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6 Financial Considerations for Starting a Business

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When starting a business, there are financial realities that should make you stop and think. If you have a good financial plan in place, you may be able to avoid the most common pitfalls.

1. Startup Costs Can Pile up Quickly

If you were previously a salaried employee, you may not have counted the perks you get from the job:

  • You work in a space that someone else pays for, on their equipment. 
  • Someone else takes care of maintaining the space.
  • You enjoy the occasional office birthday party with free cake. 

When you are self-employed, you’ll have to procure the assets you need to do the job yourself. You’ll have to do the upkeep on those assets, as well as on the space where you work (even if, or especially if, you work out of a vehicle). 

You will need commercial banking services and insurance.

2. Health Benefits are not Cheap

You’re also going to have to make up for the benefits you held previously, such as health insurance. If you have a family, the costs will be significant.

Under the Affordable Care Act, you may have qualified for health insurance premium subsidies. Still, the plans available to you may be expensive.

The Small Business Jobs Act brings some health insurance cost mitigation at tax time. The law authorizes you to deduct an employer-equivalent portion of your health insurance costs from your taxes.

3. Your Tax Situation May Get Complicated

Tax time may present a completely new set of financial issues when you become self-employed. For consultants or freelancers who don’t itemize, there won’t be a significant change. You’ll be responsible now for paying the FICA tax, which is included in the self-employment tax rate. It will be in addition to your income tax. You can choose to pay your taxes quarterly or wait until April and pay them all at once.

Conversely, self-employment will allow for new deductions: 

  • If you have a home office, you may be able to deduct a portion of your mortgage and home repair costs. 
  • You can deduct business-related travel expenses. 
  • You may also be able to deduct the cost of paying a financial advisor to help you figure it all out.

4. Budgeting May be a Challenge

Especially when you start out, you may miss the predictable, regular income stream you had through your old job. Setting a budget is much easier when you know how much will be in your account each month. For some self-employment jobs, like seasonal work, your highs and lows may be predictable. For jobs like consulting, it may be hard to gauge how to handle things. The safe bet may be to save during the feast so that you can eat during the famine.

5. Saving for Retirement Will be Different

When you’re an employee, the employer looks out for your future by contributing to your retirement plan. Once you’re self-employed, you have to save for your own retirement. On one hand, some self-employment jobs may allow you to work beyond expected retirement years. However, you should ask yourself if you want to continue working at 70.

6. Preparing for the Worst

There is a possibility your business endeavor may not meet your goals. If you start a food service business, you may get in the position of many people who open restaurants; they don’t make it financially and must close up shop. You will need a plan to prepare for this possibility. Before jumping into the world of the self-employed, talk to a financial advisor to see how you can best proceed.

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This content is developed from sources believed to be providing accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.