Curious about self-employment? Don’t worry, I’ve got you covered. In this article I’ll give you the low down about it.
It’s a fact that a few decades ago, more than half of working Americans were self-employed. Nowadays, less than one-third own their own business or work as independent contractors. However, side hustles and the gig economy are making a comeback, which has left many newly self-employed individuals wondering how to budget, save money, and file taxes.
If you’re in that same boat with millions of other Americans (and many other people around the world), it’s time you learned how to manage your finances when self-employed. Here’s what to know about self-employment.
Here’s Everything You Should Know About Self-Employment
Budgeting With a Variable Income
When you’re self-employed and running your own business, your income can fluctuate from one month to the next. This makes budgeting difficult at times.
Luckily, you can ensure you always have enough money in your bank account by basing your living expenses on your lowest anticipated monthly income. Doing so will help you live within your means during the slow season and save during the busier months.
Creating an Emergency Fund
Of course, you may also want to create an emergency fund and work on saving at least six months’ worth of essential living expenses. That way, if you fail to set enough aside for taxes or end up missing more work than expected, you still have a bit of a buffer before you have to reassess the situation and consider finding another source of income.
Paying Quarterly Taxes
To an outsider, self-employed workers look like they earn exponentially more than their employed counterparts. Since no employer is withholding taxes, they do, in fact, receive more money at first.
However, they’ll end up paying a fair amount back in quarterly taxes, which they estimate based on their gross income. These payments can total thousands of dollars, and if they underestimate the amount, they’ll end up dealing with self-employment tax debt when April rolls around.
Tracking Expenses
Because it’s up to you to estimate your self-employment taxes, keeping track of all business expenses is absolutely essential, especially if you want to make deductions and lower your payments.
Use a notebook to keep track of weekly, monthly, and quarterly expense totals. If you work from home, your expenses might include the cost of office supplies, Wi-Fi, and gas. You may even be able to deduct part of your rent or electricity bill depending on how you use your home to conduct business.
Finding Insurance
Working for yourself does come with perks, but health insurance simply isn’t one of them. At a traditional job, your employer might offer health insurance as part of their employee benefits package.
However, working for yourself means you’re the boss. And finding — and paying for — insurance is your responsibility. Failure to do so can put you and your family at medical and financial risk, so it’s crucial to find good coverage as soon as possible.
Knowing When to Ask for Help
Unless you thoroughly research what you need to know about self-employment, you won’t understand how to make quarterly payments, build an emergency fund, and save accordingly. In fact, some people still don’t feel confident enough to do all that after conducting research.
In this case, it’s best to ask a tax professional or accountant for help. That way, you can rest easy knowing your finances are stable.
Watch this space for updates in the Hacks category on Running Wolf’s Rant.
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