In today’s modern world, millennials want autonomy and independence in professional life. Instead of taking orders and reporting to managers, they like being in charge of everything. As a result, people are looking for self-employment opportunities. You can start a company, an eCommerce venture, or become a freelancer. As a self-employed individual, your work will come with freedom, flexibility, and other benefits one can’t experience in conventional jobs.
In addition to offering a better work-life balance, career independence opens doors to financial insecurity. Since self-employed people are not accountable to anyone, they neither save for retirement nor put anything aside for rainy days. Thus, any minor financial setback puts a drastic impact on their business, forcing a shutdown. With a viable business idea, prepare a robust financial plan to have your money-related matters in a row.
From maintaining business records, managing taxes to investing in pension funds – stay on top of everything. Are you wondering how? Here we are bringing the expert financial guide for self-employed individuals to help them survive and succeed.
1. Utilize Funding Carefully
Do you need additional capital? You might start a business with lump sum money, but you will require more funds to grow and expand operations. As a self-employed person, you can’t sell shares or bring in a new partner to raise capital. Therefore, you can only rely on your savings or opt for external financing. Although it is tempting to get equipment financing and loans, analyze your repayment capability. Evaluate your financial position and determine interest rates.
In case the interest rates are high or the economy is moving towards a boom, seeking loans can be risky. Similarly, think twice before using your business credit card. After all, the lower the expenses, the higher profits you can enjoy.
2. Focus on Tax Management
Whether you are a corporate employee, freelancer, or entrepreneur – you have to comply with tax laws. Employees get their taxes withheld automatically, but self-employed individuals have to calculate and manage taxes themselves. If your income exceeds $137,700, you have to pay a 15.3% tax on your annual income. Approximately 12.4% goes toward social security, and the rest is for healthcare. Before filing the tax, go through the 2020 self employed tax guide to understand your tax obligations.
It will determine whether your region or city requires separate taxes while assisting you with tax calculation. Once you know the accurate ‘tax payable’ amount, file the taxes. You can either make quarterly payments by using Form 1040-ES or file an annual return. Moreover, familiarize yourself with tax deductions and credits to cut corners on tax payments. It helps in lowering taxable income, decreasing your overall tax bracket.
3. Conduct Investment Planning
Being your boss is always rewarding. You can determine your income potential, but it is never wise to put all your eggs in one basket. Thus, instead of reinvesting all your profit into the business, find new investment opportunities to maximize returns. You can put some money into the stock market and enjoy annual dividends. Similarly, look into financial securities – bonds, T-bills, commercial deposits to get high returns with minimal risks.
Moreover, if you have sufficient profits, consider investing in the real estate industry. It offers the most lucrative returns with insignificant risk. All this investment planning requires an eye for detail. It means you have to consider economic uncertainty and market volatility before calling the shots. It would act as a financial safety net that you can fall back on if your business suffers from a loss.
4. Maintain General Reserves
Unfortunately, emergencies don’t arrive after ringing a bell. In 2020, every business was optimistic about the new decade until it hit them with a deadly pandemic. It led to the closure of several companies, limiting trading activities. And due to insufficient funds, many entrepreneurs couldn’t survive. So, how about you plan for such emergencies? As per the International Accounting Standards (IAS), you can create an emergency fund or a general reserve. Set a fixed amount – for instance, $500 and transfer it to the emergency fund from profits. In case you can’t determine an amount, set aside at least 10% of your earnings every month.
5. Look Out for Retirement Plans
When you are working in an organization, it is the employer’s job to enroll you in a pension scheme. Being self-employed, you have to make pension arrangements yourself. However, only 18% of self-employed people contribute to pension funds, making it the most overlooked finance aspect. Before it is late, understand the importance of retirements and start investing in one. Here are some options.
- One-Participant 401(k): It is a pension fund plan for freelancers and sole traders who don’t have any employees.
- Simple IRA plan: It is a traditional pension plan for entrepreneurs running the business on a small scale. You can contribute up to $13,500 or less.
- SEP IRA: Individuals can invest 25% of their entire earning into this fund.
Final Thoughts
Almost everyone dreams of becoming their boss, but self-employment comes with a fair share of responsibilities. You have to oversee the day to day operations, recruit employees, and most importantly, manage finances. From investments, insurance, funding to taxes – a strong financial foundation is crucial to success. Therefore, learn about efficient tax management techniques and set money aside to overcome financial crunches. After all, a robust financial plan can help in overcoming all potential hurdles.
