Budgeting, taxes, insurance, and more—what to plan for before going solo
Quitting your 9-to-5 to go solo is equal parts thrilling and terrifying. On one hand, you gain the freedom to be your own boss, set your own schedule, and pursue work that truly excites you. On the other hand… you’re also the HR department, the finance team, the marketing strategist, and—oh yeah—the person who has to figure out taxes.
Before you take the leap into self-employment, it’s important to look beyond the surface-level perks and get real about the financial responsibilities that come with running your own show. From taxes and budgeting to retirement planning and insurance, here’s what you need to consider to set yourself up for long-term success (and avoid panicking come tax season).
Learn To Budget With an Irregular Income
Budgeting with a steady income is one thing, but budgeting an irregular income is a whole different ball game.
Your first step should be to separate your business and personal bank accounts. This one step will make your life so much easier when it comes to budgeting, taxes, and tracking your expenses.
When you’re self-employed, your income might be unpredictible—but your bills aren’t. Set a baseline monthly paycheck for yourself to make budgeting a bit easier. Even if you bring in more money some months, stick to that set amount and save the surplus in a cushion fund. This way, when work slows down, you can pull from that cushion fund and maintain your lifestyle without added stress.
When mapping out your monthly business budget, think of the following categories as must-haves:
- Your paycheck – A set, liveable salary.
- Quarterly taxes – Plan to save at least 25-30% of your income to cover taxes.
- Recurring business expenses – Subscriptions, tools, marketing, office supplies.
- One-time and large expenses – Equipment upgrades, legal or accounting fees.
Once you’ve paid yourself, you still need to manage your personal finances wisely—especially because things can change at any time. Use the 50/30/20 rule as a guideline—50% of your income goes to needs, 30% goes for wants, and 20% goes to savings. You may need to adjust these percentages a bit depending on your income, but this rule helps keep things in balance. Budget for your lowest income months. If you earn more, great—you can save or invest the extra.
Be Prepared For Tax Changes
When you’re traditionally employed, your employer quietly takes care of a lot of the behind-the-scenes tax responsibilities: withholding taxes from your paycheck, contributing to Social Security and Medicare, and handling all payroll reporting. But when you go solo, all of that becomes your job.
Self-employment tax covers your contributions to Social Security and Medicare—the same as what you’d pay through payroll taxes at a regular job. Typically, your employer would split the cost, but as a self-employed person, you have to foot the entire bill.
Unlike a W-2 job where taxes are deducted automatically from your paycheck, self-employed people have to pay taxes as they earn income. This means sending estimated payments to the IRS quarterly in April, June, September, and January.
When you’re self-employed, your record keeping will need to be on point. The more meticulous you are, the easier it will be to calculate accurate taxes and maximize your deductions.
And speaking of deductions, you can deduct a lot of expenses to reduce your taxable income. Some typical self-employed deductions include:
- Start-up costs
- Home office expenses
- Internet and phone bills
- Health insurance contributions
- Retirement plan contributions
Your expenses must be both ordinary and necessary for your work. You might consider working with a tax pro to make the most of your money.
Make a Plan For Retirement
When you go self-employed, there’s no HR rep gently reminding you to enroll in your 401(k). There’s no employer match. No set-it-and-forget-it pension plan. That doesn’t mean retirement is off the table—it just means it’s fully your responsibility now. You have options, though, and some of them are incredibly flexible and powerful when used well.
- Traditional or Roth IRA – An IRA is one of the simplest accounts to open and work best for those who are just getting started on their self-employed journey. Compared to your other options, though, the contribution limits are quite a bit smaller, but this is a great option if you have a lower income or you need to roll over your 401(k) from a previous employer.
- Solo 401(k) – This type of plan is only available if you are a solopreneur. A Solo 401(k) has a high contribution limit and you can contribute as the employee and the employer. There’s a bit more paperwork involved, and once your plan hits $250,000, you’ll need to file an annual IRS form.
- SEP IRA – This retirement plan works well for self-employed people or business owners with no or few employees. This plan is a bit easier to maintain than a Solo 401(k)—fewer forms, no annual IRS reporting—and the contribution limits are similar. The big caveat? If you have employees, you must contribute the same percentage of salary for all employees as you contribute for yourself.
Once you choose your plan, set up automated contributions so you don’t even have to think about it. Reevaluate your plan each year as your income or business changes so you have the best plan for your situation.
Get Insurance Coverage
While insurance may not be the most exciting part of going solo, it’s essential to protect both your personal and professional life from unexpected disruptions.
Health Insurance
Let’s start with the big one—health insurance. Without an employer to split the cost or offer a group plan, you’ll need to secure coverage yourself.
Most self-employed people turn to the Health Insurance Marketplace, where you can shop for plans and potentially qualify for income-based subsidies. Private brokers and professional associations also offer individual health plans that may suit your needs better, depending on your situation.
Without your employer footing part of the bill, premiums can seem shockingly high. While the cost might sting, the silver lining is that self-employed health insurance premiums are often tax-deductible.
Life Insurance
If anyone relies on your income—your spouse, children, or even aging parents—life insurance should be part of your financial plan.
For most, term life insurance is the best mix of affordability and coverage. You’ll have financial protection for a set number of years (like 20 or 30), making it ideal for covering your working years or the time until your children become financially independent.
The cost of your term life insurance policy depends on how much coverage you get and the length of your policy. Typically, you’ll want to have a policy that covers between 10-12 times your annual income.
Business Insurance
Even if you’re a solo operator, your business still comes with risks. Whether you’re a freelancer, consultant, or creative, business insurance helps you protect your work, reputation, and income from unexpected legal or operational issues.
Some types of business insurance coverage you should consider include:
- General liability insurance – Covers claims involving injury or property damage.
- Professional liability insurance – Protects you if a client accuses you of making a costly mistake.
- Business owner’s policy – Bundles liability and property coverage.
Some clients may even require proof of coverage before signing a contract—so don’t wait until you’re in a bind to set it up.
Long-Term Disability Insurance
Long-term disability insurance is one of those things people often overlook—until they need it. But for the self-employed, it may be one of the most important policies to have. If you’re unable to work due to an injury or illness, how will you pay your bills?
Without paid sick leave or a company safety net, being sidelined even temporarily can be financially devastating. The earlier you get this coverage, the better your rates and the easier the approval process.
Being your own boss can be one of the most empowering moves you’ll ever make—but it’s not without its challenges. The financial side of self-employment may feel overwhelming at first, but like everything else in entrepreneurship, it’s a skill you can learn.
Taking the time to understand your tax responsibilities, set up a solid budget, protect yourself with insurance, and plan for retirement will give you the foundation you need to thrive in your solo journey. It’s not always easy, but the freedom to build something on your own terms is worth it.
