6 Habits of Successful Independent Contractors
Managing your own business often feels like a full-time job in and of itself—and that’s before you’ve even started working on client projects. However, the most successful small business owners know that prioritizing the financial health of their company is a smart investment of their time.
There are many fixed costs that come with running your own company, as well as personal expenses that come with being an independent contractor such as health care and retirement. When it comes to managing business finances, it can be hard to know where to start and what to dedicate your valuable time to. Simplify this process by making the following 6 strategies part of your business management habits.
1. Make the Most of Self-Employed Tax Deductions
As an independent professional, you know that taxes can be a bit involved. While there are plenty of write-offs and deductions you can claim, it’s also easy to overlook small details, or miss something you could be taking advantage of.
As a best practice, keep a detailed record of business activities, expenses, income, and receipts or records of expenses you plan to deduct. Honesty is the best policy here; underreporting income or trying to deduct things that don’t quite qualify as a legitimate business expense can result in an audit. If you’re unsure what deductions qualify, refer to the IRS guidelines, or speak with an accountant or bookkeeper.
In addition to making the most of tax deductions, be sure to set aside enough money to pay your quarterly estimated taxes. Quarterly payments help eliminate a massive tax burden at the end of the year both for you and for the government. As a reminder, independent professionals should expect to pay at least 30 to 35% of their gross income in taxes, which includes income tax and self-employment (SE) tax—both halves of Social Security and Medicare (FICA).
2. Choose the Right Business Structure
When it comes to choosing a business structure, there are many different options. A sole proprietorship is a good option if you’re just starting out or freelancing part-time, an LLC is a simple way to gain strong legal protections of a corporation, and S or C Corporations are additional options for those looking to incorporate their business.
The best business structure for you will depend on many factors such as the size of your business, your annual profit, and how you plan to grow in the future. Remember, business structure will determine your legal, compliance, and tax obligations. If you’re unsure which structure is best for you, seek out professional advice.
3. Create a Budget and Stick to it
A budget is essentially an expectation of business results. Budgets can help you manage costs, determine how you operate your business, and keep you on track for future goals. You’ll want to begin with a baseline. If you have an established business, use data from previous years. If you are just starting out, use your business plan to forecast a budget.
Plan to do a monthly budget review. Before your first reporting period, estimate how much income you plan on receiving and how much you expect to pay out in expenses. Also, consider any planned initiatives that may affect you financially. Then, at the end of the month, compare your estimates and numbers from past years with actual results. As time goes on and you get in the habit of budgeting, you’ll be able to make more informed decisions and quickly adjust for unexpected changes.
4. Don’t Forget to Pay Yourself
Receiving a regularly scheduled payment provides a clearer picture of the health of your company. If you don’t allocate funds to your salary, it can be hard to tell when you should raise prices, ramp up marketing efforts, or cut costs. While it may be difficult to initially factor in a salary, once you have sustained revenue, steady projected revenue, and you’re operating in the black, you should be able to pay yourself.
The IRS says business owners should pay themselves reasonable compensation, but there’s not a definitive answer as to what this is. To some extent, pay will be determined by how your company is structured—if you’re a sole proprietor, compensation can come in the form of a draw or distribution, or if your business is a corporation, you can opt for a salary plus a draw, dividend, or distribution. If you’re unsure what you should be paying yourself, consult with an accountant for advice, or check out the U.S. Small Business Administration’s database of income statistics.
5. Reduce Your Debt
It’s no surprise that debt can be a drain on business. If you’ve taken out a business loan or have overspent on business credit cards, it’s important to prioritize reducing debt. Start by cutting down on or eliminating anything that isn’t essential to your daily operation. Maybe you have some professional memberships or magazine subscriptions that you rarely use—every little bit adds up.
When working on your budget, commit to paying a specific amount per month towards your debt and count that payment as a business expense. You can also speak with creditors to try and reduce your settlement amount, establish a payment plan, or extend a loan term to lower monthly payments. In the meantime, concentrate on maintaining a steady stream of work.
6. Track Financial Data
Making time for a weekly and monthly financial review can help keep your business operations in check, ensure your services are priced right, and will help ease the burden of tax filings. Look at your cash flow and make sure clients are paying on time, create a plan for handling major upcoming expenditures, and know what your lines of credit are. If you see any expenses that are getting out of hand, come up with a plan to lower those costs. Look at where your sales are coming from, what your most popular are, and which sales tactics are working best.
Prioritizing the financial health of your company can lead to better business outcomes, help you establish important business credit, and build a strong foundation for future growth. If you’re ever unsure about a process or have a financial question, consult an expert. Accountants, lawyers, and tax professionals are all great resources.
MBO Partners has extensive experience in helping independent contractors successfully manage their businesses and we’re here to help as well! If you have any questions, don’t hesitate to reach out.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.