Striking out on your own is a brave decision. For many skilled IT professionals who decide to go it alone, the first few years can be a steep learning curve. As an independent consultant, you need to appreciate the fact that you’re also a business owner, which means dealing with every aspect of the business in order to ensure that the operation is sustainable. This means understanding the tax implications of 1099, managing personal and professional finances and most importantly, finding the right professionals to provide financial services. Here you’ll find the top three money considerations for Independent Consultants.
Find a quality CPA
According to a survey by Nerdwallet, 7 out of 10 Americans have concerns about filing taxes. For many, this is a dreaded exercise filled with complicated mathematics and half-understood concepts. But when you become an independent consultant, it is essential that you are trusting a professional to file taxes properly for you. The key difference between an accountant and a CPA is that a CPA has met specific examination and licensing requirements and is authorized to write audited financial statements.
For independent contractors, an experienced accountant has the correct credentials, but there are advantages with opting for a qualified CPA. For example, CPAs are extremely knowledgeable of tax codes due to the licensing examination process, and they are also able to represent their clients to the IRS if this is ever necessary.
If you’re unsure about whether the accountant you usually deal with is up to scratch, ask them for their credentials. When you’re filing your business accounts, you want to be certain that the person who is filing on your behalf is more than qualified for the task.
Separate your business and personal finances
Sometimes referred to as the “Golden Rule” of operating your own business, it is vital that from the moment you send your very first invoice, you are able to delineate clearly between your business and personal finances. This means that business expenses can be clearly identified as such, and personal expenses do not come from the same account. It is essential to ensure ease of bookkeeping as well as limiting potential legal liabilities, so this is something you should take seriously.
In order to achieve this separation, you really only need one thing, and that is a business checking account. Your local branch of the bank you’re most familiar with will be able to give you details on the paperwork needed to set up a business bank account, and the Small Business Administration has a wealth of information on various business structures and what would work best for your consultancy. Many consultants start out as a sole proprietorship, meaning that there is no separate legal identity, however it is also possible to structure the business as a corporation, LLC or partnership. Whatever route you decide to take, it’s always a good idea to get advice from a legal expert in order to make sure you’re adhering to all the IRS rules.
Create a robust savings plan
So you’ve made it through your first year as an independent contractor. You’ve collected your 1099-MISC forms from every client you’ve worked for, entered it onto your Schedule C and calculated your income tax for the previous year. For many consultants, it’s at this point that the shock of “paying taxes” really hits home. If you’ve spent your working life being taxed before you get your payslip then this tax burden can come as a bit of a shock. This is why it’s extremely important to have a robust savings plan in place to cover your taxes when the bill comes in.
As an independent contractor you are responsible for sending over your taxes in the form of quarterly estimated taxes. These are usually due in April, June, September and January. In order to be prepared for these tax payments, make sure that you are saving. But how much should a consultant be saving for taxes? The usual recommendation is somewhere between 30% — 35% of your income. It sounds like a lot, but consider that you’re not only paying income tax, but also self-employment tax. Self-employment tax includes things like Medicare and Social Security which are usually covered by employers.
In conclusion, taking the leap into independent consultancy can lead to a life of freedom and new challenges. But it’s essential to be well prepared, which includes taking care of the financial aspect of being a freelancer. For workers who have previously been employed by companies, this can mean paying self-employment taxes for the first time, which means incorporating new habits and working with trusted partners.
About the Author
Marshall Graves is a managing partner and CFO at the Stone Door Group, a Cloud and DevOps consulting company founded by independent consultants for independent consultants. Stone Door Group takes all the guesswork out of becoming an independent consultant by providing opportunities to certify on new technologies and offering a pipeline of meaningful IT consulting jobs. To learn more, drop us an email at letsdothis@stonedoorgroup.com.