There’s nothing more freeing than self-employment. However, being your own boss comes with more responsibilities — like budgeting and paying taxes.
If you’re newly self-employed, balancing your finances can be overwhelming. Luckily for you, we break down five valuable finance tips to make your life easier.
1. Don’t Forget to Pay Taxes
Unlike traditional employees, self-employed workers and freelancers are responsible for paying their own taxes. You will be responsible for paying two types of taxes: self-employment tax and income tax. Typically, the total amount of taxes you owe will be 20 percent of your income for the entire year.
So that you’re not blindsided by a colossal tax bill, put away 25 to 30 percent of your pay. Although this may seem like a lot, it doesn’t hurt to be over-prepared.
2. Keep Track of Business Expenses
As someone who is self-employed, you’re going to have various expenses. You don’t have to manually log in each expense and receipt. Automation software like Quickbooks makes it easy to record expenses.
The great thing about business expense trackers is that they can be linked to your bank account. Also, they save you time and mistakes. Gone are the days of keeping receipts in shoe boxes. The things you want to keep track of our office supplies, shipping costs, dues, and subscriptions.
Keeping track of business expenses throughout the year is going to make tax season a breeze.
3. Set Up a Retirement Plan
Since you work for yourself, you are responsible for setting up a retirement plan.
Some retirement plan options for the self-employed include Roth IRA, Solo 401(k), SEP IRA, and Simple IRA. If you’re confused about which retirement plan is for you, don’t panic. A broker will walk you through the process and explain what paperwork you need to file.
4. Save, Save, Save
Along with putting money aside for retirement, it’s important to save money for a rainy day. When you’re self-employed, you want to prepare for times when business slows down. Start by setting up an emergency fund. Your goal should be to have at least six month’s worth of living expenses put away.
The easiest way to build your emergency fund is by putting away a certain percentage of your pay. A rule of thumb many financial experts follow is 20 percent. However, you can choose whichever percentage is best for your financial goals.
5. Manage Cash Flow
If you have many business expenses, it’s a wise idea to have a bank account solely for business.
Having a separate account for business costs helps you budget and see which deductions you can take when tax season rolls around. It’s also a smart idea to use budgeting software that helps you look at your cash flow and see how much you’re spending.
If you have employees and outsource work, you can manage pay stubs at PayStubs.net.
Summary of Self-Employed Finances
Being self-employed forces you to take a deeper look at your finances. Essentially, you become your own accountant and tax preparer. Although it comes with many responsibilities, self-employment is awesome.
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