When you swap your paycheck for projected revenue, it means one thing: You’re opening a business.
Know that there will be tradeoffs between being an employee and being self-employed. A lot of people dream about running the show, but sometimes business ownership expenses catch you napping. You were aware of the main costs going in, yet some unexpected bill naturally popped up—including some that were covered by your former employer.
So, before you go all-in on a new venture, analyze this list of business expenses for self-employed individuals. You’ll also get a look at business deductions for self-employed people.
It’s been said that only two things are certain in life and taxes are definitely the more preferable, but unavoidable as both an employee and an owner.
As an employee, you had a payroll deduction for federal taxes, Social Security, Medicare, etc. You then received W-2 at the end of the year and filed your taxes.
Being self-employed and filing taxes as an independent contractor, no one will be deducting taxes from customer payments. So, the onus is on you to track revenue, pay estimated quarterly federal and sales taxes if necessary, and keep track of expenses that are deductible from your income.
With added responsibilities, it’s always prudent to consult with a professional tax advisor before and during your business run.
Your employer had insurance requirements and pertinent coverage decisions to make, but chances are they didn’t involve you. As a new business owner, the tables will turn.
Depending on the nature of your pursuit, you’ll need to design and implement an affordable business insurance program aligned with your exposures.
If you own a retail business, you’ll need coverage for potential loss to inventory and possibly the building—if you own it. If not, the terms of the lease may require that you maintain liability insurance in case your oversight causes damage to the building.
You might work from home as a freelance graphic artist, have no stock or pricey equipment, and think insurance isn’t important. Think twice. You should also maintain liability insurance in case you damage a client’s property or computer systems.
Consequently, you simply can’t run the risk of operating without business insurance, and premiums you pay will help you reduce taxable income.
Rent or Mortgage
Contractors and service businesses usually need some base of operation. That could entail a garage or warehouse that you own or an office that you lease.
In either case, you’ll need to incorporate the monthly payments into your budget. Prior to opening your own shop, concern over the cost of space never crossed your mind. And once again, the expense you’ll incur hinges on your situation.
Telecommuting is quite popular, and if you’re an independent IT person who has space to run things from your home, you’ll not only save on rent or mortgage payments, but self-employed home office expenses could possibly qualify for a deduction. But, prepare for expenditures on computer systems, a desk, office supplies, etc.
In business, product or service guarantees are sometimes offered but the one certainty you’ll face are monthly bills. Aside from rents or mortgages, you’ll need to account for all those payments necessary to keep your company rolling along.
Whether it’s for under-the-radar staples like heat, water and electric payments or functional necessities like phone and internet services, you’ll want to shop for the best deals to keep costs at bay. Small business marketing efforts can be done inexpensively on social media but to reach a wider audience, you’ll also want to leverage paid advertising for promotional and sales materials.
At some point, you’ll need to decide whether growth warrants the search, recruitment and hiring of top talent. Adding employees to the mix now means payroll will have a significant impact on your business budget.
The upside to recurring costs is most, if not all of these self-employed expenses, are tax-deductible.
Liability and Legal Action
While you do your best around quality assurance, nothing ever goes quite as planned. There will be accidents, oversights and errors despite your most diligent oversight. In that respect, you must prepare for and insulate your business from the unexpected.
It might be a common incident such as a fender-bender that could open you up to a lawsuit. So, it’s prudent to retain a legal advisor and consider liability insurance premiums as an affordable means to avert a financial disaster.
Most small businesses don’t have deep pockets to cover costs incurred from the negligence of an owner or one of its employees. Imagine the financial fallout from a more serious accident that causes $100,000 in damage to a client’s office or the spread of a virus that takes down an entire computer network—and the data stored in its servers.
A huge advantage to designing a comprehensive insurance program is being able to leverage the legal expertise of Next Insurance. You can carry on with marketing, sales, operations and delivery without an overbearing worry that a misstep could quickly put you out of business.
Technology and capital equipment
It’s difficult to function in the digital age without the use of computers. If you’re a one-man show, a laptop and an Internet connection might suit your needs. And while that cost may be manageable, supplying a full staff with computers, tablets or mobile phones will set you back a lot more.
With technology comes the need to manage it. You’ll also need to decide whether you want to employ a full-time IT person or outsource that service. In either case, maintaining your electronic equipment requires a considerable investment.
Perhaps you’re a contractor in the construction industry. Prepare for the cost of purchasing capital equipment such as tools and vehicles, and the premiums to insure them.
At times you may need to perform a service you have neither the expertise nor the personnel to complete. Hiring sub-contractors will plug that gap, and you’ll need to factor in those self-employed expenses as well.
At the end of the year, legitimate business expenses to further your pursuits will likely be tax-deductible. Every category covered above will reduce the amount of your taxable income but you must engage an accountant to navigate the laws and calculate how much of these costs offset gross revenue.
It’s prudent to account for any non-deductible expenses. Any personal expenses such as family vacations or personal entertaining won’t qualify for a business deduction. Meetings or golf outings you have with potential or current clients must have a valid business purpose to count as deductions.
Protect Your Success
Starting and successfully running a business colors the dreams of many folks.
There are more than 30 million small businesses in the United States. Some make it past the first few years—many don’t. To be successful, you’ll need to get a solid handle on your taxes and self-employed business expenses while acquiring customers and raking in sales on the other end.
The ability to do all these things will make the difference between continuing to be your own boss or working under one. Contact Next Insurance to see how we can keep you in the driver's seat.