If you’ve made the jump to self-employment, or are thinking about doing so, you’re no doubt aware of some of the financial challenges you have ahead of you. Working for yourself is great. You get to work from home, make your own schedule, cut your commute down to zero. On the other hand, there are many perks that come along with working in a traditional office setting. Many of these are financial. Fortunately, you shouldn’t let any of these hold you back. We’ll talk about the common financial pitfalls of self-employment, as well as ways to overcome them.
This is a big one. In the United States, a traditional worker has taxes paid by their employer, but for solopreneurs, employer and employee are one and the same. For this reason, taxes can approach 30% of income for self-employed people. Ouch.
There’s no way to really do away with this one, but there are ways to cut down the bill come tax season. The first thing to do is work with a tax professional. We really can’t stress this one enough. A tax professional will not only make your tax return spic and span, they will also help you identify all of the potential ways that you could save on taxes. Here are a few.
- Write off the office space you use in your house, including utilities and office supplies
- Write off the expense of using a tax professional’s services on next year’s taxes.
- Write off the money you spent on work outings, travel, food, etc.
- Write off renovations and other home-related expenses that directly pertain to your job.
- Write off that new computer you bought, which you only use for work.
It’s important to note that when your taxes go to the IRS, they aren’t all checked by a human being. Instead, they’re fed through a computer and only investigated if something looks out of the ordinary. This is not to say that you should lie, but you should feel free to max out your deductions. This is the only way to cut down on this tax bill. Look for more freelancer tax advice from top finance blogs to do even better next April.
Self-employed and freelance persons often cobble together their careers from a variety of sources. This can create a work situation that’s feast or famine. It’s great when you have tons of work and plenty of money, but when one key client calls it quits, you might have trouble making ends meet. There’s no real way to prepare for this except to create an emergency fund, always be looking for new work, and cultivate the best possible relationships with your clients.
Fewer Investment Opportunities
One of the best parts of working a traditional job is that sweet employer-matched 401(k). If you’re unaware, a 401(k) lets you use work funds (sometimes pre-tax) to invest for retirement. Sometimes these funds are partially matched by your employer. At home, you won’t have this option.
You will, however, have a Roth or Traditional IRA with Betterment investing or other brokers. These accounts work much the same way (sans matched funds), and you’ll be able to contribute a total of $5500 annually. If you start early enough and make sure to max out the account each year, you could well be a millionaire by the time you retire.
Self-employment is not for the faint of heart. It has its perks, but unless you get financially savvy, you probably aren’t going to find that it’s worth it for your wallet. Follow these tips and always be adding to your skills, however, and you could change that forever.
- Forming an LLC and Electing to be Taxed as an “S” Corp
- Taxation Benefits of Incorporating
- Self-Employed 401K: Retirement and Tax Savings Tool for Small Businesses
- How to Survive Self Employment
- How to Open Your Business