First and foremost, to know more about the difference between self-employed and self-occupied, please click here.
Whilst self-occupied employment can bring financial and lifestyle rewards – along with enormous personal satisfaction – without the backup of a regular wage or salary, running your own business calls for careful money management and careful planning for your retirement.
- Manage your cash flow
- Pay yourself a wage
- Pay a Member of your Family Working with you a Wage
- Plan ahead for holidays
- Set aside money for Income Tax and VAT
- Plan for your retirement
- Do not neglect saving for your retirement over and above your State pension
- Protect your income
While your overall annual income may be strong, the flow of money is not always regular. It can take weeks and even months for your clients to pay you.
Therefore, it is important to manage your money carefully. Running out of cash before you get paid again could mean living on credit cards.
Rather than treating all income you earn from your business as your personal spending money, pay yourself a weekly wage. You should also maintain separate bank accounts for business receipts and personal spending.
Deposit or transfer your business revenue into an savings account, and only draw on this account to pay yourself a set amount as a wage, or to pay actual business expenses. Putting your business earnings in an interest account allows you to extra income through interest.
Set a personal budget to help you live within your wage, also not to dip into business revenue too often.
It is very important that you pay the Social Security contribution on your earnings so that you will qualify for the Social Security Pension when you retire.
This is important as a member of your family working with you can only be entitled to a Social Security Pension if he or she pays his or her social security contributions on the wage earned.
If you do not pay a family member his or her wage and contributions due, that person will not qualify for a Social Security Pension and hence is likely to be At-Risk-of-Poverty (ARP) during his or her retirement.
As a self-occupied worker you will not enjoy the benefit of paid holidays: it is up to you to set aside funds. Saving a little extra on a regular basis helps you manage through quiet business periods, as well as funding a break.
A common pitfall for a self-employed person is that of failing to set aside money for income tax or Value Added Tax (VAT). If you do not meet your income tax (which can be on a quarterly provisional basis) or VAT obligations (which is on a quarterly basis), you will be subject to hefty penalties.
Keep on top of your tax obligations by opening a separate savings account for income tax and VAT respectively and regularly deposit part of your takings into both accounts. It can take discipline not to dip into the account, but a good incentive to leave the money aside until you need to pay income tax and VAT is to remember that the Inland Revenue Department and VAT Department will charge you high penalties for late tax payments.
Additionally you will incur further expense as a result of fees you may have to pay accountants or lawyers to see you through such a situation and the time you will lose by being away from your business trying to sort out the matter out.
As a self-employed person you are to pay an annual contribution of 15% on income earned – the government contributes the other 7.5%.
Self-employed persons are known to pay the 15% social security contributions on a low level of income earned in order to minimise social security contribution expense. Whilst this may result in higher income whilst you are self-employed such an approach will negatively impact your Social Security Pension and hence your pension income during retirement.
Do not rely on selling your business to fund your retirement. Without your involvement, your business may be worth less than you think. Many business ventures can also be hard to sell. Instead, think about building a separate pool of retirement savings outside of the State pension.
One hazard of running your business is being unable to work due to illness or injury. Without sick leave, your financial situation is likely to take a turn for the worse if you become sick or injured.
If you pay your social security contribution you will receive temporary paid sick leave benefit. In the event you retire early from your business because of an illness you may qualify for an Invalidity Pension subject to a decision in this regard by an independent medical board.
The period you will spend in receipt of an Invalidity Pension will be credited as a contribution towards your Social Security Pension.