For the self-employed, having a great idea for a business is just the starting point.  In order for that business to become a reality, and for the business to grow, organizing a business’ finances is important.  Businesses, whether they are global multi-nationals or single-person businesses, have to consider their finances because money is needed for many purposes, from surviving in the bad times to expanding during successful periods.  Businesses need to be able to purchase goods, develop products, acquire licenses and perhaps, employ staff.  No business can afford to ignore the organization of its finances.

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The first decision a self-employed business person has to make is whether to be a single proprietor or some form of incorporation.  Being a single proprietor is simpler and less complicated, but incorporation can be attractive as it can offer limited liability protection.

Managing cash flow

Managing cash flow is important, as all businesses have to cope with uneven cash flows.  Businesses can have a cash surplus one month and very little income the next.  For this reason it is important to develop a financial plan and a budget.  The average cash flow of the business should be calculated and then, in months when more money is received, the extra cash can be stashed in an account that earns interest and drawn out in lean months.  Sometimes it is a good idea for a self-employed person to pay himself or herself a salary and keep the business money separate.  This can simplify tax deductions and reimbursements.

Tax

Self-employed people are responsible for paying their own taxes, so it is vital that taxes are saved from every payment that is received.  It is important that self-employed individuals check the tax breaks that are available so that they do not pay too much tax.  They should also understand which expenses are deductible, such as health insurance premiums, travel costs, car expenses, retirement plans and others.

Insurance

An individual should ensure that he or she has insurance such as life, disability and health.  For health insurance it is a good idea to try to get insurance through a working spouse, or use an MSA (Medical Savings Account).  Under an MSA, the self-employed get a tax deduction on the money paid in.  A good way of obtaining disability insurance is to join an industry trade association.  401(k) plans are too complicated and expensive for the self-employed.  A better option is a tax-deductible plan, such as a Simplified Employee Pension Plan (SEP) or a Keogh plan.  A traditional Individual Retirement Account (IRA) may also be suitable.

For a self-employed woman, especially one with a family, the demands of a business and a busy family life can be onerous.  Some freelancers find that an umbrella company is the answer, as the umbrella company takes care of much of the paperwork involved in working as a freelancer, allowing individuals to spend more time with their families.  The umbrella company will issue invoices on behalf of the freelancer and pay the freelancer for completed work.  The umbrella company takes care of all the taxes and the freelancer can still claim expenses such as travel, accommodation and meals.

(This is a guest post provided by Katie Green)

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Misty Kearns

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