I left my last W-2 job first thing in the morning, the first business day of the year (after my old company resumed work after the holidays). Before I submitted my ad, I had been carefully plotting my exit for over three months, and I was so prepared that the anticipation was unbearable.
I knew I could support myself on the side hustle, and I enjoyed what I was doing, so quitting a job that wasn’t serving me was a logical step. But doing so definitely affected my finances. Here’s what I experienced — and what you can expect if you decide to do it yourself.
Taxes will take on a new importance in your life
If you have a payroll job that sends you a W-2 that summarizes your earnings each year, you probably don’t think about paying taxes very often — maybe once a year, around April 15th. But if you quit that job. And enter the world of self-employment by juggling your main gig on the side, where taxes become very important.
For one thing, you may be on the hook for more taxes than ever if your side hustle kicks in and you earn more than before. Additionally, you can pay taxes as an employer and employee. And self-employed people have to make estimated tax payments four times a year. January 15, April 15, June 15 and September 15. It’s up to you to make sure you send those payments to the IRS (and if you live in a state that collects income tax). I recommend you find a good accountant, and get in the habit of taking your tax money out of every paycheck you receive.
You will have to pay for your benefits
Leave your W-2 job and take responsibility for arranging (and paying for) benefits like health insurance and retirement plans. If your health benefits were heavily subsidized by your previous employer, you may experience some sticker shock when you log into HealthCare.gov or your state’s health insurance marketplace and look at the plans offered. The good news is that you can write off your insurance costs on your taxes.
You will also have new options for retirement plans. Self-employed workers have access to different plans than W-2 workers. A good option for you might be a Solo 401(k) – you can contribute to one as an employer and employee, which means you can save and invest more money. Check out our list of the best brokerage firms to see what your options are.
One of the problems with being self-employed is that you no longer get paid vacation or sick time. If you want paid vacation time, you must pay for it yourself. Consider taking a little extra time off your work days and save yourself the money you earned for those hours to pay yourself the following days.
Savings will become more important.
I would argue that having a W-2 job does not give you a more secure employment situation in the face of at-will hiring and mass layoffs. But I think it’s even more important to have a solid emergency fund if you’re self-employed to mitigate the potential for clients paying you late and suddenly losing a regular client who’s been giving you a lot of work. Additionally, your income may be inconsistent from week to week or month to month.
The usual recommendation for an emergency fund is to have three to six months worth of bills, but if you quit your job, you may want to stash away more in the process. Savings account deposit — just in case.
The happier you can be, the more financial flexibility you have
If you think self-finance is all gloom and doom, taxes and high health insurance bills, don’t worry — it’s not. Now you can control your own work hours and work life! For me, the best part is the flexibility I get from being a full-time freelancer. I can work wherever I want — most of the time I work from home, but I’ve worked from countries I’ve visited as well as hotels, airports, and passenger trains.
This flexibility also extends to my working hours. 2023 I’m spending money to buy a house next year, and having the ability to work harder to make my dreams come true is something I’ve never experienced with salaried jobs. At the same time, I have had the opportunity to learn new skills and become a more skilled professional, which will only benefit my future earning potential.
If you’re thinking of quitting your job and looking to lean on your side hustle, I’m here for you. Be sure to consider all of these financial considerations to make the right choice.
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