TIPS TO MANAGE FINANCES IF YOU ARE SELF-EMPLOYED
There are many benefits of having your startup. You can choose your hours, and you won’t have an irritating boss breathing down your neck. However, with independence comes responsibility. As a self-employed business owner, you’re the captain of the ship. Therefore it is your responsibility to keep the boat from sinking. And nothing can be more dangerous for a business than not keeping track of the finances. Indeed, according to reports, only 9% of new businesses survive the first ten years because of financial mismanagement.
Therefore, financial management is the most valuable skill for a self-employed person. Not only is this skill vital to keep the business afloat, but it can also help you with tax handling. Sometimes, money management can be difficult if you have no experience in accounting or business management.
Therefore, let’s see some tips to follow to avoid going under:
Keep something aside for a rainy day:
Ideally, you should have enough money burrowed away from your business to survive for six months. But, how can a struggling business put that much money aside? There are two ways you can save for your business, depending on your business model.
You can contribute all profits to the savings account after calculating the monthly costs of running the business. On the other hand, you can use a percentage system for savings on fluctuating incomes. Set up accounts for all your different expenses and then transfer a percentage of every paycheck to these funds. So, you will only have to pay more when you earn more.
Furthermore, owners of businesses with predictable cash flow can even make reserves work for them. If you know that you will not need ample money for months to come, then you should consider investing in stocks or a Certificate of Deposits. So, not only will you be saving money, but you will also get dividends on savings.
Keep your eye on the prize (money):
A self-employed person has to wear many hats and do many things. There are employees to pay and clients to meet on business lunches. Amidst all this, it can get confusing to keep track of where all the money is going. However, if you do not maintain records, you will find that you have run out of money.
Hence, it is vital to manage your budget and cash flow. Not only is this good for financial planning, but it will also help you manage all applicable self employed taxes as well.
First, set up separate accounts for yourself and your business. Hence, you will not be personally liable for any business debts or taxes. Furthermore, do not forget that you need money for yourself as well. So pay yourself a reasonable income every month.
Second, it is vital to pick an appropriate accounting strategy for the business. You can either choose the accrual method or the cash method. If you want cash flow projections, you should choose the cash method appropriate to record the purchases. But, it might be better to use the accrual method if you want to reduce tax rates.
Remember to take some time to regularly review your business’s financial position so that you can spot any issues in the calculations. If this seems too demanding for you, then you may hire an expert to help you out.
As a self-employed person, you are in charge of everything, including figuring out how much you owe taxes. Do not fret just yet though, you can plan for this expense as well. Just follow some rules.
First, save almost 30% of any money you earn for taxes. It might seem too high, but it pays to be over-prepared instead of being underprepared.
Second, calculate everything you owe. As a self-employed person, you may have to pay two different taxes. One is the self-employment tax, and the second is the income tax. Why are you paying these taxes? Well, Social Security and Medicare is a self-employment tax, whereas income tax is liable for business profits. Another vital point is to check what you owe each year since the IRS updates the form yearly.
Third, always pay your taxes AS YOU GO! Hence, you will not have to cough up a fortune each tax season, but instead, you will pay taxes every quarter. Additionally, you will avoid any penalties, and late payment will only incur a small late fee instead.
Get any advantage you can get:
Tax deductions are our favorite part of taxes since they lower the amount you owe to the government. You can deduct any expense you used for your business from your taxable income. It may be anything from car expenses to retirement savings. But it is tricky to calculate these deductions. We will mention some self-employment deductions that you may claim.
Home office deductions:
These deductions are for those who work from home. But there are some prerequisites you must fulfill to qualify for this deduction. Your business must operate at the exclusive, regular, and primary place of business. So you must have a separate room that you consistently use for work. Moreover, you can deduct a percentage of several expenses. For instance, you may subtract 5 percent of property expenses if your home office occupies 5 percent of the house. Understandably, the calculation can get very complicated. Fortunately, the IRS has a shortcut for you. Just deduct $5 per square foot of the area.
Transportation costs are often the highest expense for small business owners. Business owners operate out of their cars and use personal automobiles for many things, so they should deduct travel costs from their taxable income. You can calculate the transportation deduction in two ways. Either subtract the percentage credited to your business or track your mileage. Calculate mileage at the rate of $57.5 per mile for 2020.
You can deduct expenses for any trips or business lunches. However, you have to prove that it was all for your business. Try not to claim too many of these expenses since they are a red flag for auditors.
Self-employment is rewarding, but it can be scary and exciting at the same time. The best thing you can do for your business is to save money and keep track of all expenses. Furthermore, it would help if you kept on top of the taxes to avoid catching the IRS’s eye. Lastly, get all the benefits you can get. Above all, enjoy your work.