Financial Changes You Have to Make When You Become Self-Employed

When you make the transition to become self-employed, there are several financial changes you have to make.

The way you earn and spend money can change in significant ways once you are working for yourself. Consider the following adjustments you will have to make as a self-employed individual before you begin the journey.

Prepare for Self-Employment

If you are leaving a full-time job to start your own business, then preparation is the key. First, you have to create a solid business plan for your future. The shift from working for someone else to working alone at home can be challenging. The plan should outline the type of work you will do, how much you expect to make and the expenses from work. You can add an income statement and balance sheets to the business plan.

Many experts also recommend having a savings or emergency account that can last six months to a year as you start the self-employment journey. The account should have enough money to pay for all necessities, such as rent, mortgage, utilities and food, for the allotted time. This will act as a safety net in case the business takes longer to establish, or you have too many expenses. The goal is to not drain the savings, so you should only use them to pay for living costs when necessary.

You can set up a savings account at a traditional bank or use an online bank. Another option is to use a savings app like Acorns that is a hybrid of accumulating money and investing it. Whatever method you choose, treat the account as an emergency fund instead of a piggy bank that you can crack open every week. You need the money to last as you move through the initial stages of self-employment.

Figure Out Expenses

When you start working from home, it is easy to focus on the positives such as no longer having to commute to a job or pay for dry cleaning suits. Although there are some areas with savings, you have to think about the expenses of self-employment.

If you work from home, you may have higher electricity, internet and phone usage, which leads to higher bills every month. In addition, you may need to create a personal home office that requires buying furniture or equipment. Other expenses may include office supplies, computer software, shipping costs and travel for business.

One of the easiest ways to estimate expenses is to create a spreadsheet that lists what you expect to spend every month on your business. You should also track livings costs like groceries, household bills and other payments you have to make to keep a home running.

Check on Car Insurance

Your car insurance may change depending on the type of work you decide to do. If you will use the vehicle for your business, you may need to update the policy to reflect this. It is important that you have all the necessary coverage for a car that is used for business.

On the other hand, if you plan to work from home and will not drive for your business, then you may see car insurance payments go down depending on the company you use. Some insurance companies track your mileage, so you pay less when you drive less. While working from home, you should not have a long commute to another location every day, which will reduce the mileage drastically.

Plan for Tax Season

As a self-employed individual, you may need to make quarterly tax payments instead of the usual schedule you are used to while working for a company. Keep in mind that taxes are not being deducted automatically from any payments you receive while self-employed. This means that you must track your income carefully, and plan to pay taxes on your own. You will have to pay self-employment taxes along with income taxes.

Self-employment taxes can become complicated depending on your personal and business situation. You have to consider aspects such as health insurance, retirement accounts, business deductions and other areas that affect how much you pay in taxes. In addition to federal taxes, your state and city may have taxes that need to be paid regularly.

If you do not pay enough in taxes before the annual April deadline, you may have extra penalties and fees for underpayment. In order to avoid this, it is important to keep track of your earnings and make regular payments. It is a good idea to get help from a qualified tax accountant or attorney since it is hard to navigate the tax code on your own.

When you are self-employed, financial changes are a normal part of business. The key to surviving them is to plan early and ahead of time, so you have fewer surprises.