Considering Self-Employment? Take the Following 5 Steps First

Perhaps you've dreamed of quitting your current job and becoming your own boss. While there is a certain level of freedom to owning your own business, there are added responsibilities too. Taking the following 5 steps will help ensure that you are able to successfully transition from working for someone else to working for yourself.

Step 1: Determine your monthly living expenses.

Calculate how much money you spend per month on expenses such as your mortgage, electric and gas bills, and transportation. Tally these costs and then multiply them by 6, 8, or preferably by 12. This total is the amount of money that you will need to have on hand in order to survive until your business takes off. Without this amount of money already saved up, you will most likely end up taking out loans and going into debt.

Step 2: Establish a separate business account.

When starting a business from scratch, it is easy to lump business expenses under personal expenses. This is a big problem when it comes time to declare those business expenses to the IRS. Rather than sift through reams of credit card bills and bank account statements, establish a credit card account and a bank account strictly for your business. These separate accounts will not only help you come tax time, but will also alert you of the exact amount of money you are investing in your business.

Step 3: Establish a real home office.

Tax deductions on home offices can be a real boon for you if you own your own business, helping you save hundreds, if not thousands, of dollars. However, the IRS examines tax deductions claimed for home offices very closely. In some cases, the IRS may even request that a home office be verified and physically inspected. Because of this, it is imperative that your home office actually look like an office. Don't use your office as a spare bedroom or children's play room. Have your home office look as professional as possible- much like it would look if was located in a company building.

Step 4: Allocate additional money for taxes.

Once you incorporate, you will need to pay self-employment taxes as well as personal income tax. Self-employment taxes consist in large part of Social Security and Medicare taxes, which are charged to people who are self-employed when they pay themselves a salary. Also, if you earn an income that is not subject to withholding, you will need to make estimated tax payments (typically 4 times per year). If you don't pay enough money towards withholding, you may be charged a penalty fee at the end of the tax year.

Step 5: Obtain health insurance.

If you are employed at an outside business or company, you are most likely covered under a corporate health plan. Once you are self-employed, you will need to find your own health insurance. While many companies do offer COBRA health plans, which may be able to cover you for up to 18 months after your employment termination, eventually you will need to buy private health insurance. Determine the costs of several private health care plans before you decide to go into business for yourself. This will help you avoid some nasty financial surprises.