It all depends on your lifestyle and what you’re willing to sacrifice. If you’ve done a good job of saving in your 401k through work. You can always set up what’s called a solo 401k through your new business and take a loan against the balance.
This gives you as many tools that you need in order to ensure your new business survives and doesn’t become a business that falls into the statistic that most small businesses fail within the first 5 years of their inception.
4. Get Credit Lines.
Home equity lines of credits, cash credit lines, credit lines, get as many as humanly possible before you leave your job. This will provide you with different strategies to tap into not if, but when you encounter challenges. The goal as an entrepreneur is to keep the momentum moving forward. If you hit a rough spot where you don’t close any new deals for a month or two, you do NOT want to be freaking out.
You want to be able to know that you have set a bulletproof financial strategy in place so that when problems occur, you will not be rattled! When you’re back is against the wall, you do not want it to impact your psyche because that will negatively affect the results of your business.
5. Know What You’re Getting Into.
Moving from a conventional W-2 job into a 1099 environment is one of the most rewarding and frustrating decisions you will ever make in your life. Becoming a 1099 contractor is going to take a lot of hard work, dedication, and sacrifice. Yet, when you find yourself in the winner’s circle, it can be a decision that changes your life forever.
So, if you have a dream of having freedom and building something that will give you everything you want out of life, then I’d highly suggest you consider moving to 1099. Or, if you’re not sure, just start small while you’re still getting that income from your current job and see what blossoms over time.