Master Your Money: 4 Essential Tips for Self-Employed Business Owners
Life often feels like a juggling act, especially when you’re self-employed. Managing your personal finances doesn’t have to be one of the tasks that keeps you up at night. Here are steps to consider to help reduce financial stress and free up mental space for other priorities.
1. Make Quarterly Estimated Tax Payments
Estimating your annual income to determine quarterly tax payments can be challenging, but it’s essential to avoid penalties for underpayment. The easiest way to stay on track is to follow the federal safe harbor rules: pay 100% of your total tax from the previous year (or 110% if your adjusted gross income exceeded $150,000) divided into four equal payments.
Important Deadlines: Estimated tax payments are due on April 15, June 15, September 15, and January 15 of the following year. Special rules may apply to farmers and fishermen. Be sure to understand the tax requirements for your state and city as well.
If your income is likely to be substantially lower this year than last, consider using the 90% estimated tax liability safe harbor rule to avoid overpaying. Consulting a CPA or financial advisor can help with payment accuracy.
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2. Take Advantage of Business Tax Write-Offs
Self-employed individuals have access to a wide range of tax deductions that can potentially reduce taxable income, sometimes significantly. Familiarize yourself with what’s deductible and keep meticulous records, including receipts, for all business expenses.
Common deductible expenses:
- Insurance premiums
- Interest on business credit cards
- Mileage
- Cell phone and internet costs
- Home office space and supplies
Doing your research and consulting a tax professional can help save you money while helping you avoid potential errors. Not all deductions apply universally, so professional guidance can be invaluable.
3. Open and Contribute to a Solo 401(k)
A Solo 401(k) can be an excellent retirement savings option for self-employed individuals. It allows you to contribute up to the annual maximum limit for defined contribution retirement plans.
Key points to note:
- A Solo 401(k) typically offers more investment options than traditional employer-sponsored plans.
- Be fee conscious when selecting a custodian for your plan, as charges can vary widely.
- Once the account balance exceeds $250,000, the IRS requires annual filing of Form 5500-EZ.
- Managing this account requires extra effort, but regularly contributing to it and diversifying your investments can potentially boost your retirement savings over time.
4. Update Your Retirement Plan Regularly
Review your progress toward your retirement goals at least once a year, and adjust your strategy to account for changes in your life or financial circumstances.
Why it’s important:
- Life changes—such as shifts in income, expenses, or goals—can impact your financial trajectory.
- A financial advisor can help you navigate the complexities of retirement planning and refine your assumptions.
- Quantifying your progress helps keeps you on track and provides a sense of accomplishment as you move closer to financial independence.
A stable financial foundation begins by proactively managing these four areas—quarterly taxes, business deductions, retirement savings, and long-term planning. Once the foundation is set, you can focus on growing your business.
Sources:
“Underpayment of Estimated Tax by Individuals Penalty.” Internal Revenue Service. Accessed November 21, 2024. https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty.
“Understanding the Form 5500 for Defined Contribution Plans.” Fidelity. Accessed November 21, 2024. https://www.fidelity.com/retirement-ira/small-business/form-5500.
Royal, James & Giovanny Moreano. “What is a solo 401(k)? A great self-employed retirement option.” Bankrate. January 02, 2024. https://www.bankrate.com/retirement/solo-401k/.
Jordan H. Neuschwander
Financial Advisor
CFP®