Do you work for yourself? If so, then this blog post is for you. It talks about the financial side of self-employment and how to manage it all. We will go over what taxes are necessary, as well as budgeting strategies that can help make life easier. So read on to learn more!
If you are self-employed, it is in your best interest to keep a separate bank account, whether or not you want to track the money that comes into and out of your business. Why? Well for one thing, if someone gets access to this account without permission (such as an estranged spouse), they can file bankruptcy on it. That would put your entire business at risk! Also, some landlords will only accept cashier’s checks from businesses when renting property. This means that even though all funds come when you accept payments from users or you personally, they need to be transferred through another entity i.e.: a company name so that everything looks official and above board. Not keeping a separate business banking account leaves things open for interpretation and makes it harder than necessary for you to track your income and expenses.
After you have decided on a bank for the business account, it is time to set up your home checking account so that when funds are deposited into it they can be easily transferred or withdrawn in an effortless transaction.
Taxes are one of the most common reasons that people decide to go into business for themselves. The self-employed are responsible for paying 15.65% in Social Security and Medicare taxes, as well as income tax on their net earnings from self-employment (more than $400 per year). There’s also something called “self-employed health insurance” which can be expensive! This is where having an EIN comes in handy.
The EIN is a tax ID. If you’re planning to start your own business and hire employees, then the IRS will require that you get one of these numbers, so they can track all your issues related to payroll taxes (such as health insurance). EIN stands for Employer Identification Number. You will also need this number if you plan on hiring people or making other decisions about running an actual company – such as filing annual reports with the state.
This can be a really hard part of self-employment for many people. For some it may seem like this should go without saying but even when you have your finances together sometimes the “decision-making process” gets lost when we get into our heads. It’s important to separate emotions from decision-making to make good decisions financially!
If you are always chasing money or spending more than what comes in, then chances are things aren’t going well for your business, and maybe it’s time to reevaluate how much you’re charging, etc. There will never be an end where everything fits perfectly into the budget, that’s why it is called a budget! If you are constantly making sacrifices, then you will never get ahead.
If you have a home office, be sure to take deductions for the percentage of your expenses that relate to this space. If you have a dedicated space that is used only for work, then your office expenses are fully deductible. Keep track of how many hours per day you use this room exclusively for business, and be sure to take the percentage of total square footage as compared to the entire home.
The percentage of your home office deduction will depend on a few different factors: the size of the square footage used exclusively for business purposes compared with total square feet in your house or apartment, how many hours per day you use it exclusively for work, whether there are any shared rooms (for example, if you have kids). On top of taking deductions, you can also write off many other business expenses if they are incurred to make money. If you have employees, then be sure to get payroll software so that your taxes are easier to manage! There is nothing more frustrating than having an accountant do taxes and finding out what a headache it was because there wasn’t any good accounting system in place beforehand. It will save both time AND money!
Keep scrupulous records of all expenses and income. It’s vital to keep good records for your self-employed business, not only because you may need them in the event of an audit or other tax action, but also because they can be extremely helpful if it comes time to fill out a loan application (for example) or deal with any other financial obligations.
It’s a good idea to make monthly or quarterly reports from the books, not only for your records but also to see if there are patterns in what is going on and where money might be leaking out of your business. If it seems like expenses increase during certain months (for example), that may give you an indication that sales slow down at this time of year and things need to change within the business model, such as hiring additional staff, offering discounts, or making changes to product offerings. Make sure all receipts get entered into QuickBooks each month!