Here are some things to consider:
Who will your decision impact?
One of your first considerations should be whether self-employment makes sense for yourself and your family. To answer that question, there are several things to take into consideration, including whether you can you afford to be self-employed. While most people have the goal of earning more than they did at their previous job, sometimes it can take a few years to get there, so it’s essential to know if you can afford the growth period.
• Determine a Goal Salary. Start by determining the minimum salary you would need to cover your existing personal expenses. A budget can help with this exercise. Can you afford to make less than your current salary? If so, for how long? Do you have ample savings to help fill the gap?
• Create a Business Budget. Once you have determined a goal salary, you will need to draw up a budget for your business activities. Include your anticipated business expenses (both ongoing and one-time costs, including your goal salary and any employee compensation) and determine how much money your business would need to bring in to cover them.
• Consider Your Breaking Point. Before embarking on your own business venture, you should consider what your breaking point might look like. In other words, what would it take for you to throw in the towel and give up on your business? The breaking point for business owners is often a financial one, and it is helpful to establish it at the beginning of your venture, so you don't end up in a financial bind that’s impossible to get out of.
How will self-employment affect your taxes?
When you are self-employed, taxes work a little differently than they do for W2 employees. First off, depending on how you structure your business, you may not have your federal and state income taxes automatically deducted from your paycheck when you’re self-employed. If that’s the case, you will need to keep track of your taxes and file quarterly estimated taxes. And speaking of withholdings, don’t forget to continue to save towards your retirement when you are self-employed as well.
Another issue to consider is the Federal Insurance Contributions Act, or FICA. This money goes towards Social Security, Medicare, and Federal Unemployment. When you are an employee, you pay the employee portion of FICA, and your employer provides a match. If you are self-employed, you will need to pay the full amount of FICA for yourself as well as the match for any employees you may have.
It’s always a good idea to consult an accounting or tax professional to help you better understand all of the potential tax implications involved with owning your own business.
What is your plan for health insurance?
Another critical consideration is health insurance coverage. When you are self-employed, you will not have an employer to partially cover the cost of premiums or to negotiate a lower price based on group rates. One potential option for those who are self-employed is joining their spouse's health insurance plan. If your spouse doesn't have their own health insurance or you are not allowed on their current plan, there are a few options for you:
• Government Marketplace. Healthcare.gov was established by the Affordable Care Act and is a good place to shop for a health care plan. They offer a variety of care levels with different monthly premiums and coverage. This is a good place to start your search, but it is important to note that if your spouse's plan offers coverage, you may not be able to take advantage of the lower premium costs.
• Member Organizations. Specific organizations offer group health insurance coverage with certain memberships. It works the same way as an employer group plan, except the group consists of members instead of employees. Often, these are organizations with people in a similar industry. AARP, Writers Guild of America, and the Freelancers Union are all organizations that offer members health insurance options.
• Private Health Insurance. Some companies specialize in individual plans, and while the costs will be higher than with group insurance, they are still often reasonable. Start with the major carriers such as Cigna, Blue Cross Blue Shield, Priority, Humana, and United Health Care to see the different options. Many offer short-term plans if you plan on acquiring insurance through other means later on.
It’s also worth considering how your health insurance plans may evolve as your business grows. Do you intend to eventually offer health benefits to your employees? Keep in mind that businesses with 50 or more employees are required to provide health insurance to their full-time employees.
The idea of a flexible schedule and “being your own boss” is appealing for many. But before making the leap into self-employment it’s important to evaluate all aspects the decision to determine if it’s the right move for you.
If you are considering starting a small business in Massachusetts or Rhode Island, BankFive’s dedicated Business Banking team can help guide you. Whether you are in the planning phase or looking for lending advice, schedule a consultation with us today.