What do you call an entrepreneur who singlehandedly runs a business without a partner or a staff? Meet the “solopreneur.” More than half of the U.S. workforce will have worked as independent professionals at some point by 2027, according to one recent analysis.
If you fall into that category or are thinking about going solo, here are four key budgeting tips to keep your business on the right financial track:
1. Plan out the year to navigate variations in income and expenses.
Create an annual budget, then break it down by month, advises Howard Milove, CPA, principal and senior wealth advisor for Access Wealth Planning, LLC, in Roseland, New Jersey. “This helps you see what the big expenses are and when and where your income is coming from,” he says. Just about any accounting software package can help you create this budget. FreshBooks, for example, has a version for the self-employed that creates simple dashboards to track financial trends in your business.
“For the leaner months, you might want to consider getting a line of credit from a bank to cover costs,” Milove says. Alternatively, you can set aside a certain percentage of sales or client payments throughout the year. “If you set aside 5%, for example, you can save a lot when business is booming and tap into it later,” says Cathy Derus, a CPA and founder of Brightwater Financial in Chicagoland, Ill. The free banking app Qapital can help by allowing you to set “goals” to save for and establish “rules” for transferring money from your business checking account into your Qapital account (such as saving a percentage each time you get paid).
2. Keep business and personal expenses separate.
“This makes things much easier during tax time so you’re not scrambling to find statements for business deductions,” Derus says. Open a business checking account strictly for your company and use a business credit card to cover expenses like client lunches. Some tools, like Quicken Home & Business, are designed to help you easily keep home and personal expenses separate.
Certain areas may create an unavoidable overlap between business and personal expenses, such as if you work from home and use your internet for both work and life. “I would pay these types of expenses through your personal bank account and then allocate out a portion for business expenses when you do your taxes,” suggests Milove. “Your accountant can help you come up with proper allocation percentages.”
3. Pay taxes quarterly.
Because you are self-employed, you should be paying estimated taxes each quarter to avoid getting hit with a penalty. “The IRS wants their cut throughout the year,” Derus notes.
In addition to paying income tax, solopreneurs also have to pay the self-employment tax, which includes Medicare and Social Security and equals 15.3% of your income. A regular W-2 employee pays only half this amount and the other half is matched by their employer, but solopreneurs have to pay both the employer and employee sides of it; fortunately, you’ll get a deduction for the employer portion. The QuickBooks Self-Employed product can calculate what you owe and remind you when it’s time to pay.
Talk to your tax professional about what other business deductions you can take—for example, for a home office or use of a personal car for business—when you file your taxes. (The app MileIQ can automatically track your mileage while you’re driving, then lets you categorize the ride as either for business or for personal use.)
4. Save for retirement.
Despite all the immediate expenses you have to worry about, experts say you should still incorporate retirement savings into your budget. Your retirement plan can generate a sizable nest egg, thanks to the power of compound interest and the ability for money to grow tax-deferred, especially if you start saving early. There are several retirement plans available for solo business owners, including the SEP IRA. One designed specifically for the self-employed is the Solo 401(k), which works like a traditional 401(k) but is intended for business owners without any employees. The Solo 401(k) lets you make contributions as both the employer andthe employee, which may allow you to contribute more than other retirement plans.
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