Your time and its value
One of the many reasons why people pursue entrepreneurship is to have more control over their life and working environment. Another reason? Time and earning potential. Many employers put a limit on how much PTO can be acquired while working full time and if you aren’t in sales, the chances are that salary caps are also put into place per position in the company.
Consider the salary you would like to make and divide that by how many hours you wish to work a week or month if you plan on traveling a lot.
For instance, if you would like to make $60,000 a year and want to work only 120 hours per month on average, you need to be earning at minimum $42 an hour. Even if you are making that much an hour, that does not take into consideration hours that you will be spending behind the scenes doing administrative work to keep your new company running smoothly.
So, while that $42 an hour may be a baseline, you will need to find ways to earn more to cover the time lost doing administrative work and to account for times when you take a vacation or have a slow month. An example would be to find a way to make passive income through affiliate sales or by offering a course.
Now you are in charge of paying your income taxes in estimated quarterly payments to the IRS, which stands for the Internal Revenue Service. Your effective tax rate will vary, depending on how you file (married or single) and what state or city you live. For instance, not every state requires to pay state income taxes. However, you will have to follow the guidelines of your personal residence and not where a client you work for is paying you.
As we’ve mentioned earlier in our previous scenario, you may wish to earn $60,000 a year. However, the amount you earn before taxes and other deductions are taken out is considered as gross income. While your take-home amount after taxes is your net income. When working for someone else, they pay your taxes and figure out your net before it even touches your bank account. As for a freelancer or a small business owner, it should be your responsibility.
Research your effective tax rate and what you need to earn to bring home the net income you need to be successful in your life and not to struggle.
Deductions, which we will discuss next, will help lower your taxable income rate. Note, that you can count business deductions only once. A good rule of thumb according to the Billfold is to save 25% of your gross income and pay income taxes quarterly. What’s the worst case scenario doing this? You would overpay taxes and get a refund.>> READ: How to Prepare for Tax Time
Just like any other business owner, you are now entitled to write off expenses as deductions on your income taxes. It will depend on your line of work and what you are doing for a living, but such deductions could be internet, utilities (if you work from a home office) and new equipment such as a laptop or printer. Some freelancers even choose to write off monthly business expenses such as a Quickbooks fee or a one-time expense like a conference.
Make a list of all the things you need and would like to have to run a successful business for yourself.
Keep track of how much you are paying and receipts so you can write off the deductions for tax purposes later. You can deduct your expenses from your income before taxes to have a lower taxed amount, but you must provide legitimate proof of all your expenses, as you are eligible to be audited.
Opening a separate checking account and credit card may help you in organizing your finances as well as give you an opportunity to earn points for travel and cash back. Don’t forget to take advantage of all perks of being a smart business owner should the opportunity arise.>> READ: How Spending Plan Allows You Piece of Mind
Being fully responsible for all medical expenses is the norm when you are calling the shots. As your employer may have provided you with health insurance and a health savings account, this is now not the case. And health insurance is expensive!
>> READ: 6 Things to Always Be Saving For
Before taking a calculated risk, research your options for health insurance. Thanks to the Affordable Care Act, you may be eligible for a subsidy depending on your state and income.
Don’t forget that you will need to cover all of your medical expenses including vision, dental and prescription coverage, not just regular health care check-ups and greater health concerns – that may require hospitalization and ongoing management.
Insurance is a must. If you are healthy or married, you may have other options such as being covered by your spouse’s employer or joining a health share ministry.>> READ: Small Business Insurance: Why You Need It
Saving for the future is just as important when you are self-employed and perhaps, even more so. Retirement contributions are now managed solely by you and no longer by a human resources team.
Not only do you need to figure out how much to contribute to a retirement plan to have adequate savings by the time you reach retirement age. You must also find a financial institution that has options that work for you.
Fidelity has a great list of options you can consider depending on your financial situation and retirement goals. Two of the most common retirement options for a self employed person are a Solo 401k and an IRA:
- A Solo 401k (also known as a Self Employed 401(k) or Individual 401(k)) is a 401k qualified retirement plan that allows business owners to contribute to retirement with pre-taxed income;
- An IRA is an Individual Retirement Account that allows you to contribute to retirement with income that has already been taxed.
Choosing the best one for you will be a personable preference since both have advantages and drawbacks. A self-funded 401k will allow you to save more, while an IRA will not be taxed once you are eligible for withdrawing.
>> READ: Do I Have Enough to Retire?
The bottom line
Consider our advice and ask yourself if you are in a great place to start taking the leap into entrepreneurship. If you aren’t quite ready yet, that does not mean you will never be.
Make a list of what it will take to work for yourself and then set a date for when you’d like to have your goal achieved. Taxes, business expenses and health insurance are just a few things that may come up. So be sure to seek websites such as ours and mentors that can help steer you in the right direction.
Mary Oliver once asked, “What do you plan on doing with your one wild and precious life?” Make it a good one.