As a sole practitioner, you are the captain of your own ship. By forging your way independently of others, you have the freedom to chart the trajectory of your small business by pursuing projects that spark your interest. You can act nimbly and with autonomy by developing your own goals.
While running a small business as a sole practitioner has advantages, it brings the responsibilities of financial management to your doorstep. It is far too easy for the day-to-day work of a small business to supersede your personal financial management.
We’ve put together five important financial tips to help sole practitioners thrive.
1. Understand Your Business Structure and Tax Responsibilities
Sole practitioners often operate under a sole proprietorship business structure. It doesn’t require filing federal or state forms and has few regulatory burdens, making it an ideal way for self-employed people to start out. This also means all debts and profits flow directly from your personal finances as the owner and sole proprietor.
As a sole proprietor, you are responsible for making estimated quarterly payments if you expect to owe taxes of $1,000 or more. The amount of your quarterly tax payment is based on your income. You can calculate your estimated taxes using the worksheet on IRS Form 1040-ES. It is critical to understand your estimated quarterly tax obligation and comply with relevant guidelines established by the IRS to avoid penalties. Learn more about quarterly taxes here.
2. Keep Business and Personal Funds Separate
It is important to keep business and personal funds separate. When running a small business, it is easy to blur financial lines. One of the first steps you should take is setting up separate bank accounts specifically for the cash flow of your business. Then, paying your own salary from your business account is critical when it comes to completing your personal and business taxes. By establishing strict procedures, you can keep these boundaries in place.
3. Pay Yourself First
It is all too easy for sole practitioners to fall into a pattern of neglecting their personal finances to help build their business. This is an unsustainable model which will hinder your ability to grow your business at a healthy pace. Paying yourself first can provide a greater sense of financial security by providing you with a safety net of funds as well as money to invest to reach your long-term financial goals.
4. Track Expenses
Create a system for tracking all expenses and income. Even small expenses should be documented as they can add up to a significant amount of money. A software application like QuickBooks can help your manage your business expenses.
5. Save for Retirement
If you run your business solo, there are a number of options available for you to build a nest egg for retirement. These include:
- Traditional IRA. Contributions made to a Traditional IRA may be tax deductible, meaning you don’t pay federal income taxes on what you pay into one (Traditional IRA contributions are often referred to as pre-tax contributions). Thanks to this tax advantage, earnings on your contributions are tax-deferred – they won’t be taxed until you make qualified withdrawals in your retirement years.
- Roth IRA. This is similar toa Traditional IRA except that contributions are taxed in the year they are made (Roth IRA contributions are often referred to as after-tax contributions).
- SEP-IRA. Contributions to a SEP-IRA are tax deductible. The contribution limit is typically about a quarter of your business’s profit. A unique benefit of a SEP-IRA is that you can contribute any time up to the tax filing deadline in a given year.
- Individual 401(k). An Individual 401(k) has a contribution limit of 100% of your earnings up to a maximum of $22,500 or $30,000 if you’re at least 50 years old (for 2023). Plus, you can match your own contributions. Consulting with a financial advisor is recommended to customize an individual 401(k) for your specific situation.
Learn more about the benefits of retirement plans.
Get Connected Today
Contact Gift CPAs for more information on resources for sole practitioners as well as our full scope of accounting and business services.
We have years of experience working with small businesses to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!
