Vail Daily column: Smart money tips for the self-employed
With so many looking for jobs and the opportunities out there limited, many are considering opening their own business. Working for yourself, setting your own hours and calling the shots are appealing. But what about managing your money? Working for yourself offers flexibility, but it also presents unique financial challenges.
Whether you are currently an independent contractor in today’s work force, or just considering making the leap to entrepreneur, here are four quick tips to help you plan your financial future.
Dealing with Uneven Cash Flow
It’s so important to be prepared to deal with periods of uneven cash flow. To ensure you always have money reserves, develop a budget that allows for swings in your income. Determine an average of how much revenue you can count on each month and use that as a base for monthly expenses. During months that you earn more, resist the urge to splurge. Instead, stash away extra cash in an interest-earning savings account or money market account. Also, when setting up your budget, consider paying yourself a set salary and keeping your personal and business cash in separate accounts. These steps alone will greatly simplify your life when tax time rolls around.
As an independent contractor, you should receive a Form 1099-MISC from every organization that pays you $600 or more during the tax year. But, you should also keep your own records on what you receive because the income is taxable whether or not you receive a Form 1099-MISC. Since no taxes are withheld, you will need to calculate the amount you owe. Now is the time to invest in a good tax software program or lining up a good tax advisor. The IRS website (www.irs.gov) also has guidelines on calculating quarterly tax payments. Keep in mind, you will also have to pay your own Social Security and Medicare taxes. The good news is that the self-employed enjoy many unique tax breaks. Contributions to retirement plans, health insurance premiums, travel costs and office-related expenses may be deductible. Your personal tax advisor can help you determine which deductions are applicable to your business.
Determine Insurance Coverage
When working for yourself, it’s up to you to provide your own health, disability and life insurance to protect your business and your family. At the very least, you should have enough coverage to protect against potential loss of income due to illness or disability, medical and dental expenses not covered by government health plans, and potential medical expenses while you travel. You may also need to boost your home insurance coverage or purchase liability insurance if you have a home-based business. Your best bet is to speak to a licensed financial professional or accountant to determine how much coverage you really need.
It’s never too soon, or too late for that matter, to start saving for retirement. Fortunately, the government affords the self-employed many generous tax breaks when it comes to retirement accounts. There are a number of retirement accounts for business owners, including the traditional IRA, Roth Ira, Keogh plan, Simple-Ira, SEP-IRA and the Solo 401(k) Profit Sharing Account that you can consider.
Working for yourself can be both exciting and overwhelming, with many new challenges to face, and an equal number of opportunities. Developing a strategy that will help address your goals for economic security and success is an important step to your success.
Charles Smallwood is a financial adviser with The Prudential Insurance Co. in Edwards. He can be reached at firstname.lastname@example.org, 970-432-0045 and 970-390-1249. Prudential Financial, its affiliates and representatives do not render tax or legal advice. An individual’s particular circumstances should be discussed with a personal tax or legal adviser.