Self-employed people can make expensive mistakes, especially in their early years of being on their own. If you've been accustomed to a standard 9-to-5 job working for someone else, you've likely gotten comfortable with a regular routine of getting paid, having your taxes taken out each week, and maybe getting a large tax return in the spring. You've had a set schedule, because you haven't had a choice. Perhaps you've had benefits like paid vacation and health insurance. The only finances you've really had to keep up with have been those of your family.
Now that you're running the show, things are a whole lot different. While there are many perks to being your own boss, you may find out that living that dream isn't quite as glamorous as you imagined it to be. That said, if you can avoid some of the most common pitfalls of self-employment, you'll fare much better than if you fall into these self-made traps.
Not separating business and personal finances
One of the easiest traps to fall into is to lump your business and personal finances together. This is a major mistake, especially if your self-employment grows into employing others and/or involves any significant amount of spending. Consider utilizing both a business checking account and a personal checking account to keep your finances separate.1 That way, you won't inadvertently spend money that should be used to keep you in business. It will also help you to categorize business expenses at tax time.
Not paying taxes properly
As mentioned, you're probably used to having your taxes regularly deducted from your paychecks, but now you need to be doing the deducting yourself and setting that money aside for quarterly tax payments. Otherwise, next spring is going to be anything but a happy time when you realize how much you owe to local, state, and federal governments.
Not taking advantage of all available tax deductions
Speaking of taxes, make sure you do your research. There are many things you can deduct when you're self-employed. They may include your home-office space, internet/phone, health insurance premiums, some meals, etc. You can find plenty of information online (including on the IRS website), but it might be best to consult with an accountant and/or tax professional.
Skipping health insurance
When you're out on your own, you're going to be looking for any possible way to cut costs, and all too many elect to forego their own health insurance to save some money. This is a big mistake, as it will cost you a whole lot more if things go wrong. In addition to the financial risks that come with health issues, not having insurance will also cost you a penalty (at least at this point) come tax time.
Not working via contracts
Working without written contracts not only makes it more difficult to track your income and expenses, but it also puts you at risk of not having enough work.
Mark Prosser at SCORE makes a great point: "Dealing with clients when you’re self-employed can sometimes be tricky, especially when it comes to defining the exact scope of work for a particular project. Unfortunately, a lot of self-employed individuals have to go above and beyond their agreed scope of work, and this results in time inefficiency and loss of other potential businesses as you’re working more than what you’re paid to do for a particular client. You can avoid this by coming up with a project contract and clearly laying out the scope of deliverables prior to commencing with work."2
Not sticking to a schedule
One of the most attractive aspects of self-employment and being your own boss is the ability to set your own hours, but if you don't stick to a schedule, there's a good chance you'll find yourself procrastinating on important items or worse yet, not putting in enough work altogether. On the flipside, if you're putting in too much work, you run the risk of damaging other aspects of your life. Find a schedule that works best for you, and stick to it to the best of your ability. Both your business and personal life will benefit.
Many people dream of self-employment, and you're doing it. This is to be commended. That said, you must be smart about how you're handling this newfound freedom or else it might not last as long as you intended.
1. Click here for an article on how your bank can help you with other financial aspects of being self-employed.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.