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Full-Time to Self-Employed: 6 Things to Know Before You Make the Switch
For many people, being self-employed is the fulfillment of a lifelong dream. You get to be your own boss, set your own hours, and focus on your own agenda. However, before making the switch from full-time employment to self-employment, it’s crucial that you have a clear plan in place. You are responsible and accountable for every facet of your business, and a regular income is now no longer guaranteed. It’s a big transition, but one that is set to offer you more freedom and a deeper sense of accomplishment. The key to making your new solo venture a success, though, lies in how well you manage your finances.
Create a Budget and Emergency Fund
Without a budget, you won’t have a thorough sense of your income and expenses. When you see the numbers in black and white, you’ll have a much better idea of your needs, and therefore know where you can tighten your belt and by how much. It’s also important to build an emergency fund that can see you through a rough patch when you’re getting started. Commit to putting away three to six months’ worth of living costs into an emergency fund to ensure you have a safety net if your business is slow to launch.
Take Care of Taxes
When you’re self-employed, there’s no payroll department automatically deducting a portion of your income and paying taxes. It’s a task you’ll have to perform yourself each quarter, so it’s crucial to put the appropriate amount of money aside to pay Uncle Sam. Keep in mind that self-employed people are responsible for paying all of their Social Security and Medicare taxes, which for 2018 are 12.4% Social Security tax for up to $128,400 of net earnings, and 2.9% Medicare tax on all net earnings. Your accountant can figure out exactly how much you need to put aside each month to pay state and local taxes, but you’re ultimately responsible for paying your fair share, so keep tax laws in mind whenever money comes into your new business.
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Continue Saving for Retirement
When you’re self-employed, you must fund your own retirement. Fortunately, there are various vehicles available to help you do this. Self-employed people may now contribute up to $55,000 to either a SEP IRA or a solo 401(k) as of 2018. It’s wise for a self-employed person to contact a financial planner who can walk you through retirement options and help with other planning needs.
Purchase Life and Health Insurance
When you decide to strike out on your own professionally, you are saying goodbye to company benefits, including health care. As such, it’s important that you organize your own health insurance. In Pennsylvania, private health insurance plans can be very affordable if you are self-employed, but it pays to shop around to find the best option for your individual situation.
Besides health insurance, your employer likely provided you with life and disability insurance as well. Now that you’re self-employed, you’ll have to purchase this insurance for yourself. If you have dependents, life insurance is a must. Arguably even more important, though, is disability insurance, since it may prove your only source of income if you become disabled and cannot work.
Set Up the Right Corporate Entity
Setting up the right corporate entity is also an essential part of starting a business. Many people will become sole proprietors, which means their businesses and personal finances are intermingled. Meet with an accountant, or perhaps even an attorney, to discuss the best corporate entity for your endeavor, whether that is a limited liability corporation (LLC), which does protect your personal assets, an S-corp, or some other legal structure. Discuss the pros and cons of each approach, including tax issues.
If you are planning on making the switch to self-employment and require financial advice, contact Citadel today. We offer financing for various business needs, including lines of credit, and can help make your new venture a success.
Photo Credits: Shutterstock / puhhha, Shutterstock / GaudiLab