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What to Consider Before You Leave a Salaried Job to Work for Yourself

2017-04-17  

Source:money.usnews.com

 

The idea of being your own boss may sound wonderful, but self-employment has its financial challenges. If you're thinking of leaving a full-time salaried position to work for yourself, good for you – but if you really want this experience to be good for you, you'll want to think about these seven issues before you make the leap. As you will see, there's a lot to think about. This just scratches the surface.

 

Taxes. If you're working for a company, you may shake your head in disgust when you see how much of your paycheck goes toward taxes, but at least it's a straightforward process. You don't, for instance, get the money and have to give it back weeks or months later to the Internal Revenue Service. Instead, your employer takes the money out before you get it and sends it to the IRS. But when you're in charge, you need to be strong enough to set aside some of the revenue you collect to later send it to the IRS. That may sound easy enough, but if your budget is tight, there's some serious willpower involved. You need to put enough aside that you have money for federal income taxes as well as your Social Security and Medicare taxes. Oh, and, yes, state taxes.

 

Most self-employment experts say that comes to about a third of your income.

 

"I set up a special 'tax' account so that I can write the check every quarter and cannot touch that money," says Julie Phillippi-Whitney, who has her own public relations firm in Cincinnati.

 

How important is this to do? Brian Thompson, a certified public accountant and attorney in Chicago, says, "Self-employed taxpayers who fail to make sufficient quarterly estimated tax payments during the current year often find themselves with a $10,000-plus tax bill upon filing income tax returns the following year."

 

Insurance. Everyone who works for themselves likely worries about health insurance (unless they're on their spouse's plan), and rightfully so. According to the broker eHealth, the average monthly premium for an individual in 2017 is $393; for a family, $1,021. Your own cost will vary, and you'll want to do your research and likely consult a health insurance agent. Phillippi-Whitney suggests you do all of that before you give up your salaried position. She points out that many cities offer insurance to members of the Chamber of Commerce, and so that may be one option for you.

 

On the plus side, Thompson notes you can and should deduct your health care insurance as an ordinary and necessary business expense, though he adds, "Taxpayers should consult a CPA for further guidance regarding their specific circumstances."

 

You'll also want to think about life insurance if you only have it through your employer, and you may want to get disability insurance.

 

Jill Santopietro Panall, the owner of a human resources consulting firm in Newburyport, Massachusetts, recommends an entirely different sort of insurance. "I probably cannot overstate the importance of errors and omissions insurance for consultants who are giving business advice of any kind," says Santopietro Panall. "It's really easy to overlook, and many new business people I work with don't even know about it, but it gives you some protection from the potential repercussions of clients following your advice and not being happy with the outcome."

 

Paid vacations. Keep in mind that from here on out, you will be paying for your vacation time. That means if you go on a vacation, not only will you be paying for your airline tickets and hotel costs (just like you do when you work for someone else), you won't be making money during the week or two that you're gone. That can be an expensive week or two.

 

Buying a house or a car. Are you planning on buying a house or a car or taking out student loans for your college-bound kid? If you have any giant life moves that you're planning on taking, in which you need to borrow money soon, it would probably be best doing that before you quit your job and become self-employed. As any banker or lender will tell you, it can be harder to get a loan when you're self-employed, and much more difficult if you're newly self-employed.

 

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