Are you thinking about leaving your full-time job and becoming self-employed instead? If so, there are a few things you’ll want to think about and research before making the jump.
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It’s now been more than three years since I first became self-employed and, in that time, I’ve certainly learned a lot. However, with my wife set to leave her full-time gig in order to work at home as well, I’m reminded of some of the challenges that come with entering self-employment while also figuring out how to clear some new hurdles.
With that, I wanted to highlight three things you need to think about when leaving your day job to become self-employed.
***Retaining Your Health Insurance***
First up is something that really came to the forefront when my wife and I were making our decision and that is maintaining your health insurance.
Since the Affordable Care Act requires the majority of business to offer group health insurance plans to their employees, there’s a good chance this is currently how you’re covered. Unfortunately, this means that walking away from your day job likely also means walking away from your insurance. While COBRA is an option for extending your current coverage, this can be quite expensive, requiring your to cover 102% of the premium.
Thankfully, among other options, you are likely still able to sign up for health insurance using HealthCare.gov or state-run exchanges. Although open enrollment is now closed, leaving your job does count as a qualifying life event that enables a special enrollment period. You may even be eligible for a subsidy on your premium depending on your projected income. Given the importance of health insurance, the high price of some premiums, and the still in effect penalty for non-coverage, you’ll definitely want to price out plans before turning in your two weeks’ notice.
***Planning Your Home Office***
Next, if you plan on working out of your home, you’ll want to ensure that you have all of the tools and the space you’ll need to be productive throughout the day
Personally, having a desk to head to each morning is an important part of keeping myself on task and getting things done. While fancier or trendier desks can easily get pricey, a $100 model from Target does the job for me.
Instead, one of the investments I made when beginning why self-employed career was a reliable desktop computer. Meanwhile, with my wife’s upcoming job requiring both travel and video creation, we recently shelled out for a fast laptop that can handle video editing. While these costs can be a bit steep — especially when you’re just getting started — hopefully they’ll pay off in the form of productivity, which in turn translates to more money.
Another thing to note is that, if you plan on taking a home office deduction, you will need a dedicated room. Keep this in mind in mind when planning out workspace arrangement.
***Taxes, Expenses, and Other Finances***
While we’re on the subject of deductions, there’s a lot to consider regarding your finances when you’re self-employed, including taxes, expense tracking, and more
While self-employment can change your commute and lifestyle for the better, not all of the changes to your finances are so great. For example, business owners may be required to pay quarterly estimated taxes instead of just filing each April like you likely do now. Moreover, self-employed individuals will need to pay the full FICA taxes whereas half of these contribution expenses are covered by employers.
However, to offset these downsides, freelancers and other self-employed workers can write off a number of business expenses. In order to do this, you’ll want to keep track of what you’re spending on your business so you can itemize your deductions. To help with this, I’d recommend using bookkeeping software such as Quickbooks Self-Employed that will make it easy to keep your personal and business expenses straight.
Finally, self-employment may not be viewed so favorably by potential lenders. Therefore, if you plan on making a large purchase such as a house in the near future, you may want to look into how your work status may affect your approval odds.
Hopefully this list of considerations doesn’t dissuade you from pursuing self-employment but does help you prepare you for the transition and help you succeed.
Video credits to Money at 30 YouTube channel