Especially following the work-from-home days of the pandemic, many workers are seeing perks of being self-employed. Owning your own business means making your own hours, setting your own standards and expectations, being your own boss, and having a limitless income. 

However, unless you are a small business accountant, running a business takes a lot of financial know-how in order to keep it afloat. After all, around half of small businesses do not survive the first five years, often due to some type of financial mismanagement. 

If you are planning to start a business or become self-employed, or if you are already in the trenches, these four tips for the self-employed are essential.

Maintain a Thorough Budget

Even if you have had a strict budget for years, your mindset needs to shift when you become self-employed. In most cases, funds become more unstable, with some months bringing in more than others. 

First, work out how much your family needs to pay the basic expenses each month to set the bar for yourself, and to ensure the business is pulling in enough income. The goal is to be as financially stable as possible.

Then, focus on saving.  When those fruitful months hit, create an overhead account to help with the slower months. The recommendation workers should have saved in case of hardship is around 3 months pay. However, as someone self-employed, you will want to save as much as 9 to 12 months pay. That way, the unexpected expenses or loss of clients that business owners regularly face will not put the business in jeopardy.

Think Before You Borrow

Opening a business credit card can seem like the obvious move when becoming self-employed. Unfortunately, depending on such an account can damage your business, and your own financial status. 

Since a regular income each month is often not the case, paying off the card each month or even reaching the minimum payment may be impossible at times. This can quickly turn into a downward spiral that puts your business in a lot of debt. As your business becomes more stable, consider the various ways to borrow that will be the most beneficial to your specific business.

Protect Yourself

As an employee of a company, certain “perks” are regularly taken out of your paycheck. When you are self-employed, all funds that go towards insurance and retirement must be paid out-of-pocket. 

Even if you are looking to save money, be mindful not to neglect these opportunities and give yourself the possibility of acquiring unnecessary debt or putting your business at risk. For instance, many business owners factor health insurance into their budget, but disability insurance often gets overlooked. However, if you are suddenly faced with an unforeseen illness or accident that makes you unable to work, a lack of disability insurance could have a major impact.

Along with insurance, be sure to maintain a retirement account. Though you won’t receive the advantage of matching funds, regular payments into a 401k, IRA or Roth IRA is still vital to living the future you want. 

Take Advantage of Tax Deductions

One of the added tasks when running your own business is calculating and paying taxes, both business and personal. Usually, you will pay what you owe quarterly and will need to factor this into your budget, along with what you pull from the business as salary. 

Learning the deductions you can take advantage of will help save some of those funds. 

When thinking about potential deductions, ask yourself these questions:

  1. What do I pay every day to keep my business running? Think supplies, business cards, online fees…all of it has the potential to be written off.
  2. Do I travel for business? When you run your own business, you can deduct many of your car expenses, including mileage. 
  3. Do I have a designated workspace? Check out the requirements for a home office deduction.

Making the move from employee to self-employed is a risky one, but one full of immense benefits. As you embark on this journey, make it a habit to regularly check in on your finances and consider all factors involved. And, in those moments of overwhelm and confusion, do not hesitate to reach out to your local small business CPA in Charlotte for guidance or assistance.