Avoid being caught off guard by expenses that come with running your own business.

Going to work for yourself is exciting, but it also means taking on costs that employers typically cover. Many first-time business owners, including freelancers and contractors, are caught off guard by unexpected expenses. If you’re starting a new business, make sure you plan for the following costs.

Self-employment taxes and quarterly payments

When you work as a W-2 employee, taxes paid for Social Security and Medicare are split 50-50 between you and your employer. However, self-employed people pay the whole amount as the self-employment tax. Currently, the rate is 12.4% for Social Security and 2.9% for Medicare, for a combined rate of 15.3%.

Another surprise for many new business owners is learning that they’re required to pay estimated taxes, state and federal, each quarter. When preparing their annual tax returns, they reconcile what they’ve paid throughout the year with what they actually owe. If they pay too little, they have to make up the difference and possibly pay a penalty. If self-employment taxes are overpaid, the taxpayer may receive a refund or apply the excess amount to the next tax year.

Benefits, including insurance and retirement savings

A significant cost for those running their own business is health insurance. In addition to monthly premiums, it’s prudent to have savings on hand to cover out-of-pocket expenses, including the plan’s deductible. Depending on your income level, you may be eligible for savings through an ACA health plan.

Also, self-employed people need to have a financial plan for retirement. Far too many put off planning and discover when they’re ready to retire, they don’t have as much saved as they need.

The sooner you start saving for retirement, the more time there is for your earnings to compound. Spend some time running numbers through a compound interest calculator and see how even modest savings can grow over time.

Business operating expenses

Even home-based businesses have operating expenses. Some may be less obvious, like slightly higher utility bills. Others—such as bookkeeping, tax preparation, marketing, licensing, legal counsel, office supplies and internet service—recur monthly or annually. Budgeting for operational expenses helps maintain profitability and healthy cash flow.

Starting a new business?

When starting a new business, separating business and personal finances keeps accounting more organized and simpler. Consumers business services makes it easy to set up everything from business checking to merchant services. To learn more, stop by one of our offices or call 800.991.2221.

 

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