I love being self employed. I get to call my own shots, set my own hours and enjoy a degree of flexibility that salaried workers don't always get. But there are certainly a number of financial drawbacks I've grappled with through the years, and while I've learned how to handle them, they can be challenging for those who are new to the world of self-employment.
Here are a few money-related hiccups you might encounter—and what to do about them.
1. Having a Variable Income
Budgeting becomes much more difficult when your paycheck fluctuates from one month to the next. The solution? Assume the worst for budgeting purposes. Base your living expenses on your lowest anticipated monthly income. Then, save your extra money during those months when your income is higher.
For example, if, over the past year, your lowest month of earnings brought in $3,000, and your highest month of earnings brought in $6,000, aim to live on $3,000 of income only. It'll help you avoid stress when work slows down, while giving you an instant savings opportunity when things pick up.
2. Having to Estimate Your Own Taxes
The tricky thing about self-employment is having to calculate your tax liability. That's why I always make a point to make taxes a line item in my budget. Each month, I set funds aside for the IRS, and you'd be wise to do the same.
Of course, the amount of tax you owe will depend on a number of factors, such as your tax-filing status, your total income and your deductible expenses. If you're new to the world of self-employment, it could pay to sit down with an accountant or tax professional who can help you estimate your taxes initially. That way, you'll know how much money to set aside on an ongoing basis. Furthermore, self-employed people must make estimated quarterly tax payments during the year. For income earned in 2020, these are due on April 15 (the same day tax returns are due), June 15, September 15 and January 15, 2021.
3. Having to Track Expenses
When you're self-employed, there are a host of business-related expenses you're allowed to deduct on your taxes, from mileage on your vehicle to travel for work events to equipment and supplies. However, the tough part is keeping track of those expenses. To this end, find a system early on that works for you.
One thing I like to do is take photos of my receipts, scan them, file those images electronically, and link them to a separate spreadsheet I maintain that summarizes my costs. My logic is that physical papers can get lost or degrade over time, whereas if I store things electronically and back up my data, I'm less likely to miss key information when I sit down to file my tax return.
4. Having to Plan Carefully for Time Off
The good thing about being self-employed is getting to take time off whenever you want. The bad thing? That time off is never paid. As such, taking a vacation requires careful planning on my part—namely, I have to make sure to work extra hours in the weeks leading up to my planned time off. That way, I can earn a little extra in advance to compensate for not earning money while I'm out of the office.
That said, while planning for scheduled time off isn't all that difficult, sometimes I have no choice but to take off time without warning, such as when I or my children get sick. My solution? A healthy emergency fund. I always make sure to have at least six months of essential living expenses tucked away in a savings account.
That way, if I do end up missing more work than expected and my income takes a hit, I'm not left scrambling to cover my bills.
There are plenty of reasons to be self-employed, but dealing with the financial challenges involved can be tricky, especially when you're first getting started. Still, there's something to be said for technically being my own boss, and despite the drawbacks, I'd much rather maintain this arrangement than work for someone else.