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Building your niche in the business world is not for the faint of heart. But after months and even years of planning, you’ve started earning income as a new business owner. As an entrepreneur, you get the best of flexibility and earning potential plus some big financial responsibilities.
Understanding your unique financial opportunity is essential if you’ve recently started out on your own or started a side job. When you know the financial benefits, opportunities and risks of your new venture, they can work to your advantage.
- Take advantage of entrepreneur-friendly tax rules
Paying taxes is one of life’s necessities and a task that is less desirable than most. However, entrepreneurs often have tax advantages when it comes to deductions, write-offs and savings. Before you start setting aside cash for quarterly tax payments, consider the options available to you.Even if your business ventures are in addition to your primary job, you can save for retirement beyond the usual limits. A newer option, 401(k) only, enables the self-employed to save up to $57,000 a year. That’s more than twice the amount allowed for traditional 401(k) plans, making retirement savings an achievable goal. Use your savings efforts to reduce or defer your tax liability as your contributions grow over time.
The self-employed can also write off various expenses associated with running their business. If you use space in your home solely for your business, you may be able to reduce your tax liability. The supplies, repairs, and technology required for your operation are all expenses worth tracking and including in your business expenses. Review the latest Internal Revenue Service rules about what’s allowed when it’s time to file.
- Prepare for variable income
Budgeting is essential for any professional, but business owners need to prepare for more variation than the average person. Contract work, billable hour limits and the ability to choose your projects give you both flexibility and risk. Sometimes your work will be overwhelming, while in other seasons it may be scarce. Do what you can now to prepare for the highs and lows of entrepreneurship.Aim to project your annual revenue based on the customer relationships and contracts you have. Determine which contracts or agreements are on an ongoing basis or have fixed time frames to determine how reliable they are. For each contract, track renewal specifications, identify opportunities to re-offer work, or note if the relationship is limited. If there is an option for renewal, engage with those responsible for renewing your contract well in advance of making a decision. Ideally, you will be able to identify new opportunities and client needs to help you close upcoming work.
Once you have a good read on your income potential, determine how much of your income to save or spend. Based on your income, set aside a little for estimated taxes, which many sole proprietors pay in quarterly installments. Plan for variable income by being conservative with how much of your remaining income you use for personal expenses. Update your budget to account for slower months by cutting expenses, opting into budget charging or paying premiums in installments.
- Protect your health and assets with insurance
New business owners often assume responsibility for costs or choices traditionally made by the corporate employer. If you’re single, you’ll need to consider how you’ll access critical health and personal protection insurance. Even if you are relatively healthy, health coverage is an essential necessity that you should pay attention to. One hospital visit can spell financial ruin, so look at your premiums as an investment in your future.Health insurance options can be reviewed at HealthCare.gov, and you can choose from state-specific coverage that meets your needs. If you are married, you may also be eligible to enroll in your spouse’s employer-sponsored plan. Use health savings accounts if possible to save money for health-related expenses over time.
Also, review the life insurance, short-term and long-term disability insurance, and supplemental home coverage needed for your home office. As a sole proprietor, your income depends on you, so if you are sick or injured, disability insurance can support your income. If others rely on you for income or to pay off debt, life insurance is out of the question. Right-sized homeowners insurance can protect your investment in equipment, inventory and supplies that often go beyond traditional home coverage.
Cultivate your career on your own terms
As an entrepreneur, you make the rules. This can be refreshing, especially after working in the corporate world. As you share your expertise with others, realize the opportunity you have to create a career that supports your aspirations.
Develop your own mission and vision for your sole proprietorship, just like the larger organization. You may not share this vision with others, but it is an exercise that will help you focus on your overall goal. Flexibility, financial freedom and more time spent doing the things you love are the top contenders here.
Once you develop your career vision, use it to guide how you take on work and engage with clients. With that vision in mind—and a solid financial foundation to support it—you’ll soon be cultivating the career of your dreams.
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