Once upon a time, I worked at a nonprofit. The job, while rewarding, was a lot of work for low pay, and the organization was full of office politics and internal drama. I used to dream of quitting my job and striking out on my own, being the creative #Girlboss I knew I could be.
In July 2014, I did just that. I quit my safe office job to be my own boss — while I had student loans. It was a gamble to replace a steady paycheck with inconsistent income, but the move paid off. I ended up doubling my income and paying off my debt early.
While being my own boss has been a good move for the most part, there are things that I didn’t consider (or even know about) before I pursued self-employment.
Here are six financial lessons I’ve learned from being my own boss.
1. Self-employment tax sucks
You know when you get your paycheck and you see all of those deductions? As an employee, you pay half of your Social Security tax and Medicare tax. Your employer pays the other half. When you’re self-employed, you are both the boss and the employee — and get to pay both!
According to the Social Security Administration, “If you’re self-employed, you pay the combined employee and employer amount, which is a 12.4 percent Social Security tax on up to $118,500 of your net earnings, and a 2.9 percent Medicare tax on your entire net earnings.”
This tax law makes sense in a way, but it doesn’t hurt any less when it’s time to pay up.
2. Where you live matters (a lot)
Before I was self-employed and became a personal finance nerd, I never considered how state income taxes affected my finances. I didn’t realize just how varied the income tax rate is by state.
I quit my job when I lived in Oregon and I currently live in California, both of which have some of the highest income tax rates in the nation. When quitting my job, I didn’t consider my state’s income tax in my decision.
When creating a business and determining your pricing model, you need to think of things like this — not just what you need to survive. Figure in your state’s taxes if you’re considered working for yourself.
3. Business expenses are still expenses
As a business owner, you can deduct certain business expenses. Got a new laptop for your writing business? That’s a business expense. Have a lunch meeting with a client? That’s a business expense.
While the IRS has set up this system of deductions to help ease the burden on business owners, the deduction isn’t dollar for dollar.
Before I quit my job, I often heard “I’ll just write it off!” from my self-employed friends. I was under the (wrong) impression that if you deducted $100 from your taxes, you’d pay $100 less come tax time.
But business expenses are not deducted on a dollar for dollar basis. Qualified expenses help you lower your taxable income, but at the end of the day they are still expenses.
4. You can’t write everything off
After a fairly brutal tax season this year, I talked to my accountant to see about any deductions we may have overlooked.
I moved to California this year and my rent increased coming from Oregon. I work from home 95 percent of the time and I’ve heard of others writing off a portion of their rent.
Excited about that prospect, I talked to my accountant but was swiftly shot down. In order to deduct a portion of your rent, you need to have “regular and exclusive” use of your home for business needs.
According to the IRS, “You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.”
The “exclusive” part made me ineligible. If I had a dedicated home office, I could do it. In reality though, I work from the dining room table, my desk, and after a long day, from bed. All of these places are multifunctional and most definitely not exclusive.
5. You pay taxes quarterly
Ok, you might be picking up on a theme at this point: One of the worst parts of being self-employed is taxes.
As a business owner, you don’t just pay taxes once a year. You pay them four times a year! If you don’t, you may be hit with an underpayment penalty and have a huge tax bill come April.
Even after two years of being self-employed, paying taxes every few months still hurts. Though I save for my quarterly taxes in a separate bank account, it’s always tough to part with your hard-earned money, especially when your tax rate is so high.
6. You have to fund your own sick and vacation time
When you dream of being your own boss, you probably think of working on the beach, sleeping in, and working on your own schedule. Unfortunately, working for yourself isn’t always that glamorous.
You have no employer benefits, which means you pay out of pocket for health insurance. Not only that, but you don’t have any paid sick or vacation time.
Everyone says that as a business owner you need an emergency fund. Of course you do! But everyone needs an emergency fund. Business owners, however, do need to fund their own sick and vacation time.
Why? Because if you don’t work, you don’t get paid.
I learned this lesson big time this year when I took a dream vacation to Italy. I budgeted for the vacation, but not the actual amount of work I lost during those two weeks. I worked as much as possible before and after my trip, but when it came time to invoice I ended up making much less than I normally do.
Just this month, I was struck with the super flu and was out of commission for nearly two weeks. I missed out on thousands of dollars in productivity because I got sick. Let me tell you — there’s nothing fun about worrying about money when you feel like you’re on your deathbed.
So I’ve set up separate sick and vacation funds that I will contribute to regularly. Next time I choose to go on vacation or unexpectedly get sick, I won’t feel like I’m getting screwed.
It can still be worth it, though
If you’re thinking of being your own boss, take these six lessons to heart. I wish I would have learned them earlier, but I was caught up in the whole “idea” of being my own boss, rather than thinking practically about my financial picture.
Being your own boss can be a great move if done right. After all, it’s what helped me double my nonprofit salary and pay off debt even faster. But it’s important to think about all the financial implications of doing so first.
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