You may believe that it’s easy to become self-employed or to start your own business. Yet, there are several financial realities that should make you stop and think. However, if you are really eager to become self-employed, you shouldn’t let these concerns stop you from reaching your goals. If you have a good financial plan in place, you may be able to avoid pitfalls.
1. Startup Expenses Can be a Barrier
If you were previously a salaried employee, you’ve perhaps not counted the minimal perks you get from the job. Everything you need to do the work is provided for you. You work in a space that someone else pays for. You enjoy the occasional office birthday party with free cake. When you are self-employed, you’ll have to procure the assets you need to do the job yourself. You will have to maintain upkeep on those assets as well as on the space where you do the work (even if, or especially if, you work out of a vehicle). Startup costs can pile up quickly. The costs may include things like commercial banking services and insurance.
2. Health Benefits
As with now having to provide your own tools of the trade, you’re also going to have to make up for other benefits you held previously. You will have to provide your own health insurance. If you have a family, the costs will be significant.
Under the Affordable Care Act, you may have qualified for health insurance premium subsidies in your state. The subsidy will lower the costs of the plan. Still, the plans available to you in the marketplace may be expensive.
The Small Business Jobs Act brings some health insurance cost mitigation to you at tax time. The law authorizes you to deduct an employer-equivalent portion of your health insurance costs from your taxes.
3. Your Tax Situation May Become Complicated
Tax time may present a completely new set of financial issues for you when you become self-employed. For consultant or freelancers who don’t itemize, there won’t be a significant change. You’ll be responsible now for paying the FICA tax, which is included in the self-employment tax rate. It will be in addition to the income tax you owe. You can chose to pay your taxes quarterly or wait until April and pay them all at once.
Conversely, self-employment will allow for new deductions. For example, if you have a home office, you may be able to deduct a portion of that. You can deduct business-related travel expenses. You may also be able to deduct the cost of paying a financial advisor to help you figure it all out.
4. Budgeting Will be a Challenge
Especially when you first start out as a self-employed, you may miss the predictable, regular income stream you had through your old job. Setting a budget is much easier when you know how much will be in your account each month. For some self-employment jobs, like seasonal work, your highs and lows may be predictable. For other jobs, like consulting, it may be hard to gauge how to handle things. The safe bet may be to save during the feast so that you can eat during the famine.
5. Saving for Your Retirement Will be Different
When you’re an employee, the employer looks out for your future by contributing to your retirement plan. Once you’re self-employed, you have to save for your own retirement. On one hand, some self-employment jobs may allow you to work beyond expected retirement years. However, you should ask yourself if you want to continue working at 70.
6. Preparing for the Worst
Somewhat related to issues like the difficulty in budgeting and saving for a rainy day is the possibility your business endeavor may not meet your goals. If you start a food service business, you may be in the position that many people who open restaurants are in; they must close up shop. You will need a plan to prepare for this eventuality. Before jumping into the world of the self-employed, talk to a financial advisor to see how you can best proceed.
This content is developed from sources believed to be providing accurate information, and provided by Generous Wealth Management. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.