As larger corporations downsize to meet the competitive challenges of the 21st century, many middle managers are taking the opportunity to strike out on their own as consultants. They often seek the independence and satisfaction of working for themselves. Wouldn’t everyone?

However, independence is a two-sided coin. The other side is responsibility. What used to be provided by the employer now becomes the self-employed’s personal responsibility. This leaves the newly self-employed with some difficult choices. A self-employed person is often completely responsible for funding his or her retirement benefits, as well as health care, office expenses, and any vacation time. If your business is a one-person operation, then paying yourself to go on vacation could cause some financial difficulty.

While each business is unique, it is important to understand that, if you have employees, you will have to allocate a percentage of revenues to cover those expenses. Setting aside sufficient cash reserves and avoiding excessive debt can help assure funds will be available for employee benefits and general overhead. One way to be sure these amounts accrue is to make cash deposits to an escrow account at the same time you pay quarterly estimated federal and state income taxes.

Professional input is vital for handling certain issues. Consider the following questions: Can expenses for a home office or a business be written off as tax deductible? Are group or association plans available for health and hospitalization insurance? What products are available to help build your own retirement? Can those products be provided by a tax-sheltered qualified plan?

All of these questions need to be answered, because the success of a small business depends not only on getting revenue, but also on allocating a portion of that revenue to the owner’s future security.


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