According to a Bankrate survey, only 28 percent of Americans feel financially secure in this economy. During times of economic hardship, many turn to self-employment as a way to increase their income.
Working independently has many advantages. You can set your own schedule and salary, and choose who you work with. But if you ever run into financial problems and it is your only source of income, borrowing money can become difficult. Lenders typically require copies of pay stubs or W2s to approve you for a loan — something you may not have if 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 the self-employed to qualify for a personal loan.
Small business loans are another alternative. However, these are more restrictive because you can only use the money to cover business-related expenses, such as buying new equipment or upgrading your workspace.
Key statistics on self-employment
- There are over 15.8 million self-employed people in the US
- Self-employed people account for 10.1% of the country’s workforce.
- The average national salary for a self-employed person in the US is $84,305 per year or about $40 per hour.
- New York, Washington DC and Atlanta are the three highest paying cities for the self-employed, with average annual salaries of more than $70,000.
- Engineering, IT and marketing are the three highest paying sectors for self-employment in the US
Self-employed by demographics
The rates for self-employed persons vary depending demographic factors. Here you will find an overview of the top cities for the self-employed and self-employed by age.
| City | Self-employed rates |
|---|---|
| Hialeah, FL | 20.3% |
| Miami, FL | 18.9% |
| Hollywood, FL | 18% |
| Cape Coral, FL | 16.2% |
| Los Angeles, CA | 15.9% |
| Age range | % Independent |
|---|---|
| 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% |
| More than 64 | 23.7% |
As shown above, four of the five cities with the highest self-employment rates are in Florida. Likewise, older Americans are more likely to be self-employed than younger ones.
Self-employed by industry
Self-employed people work in many sectors. However, the following sectors have the largest concentration of self-employed people in the US
Salary and tenure of self-employment
The length of time that self-employed people spend in one job varies considerably. 21 percent of self-employed people only stay in a job for one to two years, while 25 percent stay in one job for more than eleven years.
The average self-employed person in the US earns slightly more $84,000 per year or about $40 per hour. However, salaries fluctuate based on factors such as industry and location. For example, the average salary of an independent consultant is $97,500 per year, but those who live in California often earn well over $110.00 per year.
But consultancy is not the only lucrative sector for the self-employed. The table below shows the highest paying industries for freelancers, contractors and other self-employed people.
| Independent industry | Average annual income |
|---|---|
| Engineering | $102,462 |
| IT | $81,809 |
| Marketing | $72,420 |
| Art/design | $65,594 |
| Sale | $62,160 |
Tax deduction for self-employed persons
Self-employed individuals typically receive multiple 1099 forms from companies or individuals to whom they provided services during the year. These forms, along with copies of invoices and quarterly Social Security and Medicare payments, are what most self-employed people need to file their taxes.
In addition, self-employed individuals can claim a range of deductions that most W-2 employees cannot claim, including the following:
- Insurance costs (both business and healthcare)
- Travel and meals
- Home office
- Advertisement
- Equipment and supplies
- Further training and certifications
- Telephone and internet bills
- Interest paid on credit cards and personal loans used for business purposes
Combined, these deductions can save thousands of dollars on a self-employed person’s tax bill. Not only that, but it is also essential to keep copies of this, as well as any tax forms and tax returns, as these can 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 often fluctuates more than that of regular employees.
How to prove your income if you are self-employed
Before applying for a personal loan, find out what types of income documentation the lender may consider.
One of the first and most important steps in applying for personal loans is preparing documentation to verify stable, consistent income. This is a simple process for someone who works for an employer, as he/she will usually need to provide copies of recent pay stubs. Some lenders can even verify income electronically through an employer’s payroll system.
However, potential borrowers who are not on an employer’s payroll will have to provide other documentation to prove their income, according to Mary Monroy, a credit counselor at ClearPoint Credit Counseling Solutions.
“The lender will likely need two years’ most recent tax returns, a profit and loss statement and bank account statements to verify that income is seasoned. If not, sometimes copies of deposited checks are required,” Monroy said.
Chris Dervan, senior vice president and product manager at PNC Bank, says income verification is a standard requirement for all loan applications, regardless of income sources.
“We require income details and documentation for all applicants, so there is no difference for self-employed borrowers in that regard. The variation would be in the type of documentation involved for those who do not have a pay slip.” – 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 may want to consider applying for a small business loan.
Business loans
A business loan is a loan specifically intended to cover business expenses. You can usually get approved for higher loan amounts than with a personal loan. However, you must use the money for business purposes and the application will take longer. In addition, the lender may request business financial statements, proof of income, profit and loss statements, projected financial statements, tax returns, and any loan application history, if applicable.
Just like with a personal loan, you also need good or excellent credit to qualify for financing. If your credit score is low, you may still be approved, but with less favorable loan terms. And if your company has not been established for a long time, you usually have to personally guarantee the loan. You are liable for the outstanding balance if your company falls behind on payments.
Health insurance
If you need money to cover healthcare costs that you can’t cover with a business loan, it may be worth considering standalone health insurance.
If you are self-employed, you can consider your health insurance as professional expenses. This allows you to deduct premiums from your adjusted gross income from your taxes, lowering your tax bill and increasing your refund.
Health insurance is accessible through federal and private programs, although federal plans are generally safer and more affordable. When looking for healthcare providers, you should look for an affordable plan with good coverage and low premiums and deductibles.
Frequently asked questions
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Ideally, you have been 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 grant you a loan.
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A 1099 employee is someone who works on a contract basis versus someone who works full-time for a company. Examples of 1099 employees are freelancers, self-employed people and independent consultants.
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The gig economy is a labor market in which a large percentage of the population does freelance work and takes on short-term contracts rather than having a permanent job.
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The self-employment tax rate is currently 15.3 percent; 12.4 percent for Social Security and 2.9 percent for Medicare.
