When you’re a salaried employee it’s easy to romanticise about life as a business owner. There are many positives to being self-employed however there are some negatives too. The self-employed are responsible for both profits and losses. So does the reality of self-employment live up to the dream?
Let’s firstly consider the financial obligations and implications of being self employed and how they differ from those that apply to employees. Understanding the differences and what they mean to your bottom line is important to the success of your business.
There are six important financial considerations:
1. Tax – The self employment benefit from certain tax deductions not available to employees. However, you’re responsible for understanding your obligations to the ATO, to prepare quarterly or annual tax instalments and budget accordingly as tax payments can put considerable strain on cash flow.
2. Fluctuating income - There will be some months when cash flow will be tight such as the Christmas and early New Year period. This can make paying bills and meeting mortgage repayments a problem. Careful financial planning is needed to cover for when work is slow or when invoices haven't been paid on time.
3. Pensions - Unlike being an employee who receives regular and mandated employer contributions into a super fund for their entire working life, for the self employed super contributions are your responsibility. You need to be proactive when it comes to saving for retirement. Contributing to a super fund offers valuable tax relief whilst at the same time ensuring you save enough for a comfortable retirement.
4. Insurances – They are a significant cost impost to the business and for the business owner but a necessity none the less, unlike for the employee.
5. Health checks - Costs of relevant health checks such as eye tests sometimes included in an employee’s salary package must be scheduled and budgeted for by the self employed.
6. Unpaid sick leave, holidays and other benefits – Being self employed means you won’t pay yourself holiday, maternity, paternity or sick leave however this will be a cost to the business if you employ staff.
But don’t despair. There’s plenty of help out there to guide you through the maze, your accountant for example or a business mentor or consultant such as myself.
At Business Strategies for Tradesmen we offer a free, no obligation consultation.
Remember, the measure of success is when your business is firstly, and most importantly cash flow positive, and secondly when you and your investors get their money back.
With you in every success,