7 Things To Know Before You Go Solo

Are you starting your own business or becoming self-employed in the new year? These days a growing number of workers are setting their sights on going solo and becoming “free agents”, independent contractors, consultants, “solopreneurs”, and others who rely on self-employment for a portion (or all) of their income.

Working for yourself can be very rewarding, but it’s not without its challenges. Before you sign up to be your own boss, consider these 7 things to know before you go solo.Women doing biz

  1. Increased cash reserves. Being self-employed often means having periods where work is hard to come by or your income fluctuates. Sometimes customers pay late or not at all. It’s always a good idea to have cash on hand for emergencies, but self-employed people need to have the financial resources to get through any lean periods they may experience.
  2. Self-employment tax. Since you are your own boss, the IRS requires you to pay both the employer and employee portions of social security tax if your net earnings are $400 or more. Also known as the SE Tax, this tax includes payments made to both Social Security and Medicare. For income earned in 2013, the tax is 15.3% on earnings up to $113,700.
  3. Estimated tax payments. In addition to paying your SE Tax you will need to make estimated tax payments on your taxable income. One of the most frequent mistakes the self-employed make is they fail to make estimated tax payments. The IRS says  “if you are filing (taxes) as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return” (IRS.gov). For more specific details, download IRS Pub. 505 Tax Withholding and The Estimated Tax or visit the IRS website at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes
  4. Health insurance. COBRA allows you to continue the health insurance you had with your employer for up to 18 months. However, eventually you will need to purchase health insurance on your own. Rates vary greatly based on a lot of factors. In general, you should be able to get a high deductible Health Savings Account or HSA. The family deductible on those plans is $6,450. The good news is that your deductible becomes a tax deduction and you may be able to deduct your premiums as well. With the new health care exchanges that went into effect on October 1st  you may be able to find other options which include various deductible amounts and premiums. As a self-employed person, your health insurance premiums may be tax deductible. Talk to your tax professional about how your health insurance may affect your taxable income.
  5. Lost benefits. Typical employee benefits like life insurance, disability insurance, the match on your retirement plan, profit sharing, etc. go away when you become self-employed. If you want those benefits, you will need to provide them on your own.
  6. Unreimbursed expenses. You might have some expenses as an employee that are paid for by the employer such as cell phone service, internet, mileage for your car or other travel related expenses, continuing professional education, etc. As a newly minted solopreneur you will have to pay these expenses out of pocket.
  7. Know your numbers. Self-employed people must keep track of their income and expenses, ideally in a separate business checking account. This not only proves useful at tax time, it’s just good business sense. Accounting software like QuickBooks or QuickBooks Pro can help. The more closely you can track your numbers, the better off you will be in the long run.

If you are self-employed, what are some of the financial challenges you have had? I would like to know. Email me at mpbranch@focusfinancial.com with the subject line “Solo”.

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