From being your own boss to flexible work hours, there are many reasons you might choose to go into business for yourself, but along with the freedom of calling the shots, self-employment also brings unique financial responsibilities. From taxes to savings, here’s what to keep in mind if you’re self-employed.
Taxes for the self-employed
When you work for someone else, taxes usually aren’t a big deal. The accounting department handles the withdrawals from your paycheck, and you don’t have to think much about it. When you work for yourself, the taxes from the revenue you generate are your responsibility, and it’s important to understand how they work.
“Many people who are self-employed end up in tax trouble because they don’t understand the tax code,” says Beverly Hobbs, AAMS, an LPL Financial Advisor with SAC Federal Credit Union. “They’re responsible for paying their own income taxes as well as self-employment taxes, which include Social Security and Medicare taxes. These are usually filed quarterly.”
Taxes for those who are self-employed can be complicated, and it might be a good idea to let professionals do the heavy lifting. A good tax preparer:
- Knows the latest tax law changes and updates
- Uses professional tax prep software for accurate results
- Typically provides a quick turnaround
- Is your best resource for knowledge and advice
Also, check out the IRS Small Business and Self-Employed Tax Center for tips, strategies, and downloadable forms.
Keep up with the bookkeeping
Whether you’re a marketing consultant or childcare provider, it’s important to treat your business like a business, not like a hobby, and in order to keep the ship sailing, you need to be diligent about keeping a handle on your finances. Along with setting aside money for quarterly taxes, you should also:
- Develop a strict monthly and yearly budget for both personal and business spending
- Keep meticulous records of income and expenses
- Develop a process for issuing invoices (and checking up on them)
- Keep and file expense receipts you’ll need at tax time
It’s a good idea to set aside time to address the day-to-day finances of self-employment. When you keep up with it regularly, it won’t become an overwhelming task.
Personal finance essentials
Along with business finances, being self-employed means you’ll have to take a closer look at your personal finances, too. One important area is retirement. There are no more automatic 401(k) deductions or matching contributions when you’re self-employed. It may be in your best interest to talk with a financial professional to decide whether an IRA or other retirement vehicle is best for you.
Beyond retirement, savings become vitally important when you work for yourself. You could easily have a lull in freelance writing gigs, and you’ll want to have enough set aside to pay the bills until you can find more work. SAC Federal Credit Union offers a variety of savings accounts, plus the personal guidance that will help you find the right one for you. (To learn more about emergency funds, read “Ready for a rainy day: Create an emergency fund for unexpected expenses.”)
Taking on many titles
When you’re self-employed, you’re the COO, CFO, marketing officer, bookkeeper, and more, all rolled into one. In order to be responsible for every aspect of your business, you’ll need to wear many hats. Here are some ways to make those hats fit better.
- Take courses in finance, marketing, planning, management, and other topics at a community college or online
- Expand your knowledge through websites and self-help books
- Seek advice from successful entrepreneurs
- For more information on financial basics for self-employment, contact SAC Member Services at (402) 292-8000 or firstname.lastname@example.org. Or you can request more information here.
It’s clear that running a business is a lot more involved than being an employee. The keys to success are preparation, knowledge, and determination. In the comments section below, tell us which facets of self employment you’d like to learn more about.
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