Carving out your niche in the business world is not for the faint of heart. But after months and even years of planning, you’ve started making money as a new business owner. As an entrepreneur, you get the best of flexibility and earning potential plus some major financial responsibilities.
Understanding your unique financial opportunity is essential if you’ve recently gone out on your own or started a side hustle. When you know the financial benefits, opportunities and risks of your new venture, they can work in your favor.
- Take advantage of tax rules adapted to entrepreneurs
Paying taxes is one of life’s necessities and a task that is less desirable than most. However, entrepreneurs often have tax advantages when it comes to deductions, write-offs and savings. Before you start setting aside cash for your quarterly tax payments, explore the options available to you.
Even if your business ventures are in addition to your primary job, you can save for retirement beyond the normal limits. A newer option, 401(k) only., gives self-employed individuals the opportunity to save up to $57,000 a year. This is more than double the amount allowed for traditional 401(k) plans, making retirement savings an achievable goal. Use your savings efforts to reduce or delay your tax liability while your contributions grow over time.
The self-employed can also write off various business-related expenses. If you use the space in your home exclusively for your business, you may be able to reduce your tax liability. The supplies, repairs, and technology required for your operation are valuable expenses that should be tracked and included in your business expenses. Review the latest IRS rules for what’s allowed when it comes time to file.
- Prepare for variable income
Budgeting is essential for any professional, but business owners have to prepare for more variance than the average person. Contract work, billable hour limits and the ability to choose your projects give you both flexibility and risk. Sometimes your work will be overwhelming, while at other times it may be scarce. Do everything you can to prepare for the ups and downs of entrepreneurship.
Aim to project your annual earnings based on the client relationships and contracts you have. Determine which contracts or agreements are on an ongoing basis or have fixed time frames to determine how reliable they are. For each contract, track renewal specifications, identify opportunities to rebid work, or record whether the relationship is final. If renewal is possible, contact the people responsible for renewing your contract well in advance of the decision. Ideally, you’ll be able to identify new opportunities and client needs that will help you tap into upcoming business.
Once you have a good read on your income potential, determine how much of your income you want to save or spend. Based on earnings, set aside a portion for estimated taxes, which many self-employed people pay in quarterly installments. Plan for variable income by being conservative about how much of your residual income you use for personal expenses. Update your budget to account for slower months by cutting expenses, enrolling in budget billing or paying premiums in installments.
- Protect your health and property with insurance
New business owners often assume responsibility for costs or decisions traditionally made by the corporate employer. If you’re single, you’ll need to consider how you’ll access critical health insurance and personal protection insurance. Even if you are relatively healthy, health insurance is a necessary need to address. One hospital visit can spell financial ruin, so look at your premiums as an investment in your future.
Health insurance options can be reviewed at HealthCare.gov, and you can choose from state-specific coverage that meets your needs. If you are married, you may be eligible to enroll in your spouse’s employer-sponsored plan. Use health savings accounts if possible to save money for medical expenses over time.
In addition, review the life insurance, short-term and long-term disability insurance and supplemental home coverage needed for your home office. As a sole proprietor, your income depends on you, so if you are sick or injured, disability insurance can support your income. If others rely on you for income or debt repayment, life insurance is non-negotiable. Having the right size homeowner’s insurance can protect your investment in equipment, inventory and supplies, which often exceed traditional home coverage.
Nurture your career on your own terms
As an entrepreneur, you make the rules. It can be refreshing, especially after working in the corporate world. As you lend your expertise to others, realize the opportunity you have to create a career that supports your aspirations.
Develop your own mission and vision for your individual owner, just as you would a larger organization. You may not share this vision with others, but it is an exercise that will help you focus on your overall goal. Flexibility, financial freedom and more time spent doing the things you love are the main contenders here.
Once you develop your career vision, use it to guide how you take on work and how you deal with clients. With this vision in mind — and a stable financial foundation to back it up — you’ll soon be cultivating the career of your dreams.
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