It’s thrilling and terrifying at the same time. On one hand, you’re self-employed, doing exactly what you want to do without having to answer to a boss, show up in an office on time every day, or dealing with annoying co-workers. You make the rules and live life as you like.
On the other hand, though, you’re without the “safety net” of a fixed income. With no regular paycheck coming in, budgeting can be a challenge, and if you’re not careful, you can find yourself struggling just to pay the bills each month – no matter how much you earn.
Taxes First
As an employee, your boss conveniently paid your taxes on your behalf, leaving only your net pay in your check each week. As an entrepreneur, you don’t have that benefit, and that causes a lot of trouble for some newly self-employed people. Here’s the thing – your “paycheck” suddenly looks a lot larger than it really is. With no FICA, Social Security, or other taxes being withheld, it’s easy to simply spend what you’ve earned, and then find yourself in trouble come tax time.
Your accountant will be able to help you determine what percentage of your gross income should be set aside for taxes. If you’re self-employed, you will typically have to pay quarterly income tax – which is based on what you earned last year and is paid in advance – so you need to make sure you have that money set aside or you’ll face some pretty serious fines from the IRS. Quarterly taxes are due April 15, June 15, September 15, and January 15.
The easiest way to manage your tax payments is to open a separate bank account just for taxes. For each dollar you earn, take a percentage of that (whatever you and your accountant decide is the correct amount) and put it in your “tax” account. Then when it’s time to pay your quarterly taxes, simply write a check and mail it off.
Business Budget Planning
Just like your household, your business needs a budget. You need to have a pretty good idea of what you expect to earn each month, and also what your expenses will be. You can also plan in advance for new equipment purchases, business trips, and other out-of-the-ordinary expenses.
Some of the most common expenses you should count on include
- Taxes (yes, I mentioned them earlier, but it’s that important)
- Hosting accounts
- Domain renewals
- Mailing list managers
- Memberships in business education forums and mastermind groups
- Contractors (writers, web designers, and others you outsource work to)
- Your accountant and lawyer if you have one
- Business only utilities, such as your cell phone, your Internet connection, and anything else you pay for from your business account.
Notice I mentioned your “business account.” If you want to have good business cash flow, it’s important to keep household money separate from business money. This can mean simply setting up a business checking account and depositing all money there first, then withdrawing your tax money into your tax account, and your money (your salary, actually) into your personal account.
Not only will this help with cash flow, but if you form an LLC or a corporation, it’s vital to clearly differentiate between your personal funds and your business funds. Mixing the two can result in you losing the liability protection that forming a business entity afforded you in the first place.
Cash flow is one of those things that small business owners don’t like to think about, but in order to have a healthy, sustainable business, it’s vital for you to manage it well. Create a budget, be diligent about setting aside money for taxes and saving some funds for when you have a slow month, and you’ll never have to worry about how your business will manage to pay the bills.
These are great tips!
Paul, this is SUCH an important topic! In my circle (virtual assistants) it sometimes shocks me just how laid-back people are about money and cash flow. They don’t know how much they pay in taxes, they don’t know how much they spend each month, and they don’t know how much they’re likely to make next month. And it’s so stressful trying to run a business that way. Much better to do the math and know exactly what you earn and where it goes.
I agree, Cindy! A lot of people just look the other way when it comes to money. People are quick to say, “I made $x this month (or this year).” That is great – the follow-up question to that statement is, “What did you spend?”
In the internet world, people are quick to spend $7 or $27 on a report, a product, or a tool. For a lot of people, this is disposable income. Popping down $27/week does not get missed. But, it does quickly add up!
If nothing else, just track how much you spend each month on a piece of paper. Is that total LESS than what you made? If so, keep it up! If not, start adjusting on your spending, or sell more!
Thanks for stopping by, Cindy! I appreciate you for commenting!
Hi Paul. This is great advice. It’s interesting to see the difference in tax due dates between Australia and the U.S.
Whoops! Great point, Amanda! I was not thinking about outside the US when this was posted! I should go back and update this to reflect that! Thanks!