Self-Employment Budgeting Tips

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When you’re not working a 9-5 job with a stable, predictable salary dispensed into your bank account on a set schedule, budgeting for recurring monthly expenses can be a bit tricky. While being self-employed can afford you the freedom to work flexible hours, have a varied office location and the ability to do something you love, it does not always provide the easiest and most consistent stream of income to rely on. This is where careful, diligent budgeting comes in handy.

 

1) Always budget for the necessities first!

While you are most certainly deserving of a dreamy resort vacation this summer, that doesn’t mean it qualifies as a necessity, as your vacation can easily be delayed until you can truly afford it. Necessities solely include staples like your rent or mortgage payment; groceries, gas, medical insurance, car insurance and car payment or other required transportation costs; utilities like electricity, phone, internet, water, sewer and garbage. It is also critical that you budget for your income taxes, as they will no longer be automatically deducted from your income. Anything else not featured on the aforementioned list does not qualify as a necessity and therefore you can live without it and save up for it before purchasing it.

 

2) Establish an emergency fund.

If you haven’t done so already, creating an emergency fund that has enough money to sustain 3-6 months worth of your necessary expenses is an absolute must for the self-employed. Not only does this provide you with added financial security and stability, it also buys you time to find a new job or side gigs if your self-employment opportunity does not prove lucrative enough to afford your expenses.

 

3) Once you have your emergency fund in place and have mastered budgeting comfortably for the necessities and have some wiggle room left over in your budget each month, you can start budgeting for “little luxuries.”

When I say little luxuries, I mean just that. Not living large, but treating yourself to small and affordable indulgences in moderation but on a regular basis. This may include something as mundane as ordering a Netflix subscription and Chinese takeout once a month, or something as exhilarating as a night out at a rock climbing gym with friends depending on your tastes and interests.


Pro tip: seek out experiential luxuries whenever possible as they don’t generate physical clutter that you’ll have to deal with down the road. The memories you’ll gain are much more valuable in the long run.


 

4) Think big: now that you’re managing all your monthly expenses (including little luxuries) like a pro and have a solid emergency fund in place, it’s time to consider your long-term financial goals.

When you’re self-employed, saving for retirement is even more important than it is for your peers who participate in employer-sponsored retirement programs. Given that you don’t have the opportunity to participate in employer-based matching programs, you will need to be proactive and learn to not only save diligently toward your retirement fund, but also actively invest your money wisely to make it work for you. There are tons of great retirement-planning resources available online, but if you’re feeling overwhelmed at the prospect of managing your own retirement accounts, consider consulting with a local retirement specialist who can help get you on the right track. If you’re more concerned about meeting more immediate financial goals like purchasing a home or a new vehicle (or even that resort vacation), a financial planner will be able to help you adequately allocate funds for each important goal while still contributing to your retirement so that it can continue to grow as you meet your other major milestones.

Veitengruber Law can guide you through your NJ asset management needs as you get older; with advances in medical care extending life expectancies, you may be facing difficult choices over health care and your legacy. We also have close relationships with expert financial planners and NJ CPAs with whom we are happy to connect you.

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Paying Taxes When You’re Self-Employed

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It can definitely be confusing when tax season rolls around if you are currently working as a 1099 contractor, or in other words, if you are self-employed. If you have been working from home – either on your own business or as an independent contractor, you do still have to pay income tax, as long as you’re actually generating an income. The tricky part is, now you are considered to be the employer and the employee.

Most 1099 contractors love the flexible work schedule and increased amount of independence that comes with being self-employed. However, one of the negatives that unfortunately also comes with the package deal, is figuring out and managing to pay your own income taxes properly and on time.

After all, no one wants to get in trouble with the IRS.

Just like a W-2 employee, your income taxes as a 1099 contractor will be determined by how much you earn per year. You can pay your taxes electronically or the good old-fashioned way: by mail.

The first thing you’ll need to do when determining how much of your wages to fork over to the government, is to add up all of your yearly income. Be sure to include all payments you have received from any and all clients throughout the entire preceding calendar year. The nice thing about working independently, is that you can then deduct business expenses and tax credits from your gross earnings. You can deduct virtually anything that you use to help run your business, ranging from the supplies you use on a daily basis and office furniture in your home to any expenses related to traveling for your business. Another nice bonus of working for yourself, is that you can actually deduct part of your mortgage payment if you have a home-based office.

Next, you should also know that as an independent contractor, you will be required to pay something called a Self-Employment tax, or SE tax. This is because you no longer have an employer taking money out of your paycheck to go toward Social Security and Medicare.

By using form 1040-ES, you will be able to determine whether or not you are required to pay your SE taxes, as well as your income taxes, quarterly, or if you can simply pay them once per year.

After filling out the worksheet attached to form 1040-ES, you will know your estimated quarterly tax payments. Included with form 1040-ES are blank vouchers that independent contractors can use when sending in quarterly tax payments to the IRS. Remember, you can also pay quarterly using the IRS’s electronic payment system.

Even if you pay your SE and income taxes on a quarterly basis, you will still be required to file an annual return every year. This is because most sole proprietors estimate their quarterly income. Your annual report will show the IRS your actual earnings for the entire year so that any corrections may be made to the quarterly payments that you have submitted.. To file your annual return, you can use the Schedule C form, found on the IRS website.

Filing your taxes as a sole proprietor or 1099 contractor can be confusing, especially if this is your first year in business for yourself. By using the tips in this article, you should be able to successfully handle filing the appropriate forms and making the correct payments.

Should you need further assistance, we can easily direct you to a trusted tax preparer within our vast professional network. It’s as simple as leaving a comment after this post, sending us a quick note using our Contact Us form, or calling/dropping by our office. As always, we’re happy to help!