Self-employment gives you the freedom to set your own hours and choose your clients. With this freedom, however, comes certain challenges. Leaving the world of 9-5 employment means letting go of a certain degree of security. It's important to prepare both psychologically and practically for a more independent way of life. In particular, you need to consider certain financial realities. Let's look at the top 5 financial steps to help prepare for the adventure of self-employment: When you have a job, paying taxes is fairly simple. Taxes are withheld, you file, and you either pay what you owe or receive a refund every year. When you're self-employed, it's a bit more complicated. When you become self-employed, the Internal Revenue Service considers you a business. There are actually several types of business structures to choose from. Most freelancers start off as sole proprietors. If you have employees or partners, on the other hand, it may be advantageous to set up a Partnership, Corporation, or Limited Liability Company (LLC). If you're not sure which option works best for you, you should consult with an accountant or tax attorney. It's also important to note that as a self-employed individual you should plan to file your taxes quarterly. In fact, not filing quarterly can lead to certain penalties. As a freelancer, you're in business for yourself. There are several advantages to establishing business bank accounts and establishing business credit. Doing so helps you obtain small business loans and other types of financing. Even if you aren't planning to apply for a loan right now, you may want to at some point. Business credit can also help you get better terms from suppliers and vendors. There are a few steps to follow when establishing business credit: Obtain an employer identification number (EIN), also known as a tax identification number. Make sure you have a dedicated address and phone number for your business. If you operate from home, consider renting a virtual office. Open up a business checking account. This helps you separate your personal and business expenses, which is useful for taxes as well as keeping your finances in order. Apply for a business credit card. Use your line of credit consistently but responsibly. Always pay promptly. This will help you build trust and credibility with customers and suppliers and gradually increase your credit limit.1. Find the Best Business Structure for Filing Taxes
2. Establish Business Credit
3. Obtain the Best Types of Insurance
When you're self-employed, you don't get benefits such as health and other types of insurance. It's now your responsibility to find insurance. The best plan will depend on many factors, such as your age, current state of health, and whether you're single or have a family or dependents. It's important to do your research and find a health insurance plan that meets your needs.
You may also want to consider other types of insurance. As a freelancer or small business owner, there are several types of insurance worth considering to protect yourself and your property. Any type of business is potentially vulnerable to lawsuits. This is especially a concern if you have a physical business or provide a service that involves working on people's homes or property. However, no one is immune to lawsuits and even digital businesses should research insurance possibilities.
4. Manage Your Cash Flow
One of the biggest challenges of self-employment is uncertainty. If you're accustomed to receiving a regular paycheck, it can be unsettling to have your weekly and monthly income rise and fall. Some businesses are seasonal and take in more money in the summer or during the holidays.
However, your cash flow can spike at unpredictable times. Many things outside your control can affect business: the general strength of the economy, competition, and industry trends. When your cash flow varies, it's important to manage your money.
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When business is good, be careful not to overspend. Create a budget and put aside money for expenses, taxes, and savings.
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Bill your clients in a way that maximizes cash flow. For long projects, consider milestone payments rather than waiting until the end to get paid.
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Consider invoice factoring. This is a system where you can get paid upfront for invoices. Invoice factoring helps you maintain a steady cash flow. You do, however, need established clients in order to become eligible. PayPal now offers a similar type of financing, offering customers cash advances that are paid back out of future earnings.
5. Prepare for Retirement
It's a disturbing fact that many people are not adequately preparing for retirement. According to a recent study, one in three Americans has less than $5,000 in retirement savings. It's never too early or too late to prepare for retirement. When you have a job, you can arrange to have money taken out of your paycheck and put into a fund such as a 401K. When you're self-employed, it's your responsibility to make your own arrangements.
There are several ways to approach this. You can set up your own retirement account such as an IRA. You can also put money into other types of accounts such as high-interest savings, checking, or mutual funds. The important thing is to be consistent about saving for retirement.
Educate Yourself About Self-Employment
We've covered some of the most important financial considerations for the self-employed. There are many other adjustments you need to make, such as finding the best places to work, managing your time, and marketing your services. You don't need to feel overwhelmed, though. Don't feel you have to figure out everything all at once.
You may need to consult with certain professionals such as an accountant or attorney if you have specific questions. You may also need to make certain adjustments based on experience. For example, you may start out as a sole proprietor but find it's advantageous to form an LLC or Corporation at some point.
You definitely need to pay closer attention to many financial issues when you work for yourself. Despite these considerations, self-employment is well worth the effort. Being your own boss allows you to create a more independent lifestyle, with much more flexibility and freedom.
