It can be a great feeling to be self-employed. You can set your own schedule and you’re the boss so there’s no one telling you what to do. You can work as many or as few hours as you want, you can even take a nap if you want. However, since you won’t have that steady income you had as an employee, your income won’t be as constant either. You’ll also find that you have a lot of expenses that you didn’t have before.
As a self-employed contractor, you’ll need to set up a business bank account to save for those extra business expenses. So, what do you need start saving for? Below are 4 areas you need to get started on, and you may need to add more to the list later.
1. Taxes. No one likes paying taxes but you’ll like it even less if you get a big tax bill in April and you haven’t set aside enough funds to pay them. As a general rule, it’s suggested that you save at least 25-30% of your earned income to pay your tax bill. Depending on your income you may need to save more. Though you will be able to deduct some of your expenses, which may lower your tax bill.
FYI: For those who owe more than $1,000 a year in taxes, you will need to make quarterly estimated tax payments. If you don’t pay the estimated taxes, you will owe a penalty. The “self-employment tax” is set at 15.3% which includes Social Security and Medicare taxes. Your “income tax” depends on your earned income.
2. Health insurance. Since you no longer have an employer to sign you up and pay a portion of your health insurance, finding suitable insurance is now up to you. In 2019 you no longer have to worry about a penalty for not having insurance coverage. However, accidents and illnesses can happen to anyone. It’s a good idea to get coverage or you could end up with some relatively steep medical bills if you’re not covered. When you research different plans, make sure that you sign up with a reputable company.
3. Vacation/ time off. At some point you may need a little time off. Set up a “vacation or time off" fund. That way you can take a little time off without the guilt. Make sure that your account is easy to access without having to pay fees for early withdrawal. Ask you bank for the best kind of account.
4. Retirement account. The self-employed often forget about their retirement accounts. Maybe you have a 401(k) from a former employer where you can continue to contribute. You won’t get the employer matching funds but you can still have your contributions directly deducted from your bank account. If you don’t have a 401(k) from a prior employer, you can set up an IRA yourself. It's tax deferred so it will give you a tax break while you save for your retirement. Be sure to set up automatic contributions.
Many self-employed workers love the freedom and flexibility of being their own boss. Just remember, all that freedom comes with more responsibilities too. Are you prepared? At Summit CPA we offer multiple resources that will help get your business on the right track. If you need assistance, contact our office at (866) 497-9761 to schedule an appointment with our advisors.