Congratulations. Your business plan is set. The seed capital is in the bank. You’ve signed a lease and ordered your Aeron chair. A few starter clients are ready for the plucking like low-hanging fruit. Now all you’ve got to do is walk into the president’s office and declare your independence.
Not so fast. There are some essential steps you should take before you quit your job to go solo. When you become self employed, you don’t just break a set of chains; you also shred a safety net that’s stronger and more pervasive than you may realize. Not only that, but going out on your own dramatically alters your tax status and creditworthiness.
Take the Time, Not the Money
You already know you’re going to kiss paid vacations goodbye. What you may not realize is that you’re about to work for the world’s strictest task master. Taking off weekends will soon prove difficult, not to mention skipping town for two weeks in the summer.
Even if vacation pay accrues with your current employer and you could pocket the cash when you leave, don’t do it. Take the time off now, before you go out on your own. When you’re independent, free time is more precious than money…and a whole lot more rare.
Network On Your Boss’s Dime
Making contacts, mixing, meeting and greeting will all be doubly important when you’re flying solo, not just for getting business, but also for maintaining your sanity. Unfortunately, whatever after-hours networking you do as a free agent will subtract from a nano-personal life. The best way to compensate is to take in every luncheon, conference and convention you can before you leave your current job. Make as many initial contacts as you can now, when it’s on your boss’s dime. You can follow up later by calling to say you’ve hung out your own shingle.
Get a Checkup
You’re savvy enough to figure out a way to replace your current health insurance coverage—either by signing on to your spouse’s plan, buying into another group or funding a health savings account. But new coverage means new waiting periods, especially for pre-existing conditions. And your health savings account may not have much of a balance for at least a year.
That’s why you should have every procedure prudence demands before you give up your current coverage. Have a heart-to-heart with your primary care physician and, if need be, complain of everything from chest pain to fecal blood in order to justify the tests you might need. Fill prescriptions early and often.
Do Some Pretax Planning
Your accountant actually has office hours outside of March and April, and now is the time to take advantage. Self employment not only means paying estimated taxes, it means covering all of your Social Security contribution, not just the half you spring for today. Those first few tax bills will create a great deal of pain unless you’ve planned ahead. The same goes for funding a pension plan. There’s no such thing as matching funds when you’re self-employed. Have the cash on hand to make your next year’s contribution early, before invoices start piling up.
Borrow Sooner Rather Than Later
The time to take out a home equity loan to serve as an emergency fund or to refinance your mortgage is now, when you’re still employed. Especially during this financial downturn, banks like to see that you’ve actually got an income. Besides, once you’re self-employed, it will be in your interest to downplay your reportable income to minimize taxes, making you a less desirable borrower. That means not just taking out any home loans before you quit, but also any other personal loans wholly or partially based on income. While you’re at it, extend the limits on your credit cards now, too.
Use Your Ability To Get Disability
It’s foolish for any income earner not to have disability coverage. For someone who’s self employed, it’s inexcusable. You’ll have no paid sick days, no one to cover for you, no employer-provided coverage—no matter how short-term or insubstantial—standing between you and financial disaster if you’re rear-ended by a drunken high-schooler one night. The problem: It’s very difficult for those who are self employed to get affordable, effective coverage.
Under the least expensive “any occupation” coverage, an insurer can refuse to pay benefits to a software engineer who, despite a severe head injury, can still flip burgers. “Own occupation” coverage addresses that issue, but the cost is prohibitive. The middle ground and smartest option is “income replacement” coverage. But once again, the problem for a self-employed individual is the difficulty in documenting actual income. The answer is to purchase “income replacement” coverage while you’re still employed.
Apply to Procrastination U.
One area where showing less income on paper will actually help you is qualifying for college financial aid and government educational loans. While the rules and standards of schools and loan programs vary, one thing is certain: the lower the parents’ income, the larger the kid’s aid and loan package. Parental assets are also factored into the mix, so if you’re planning on investing some of your savings or home equity in the new business, that will also result in more for your child. Put off applying for aid or loans until you’ve gone into business for yourself.
Hold Off On the New Wheels
If you’re thinking about a new car, it may make sense to wait until you’ve launched your business. For someone who’s self employed, leasing could be a better deal than buying. Lease your car and you can deduct the costs proportional to the amount of driving you do for business. Leasing also lets you pay far less out of pocket both initially and monthly, conserving your cash. By having your business both lease and operate the car, you transform a significant personal purchase into an ongoing deductible expense.
Time Renovation Projects to Straddle Your Launch
Home improvement projects are, in the best of times, complex. Scheduling them around the time you’re launching a business just adds another layer to the complexity. The first secret is to obtain the financing for the project while you’re still employed, in order to get the easiest and best loan deal. The second secret is to then delay actually having the work done until after you’ve gone solo. That’s because, if you work from your home, a percentage of the project’s cost, equivalent to the percentage of the home’s total square footage used for business purposes, could be deductible. Granted, timing all of these issues while simultaneously managing the launch of your new business is a little like juggling chain-saws. But you might as well get used to it: That’s pretty much the definition of self-employment.
Mark Levine is the acclaimed co-author of bestselling books including Second Acts: Creating the Life You Really Want, Building the Career You Truly Desire and It’s All In Your Head: Thinking Your Way to Happiness.