Becoming self-employed can be very exciting and financially rewarding. However, there are plenty of financial issues that can overwhelm you.
Here are 5 tips to cut through the confusion of starting your own business:
Tip #1: Find an Accounting Professional
When you start working for yourself, you typically have to wear many different business hats. All of a sudden you’re the CEO, CFO, and are also running the legal and sales departments!
I can tell you from personal experience that when you go into business, one of your new best friends should be a Certified Public Accountant (CPA). Find a local professional that you can meet face-to-face and who seems to understand the kind of work you do. A good accountant can save you money by making sure you plan accordingly for taxes and write off as many business expenses as possible.
Tip #2: Be Prepared for the Self-Employment Tax
Something that can take new entrepreneurs by surprise is the self-employment tax. Here’s why: When you work as an employee, you only pay for half of your Social Security and Medicare taxes and your employer pays the other half. When you become your own boss, you have to pay 100% of these taxes and it can be a lot more than you think.
The self-employment tax for 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). The first $106,800 of your combined wages, tips, and net earnings for the year are subject to the Social Security tax—but all of it is subject to the Medicare tax.
You file self-employment tax on Schedule SE with your Form 1040. Remember that if you don’t report all your self-employment income, your future Social Security benefits will be reduced.
Tip #3: You Must Pay Estimated Taxes
In addition to self-employment tax, you also have to pay federal and state income tax 4 times a year based on how much you think you’ll earn, even if you’re just working part-time at your business. The IRS requires estimated tax so you don’t spend money that really isn’t yours. Otherwise, you could find yourself unprepared to pay a huge tax bill at the end of the year. An accountant can help you calculate the amount you should pay in estimated taxes each quarter.
Tip #4: Deduct Business Expenses
Even though you have to pay more in taxes when you’re self-employed, you’ll have the benefit of being able to deduct qualified business expenses. Those are all the common and necessary costs of running your business, such as office supplies, computer software, liability insurance, entertaining, or travel, for instance.
You can deduct all or a portion of qualified expenses from your taxable business income, which reduces the amount of tax you owe. For more information refer to IRS Publication 334, Tax Guide for Small Business.
Tip #5: Use Financial Software
There are many software programs and online services that can help you keep up with your business expenses and tax deadlines so your business runs smoothly. QuickBooks is the most popular desktop accounting software. If you prefer to work in the cloud, check out QuickBooks Online, FreshBooks, and Outright, which are paid and free online accounting programs.
Successful entrepreneurs know how to leverage their unique skills and abilities. If keeping up with the financial details of your business isn't one of your strengths, be sure to leave it to a professional. Instead, use your time to refine what you do best, so you can grow your business.