I've been self-employed for the last ~18 months. In the past I started two VC-backed startups, then was a PM at some later-stage companies before returning to entrepreneurship.
This time around, I'm building a solo "digital product studio" [1] instead of a startup. So, I'm staying one person, haven't raised money, and have multiple revenue-generating products. Product revenue doesn't cover my costs yet, so I do occasional consulting to bridge the gap.
I like the flexibility of this lifestyle. I'm based in NYC, but writing this from Tokyo where I've been doing a creative residence for the past two weeks.
And, a fun technicality - I truly self-employed in the sense that I have a salary and a payroll system. This is because my company is registered as an S-Corp in the USA, which requires the owner to be on a salary.
I have a similar story. I’ve been self-employed for the last 6 months after 14 years of startups. Started out as an engineer in TN, and moved to SF a couple years ago where I got into management just in time to help with rounds of layoffs. Got some severe burnout, quit, and now I’m working on my own products while doing consulting/contracting on the side through my agency. I live fulltime in an RV traveling the country and working remotely. At the moment, I never want to work for someone else again.
How do you find work? I've been trying to start a similar consultancy but I've had a hard time finding organizations who don't want staff augmentation.
> And, a fun technicality - I truly self-employed in the sense that I have a salary and a payroll system.
That's how most devs here in Norway would do it. Make a "proper" company, where you own 100 % of the shares. Then hire yourself, and pay yourself salary, withhold taxes, pay into a pension program etc. Mainly because if you make good money, it's better to leave some of it in the company (and for instance re-invest it into some index funds or something), instead of taking it out immediately as salary and getting it taxed before re-investing. But then still take enough salary to cover your expenses, get social security benefits etc.
doesn't the 'company' itself also pay taxes on the income?
For most solo folks in the US, the revenue flows directly to you. You could set up a more complex corporate structure to hold the income that you don't pay to yourself, but that corporation would itself have to pay taxes on the income too. I suspect there's not any real savings/benefit until there's enough 'leftover' money to start getting creative/flexible.
At least in the US that's true only for a C-corp. S-corps are pass-through entities. So it works like this very simplified example:
Business gross earnings: $200,000
Owner salary: $60,000
All other expenses including employer-side payroll tax: $20,000
Year-end result:
Owner receives a W2 reporting $60,000 in wages, which is taxed for Social Security, Medicare, and a special "self-employment tax". These wages are also eligible for deductions for retirement plan contributions (but not section 125 cafeteria plan deductions).
Owner receives a K1 reporting $200k - $60k - $20k = $120,000 profit, which is taxed at the owner's individual income tax rate.
The business itself will not pay corporate tax on its profits like a C-corp would.
Company taxes are paid based on the profit. If you spend all the company income, on salaries or equipment or whatever, there’s no profit, and thus no taxes.
Yup, it's the same here. So there is a tax on the profit of the year that you let remain in the company, but it's a much lower tax than a wage tax. So it's better to leave it in the company until you need it, instead of paying a high marginal tax rate on taking it out as wage immediately.
Not all expenses are deductible, or 100% deductible in one year.
The biggest issue we've seen in software was the 2017 tax act, affecting software R&D starting in 2022. Depending on how you classify those expenses, you could have a sizeable tax bill, even without any 'profit'. But even hardware - that's typically going to be amortized over minimally a few years.
Bring in $200k in revenue. Spend $20k on hardware. You may only get to deduct $4k of that hardware expense in each of the next 5 years.
This is an excellent question and is, I have found, one that is being surprisingly ignored through all the hubub around section 174 / software / R&D, considering how many consulting shops and agencies are out there doing contract software development.
As best as I can determine, through reading the IRS's guidance and consulting with an industry expert, the answer is that doing software dev as a contractor/consultant does not qualify as R&D activities that must be capitalized if you're the contractor/consultant. Here is the language with a guiding example w/ analysis. The key being that the contractor bears no "financial risk" or right to use the software for its own purposes.
SECTION 6. RESEARCH PERFORMED UNDER CONTRACT
.01 Purpose. The Treasury Department and the IRS intend to propose rules in
forthcoming proposed regulations consistent with the interim guidance provided in this
section 6, which provides taxpayers with clarity in determining whether costs paid or
incurred for research performed under contract are SRE expenditures under § 174.
.02 Defined terms. For purposes of this section 6:
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(1) Research provider. The term research provider means the party that contracts
with a research recipient (as defined in section 6.02(2) of this notice) to:
(a) perform research services for the research recipient with respect to an SRE
product, or
(b) develop an SRE product (as defined in section 6.02(4) of this notice) that the
research recipient acquires from the research provider.
(2) Research recipient. The term research recipient means the party that contracts
with the research provider to:
(a) perform research services for the research recipient with respect to an SRE
product, or
(b) develop an SRE product that the research recipient acquires from the
research provider.
(3) Financial risk. The term financial risk means the risk that the research provider
may suffer a financial loss related to the failure of the research to produce the desired
SRE product.
(4) SRE product. The term SRE product means any pilot model, process, formula,
invention, technique, patent, computer software, or similar property (or a component
thereof) that is subject to protection under applicable domestic or foreign law. For
example, mere know-how gained by a research provider through the performance of
research services for a research recipient that is not subject to protection under
applicable domestic or foreign law does not give rise to an SRE product in the hands of
the research provider.
.03 Treatment of costs paid or incurred by research recipient. The treatment of costs
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paid or incurred by the research recipient is governed by the principles set forth in
§ 1.174-2(a)(10) and (b)(3).
.04 Treatment of costs paid or incurred by research provider. If the research
provider bears financial risk under the terms of the contract with the research recipient,
then costs paid or incurred by the research provider that are incident to the SRE
activities (see section 4.03 of this notice) performed by the research provider under the
contract are SRE expenditures. However, even if the research provider does not bear
financial risk under the terms of the contract with the research recipient, if the research
provider has a right to use any resulting SRE product in the trade or business of the
research provider or otherwise exploit any resulting SRE product through sale, lease, or
license, then costs paid or incurred by the research provider that are incident to the
SRE activities performed by the research provider under the contract are SRE
expenditures of the research provider for which no deduction is allowed except as
provided in § 174(a)(2), regardless of whether the research recipient is required to treat
its costs as SRE expenditures under section 6.03 of this notice. For purposes of the
preceding sentence, a research provider will not be treated as having a right to use the
SRE product in the trade or business of the research provider or otherwise exploit the
SRE product through sale, lease, or license if such right is available to the research
provider only upon obtaining approval from another party to the research arrangement
that is not related to the research provider within the meaning of § 267 or § 707.
.05 Example. The following example illustrates the rules set forth in section 6 of this
notice.
(1) Facts. Company C engages Company D, a contractor located in the United
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States, to develop an SRE product for use in Company C’s trade or business. The
activities undertaken by Company D are undertaken upon Company C’s order, and
Company D makes no performance guarantees with respect to the SRE product.
Company C will pay Company D a fixed sum of $25,000 plus an amount equivalent to
Company D’s actual expenditures. Company D does not have any right to use or
otherwise exploit any resulting SRE product. In 2023, Company D incurs $125,000 of
expenditures to successfully develop the product in the United States, and Company C
pays to Company D $150,000 pursuant to the terms of the contract.
(2) Analysis. Under section 6.04 of this notice, Company D may not treat the
$125,000 of expenditures it incurs to develop the SRE product on behalf of Company C
as SRE expenditures under § 174 because (i) Company D does not bear financial risk,
and (ii) Company D does not have any right to use or otherwise exploit any resulting
SRE product. Under section 6.03 of this notice, the $150,000 paid by Company C is an
amount paid to another party for research or experimentation undertaken on Company
C’s behalf under § 1.174-2(a)(10) and (b)(3) and is thus an SRE expenditure under
section 4.02(2) of this notice. The applicable § 174 amortization period is 5 years (60
months) because the research is performed by Company D in the United States.
Company C’s location is not relevant for determination of the applicable § 174
amortization period.
This is super cool! I was/am a startup founder too, bootstrapped an open source project, raised VC money, but ultimately it didn't work out. Now thinking about a solo business again and the studio model was exactly what I was looking at. How did you decide what to build?
My first product Postcard [1] is a personal website builder. I built that because I thought a personal website maker made logical sense as an indie business, and I wanted a way to stay in touch with friends after I deleted social media. But, it's hard to scale - user acquisition is the name of the game, willingness to pay is lower, the product isn't super differentiated, and I don't have a lot of experience in B2C. So, it makes money and continues to grow - but is small in absolute terms.
I decided to work on a more ambitious project that I had been thinking about for years, inspired by a product I wanted at my last startup, and by the chaos of being in 100+ slack channels at a previous job. I hate how people use Discord + Slack - they're good for urgent communications, but we need a "low-attention" version for important communications in communities and at work. So, I started building this product last Summer.
Booklet is an async, newsletter-first community platform [2]. Something like Google Groups with the polish of Slack. Booklet's far more complex than Postcard, but plays into my skills more - such as complex permissions systems, email marketing infrastructure, B2B sales, and being able to incorporate all the latest OpenAI goodies quickly. I launched it about three months ago, it has revenue, and I've been scrambling to build things in response to user feedback. I'm thinking of doing a bit of a relaunch next week as some foundational flows come together, such as full PWA support, search, and Stripe member sync.
Coincidentally - the project I launched to dogfood Booklet, called FRCTNL [3], is doing quite well. I had no intention of monetizing it, but I included a referral link to the accounting service I use. People have been using that referral link, and last quarter FRCTNL was my highest-earning product.
I'm sure in a few years I will have some great stories after the fact about the lessons I was missing in plain sight. But, things feel a little chaotic, uncertain, and fun at the moment. The core theme is building things that I want. My main insight so far has been to build unique, differentiated products that I want to use myself.
I hate to have to ask this but how do you manage healthcare being a solo s-corp? I was under the impression this could only be done through a company if two unrelated family members owned the company? The only other alternative is "Obamacare"? I could be totally wrong.
Speaking as someone who has been mostly self-employed since about 2002, Obamacare is a godsend. Massively better than the old individual "underwriting" system that basically made it impossible to get coverage. Yes, health insurance is expensive, but you may be amazed that the ACA marketplace plans frequently cost less than employer plans with better market protections. The only way to do health insurance nowadays is to assume it's only for catastrophes; ie: an $8-15k deductible is nothing compared to a $250k hospital visit. Basically, you are buying a discount plan (your insurer's negotiated rates) plus a stop-loss cover. An example: I am an old fart at 63 and have an HSA plan with a $7,500 deductible. My premium is $900/mo, thus the MOST I will ever have to pay for health care in any 12 month period is $18,300. Way less than a $300k uncomplicated heart attack or a $1M cancer diagnosis. Work your tax returns right, and you can get subsidies that reduce the annual costs even more . . .
It's probably worth remembering this sort of thing when people say there is no difference between the parties. Every Republican voted against it, they almost repealed it, and apparently are gearing up for another crack at repeal https://www.theatlantic.com/politics/archive/2024/01/trump-o...
At your age, you'll likely be on Medicare soon either way, but some of us are still decades away.
I truly am waiting for Medicare (traditional only, no Advantage plans as those are a complete rip-off). I can tell you though, I've been continuously on the ACA since it started selling plans in 2012 and it's always been better than anything I could cobble together before. It's fantastic to be able to decide how and where I want to live my life without being locked into a shitty job or tied to a crap insurer because you can't pass underwriting to get on a different plan.
Also, I am on the highest ACA premium tier because of my age. Someone who's 35 could get the same policy I have for about $400/mo., unsubsidised.
Thank you - as someone with a bit of disability and facing future hip surgery, that's a helpful perspective. You're not far off on my age; I actually aged off my parents insurance right around the time the ACA passed and so I was able to get back on because of that law which extended parental coverage until 26. I'm currently quite happy with most aspects of my employment which includes my health insurance, but that situation never seems to last.
This is awesome! Nice work. This model was a dream of mine for a while -- I generally love being solo but even a small group of 3-6 people working on a revenue-generating digital product studio has so much potential to be super super fun. Good luck with it and keep us posted!
Wow! I’m working on the same thing at https://stackstudio.dev right now. Your blog post was really eloquent, it’s always inspiring when someone else shares your idea. Best of luck.
Thanks! I'm trying to do more essay writing there [1]. Most indie makers seem to have some content strategy where they share their story. I avoid social media and don't desire to become a Youtuber, so I'm focusing on writing as a content channel. I'm focusing essays on my creative process, inspiration, and specific experiences as an operator - the stuff I want to read. I'm avoiding prospective predictions about the future, being negative (an actual self-imposed rule), and talking about things that feel more like theory than practice.
The next piece I plan to publish tomorrow will be a recap of a talk I gave over the weekend, covering how most of our knowledge work practices come from factories, and ways software engineers are at the forefront of changing those industrial-era practices.
P.S. - if you're ever in NYC, come join for a dinner of Dimes Square Ventures [2], which is a little community I run for local indie makers (using Booklet!)
There is someone renting a room around Mount Fuji on AirBNB that advertises themselves as a systems engineer with fiber in the middle of the woods. Sounded like a great place to work to me!
Really cool - I’m in a similar boat, having created startups and also was a PM in senior roles at a few great companies. I’ve been consulting, which is fine, but wanted something with a little more connection to the project so I just set up https://metaluna.io and am aiming for something on the agency route. That said, I really like the way you’re thinking of a “digital project studio”. Is there a community of people doing this somewhere?
Same here! I've been running my own digital products (https://flat.social and some smaller ones) and bridging the gap with consulting. For me, the flexibility lead to a fully location-independent lifestyle which allowed me to work from places where I feel at my best. Currently writing this from a tropical patio in Brazil :)
After I sold my last company, I felt like my identity was overly tied to one product. So, I decided to build a company separate from the products, so that over time the products can change but I have a through line company brand.
When I started this comapny, I didn't have a product - but I had the holding company (Contraption Company). My first product was Postcard, but now I spend most of my time building Booklet. As the shift in products has happened, my professional email address has been the same, the terms of service have been shared between services, and I have a unified blog + announcements email list. This also means I can launch lightweight experiments such as "FRCTNL", and even if it's not commercially successful - I benefit from compounding returns in the brand and mailing list.
I'm self employed in NYC and its a dream of mine to travel/work in Japan. I've sort of written the idea off that unless I can speak the language its going to be too difficult. Curious if you agree or not.
I speak zero Japanese. I've met a lot of immigrants here in the last couple of weeks, and it seems that you can get to a working level of Japaneses within a couple of months. After that, it seems that working for a Japanese company IRL is the biggest determinant of becoming fluent.
I've heard that the path from temporary visa to a more permanent one is somewhat straightforward for a self-employed person if you're able to show moderate revenue from Japanese clients.
Hasn't change, it's pretty terrible but my accountants thought it was marginally better. I've heard that some people get an office outside the city (such as Hoboken) to "work" outside the city.
It's been a fun experience, though - I shared a house with an illustrator from LA. I spent time exploring Tokyo and working on Booklet. At the end, every resident gives a gallery - normally it's visual, such as drawings, but mine became a presentation.
This time around, I'm building a solo "digital product studio" [1] instead of a startup. So, I'm staying one person, haven't raised money, and have multiple revenue-generating products. Product revenue doesn't cover my costs yet, so I do occasional consulting to bridge the gap.
I like the flexibility of this lifestyle. I'm based in NYC, but writing this from Tokyo where I've been doing a creative residence for the past two weeks.
And, a fun technicality - I truly self-employed in the sense that I have a salary and a payroll system. This is because my company is registered as an S-Corp in the USA, which requires the owner to be on a salary.
[1] https://www.contraption.co/essays/digital-product-studios/