BusinessCryptocurrencyMoney

Here’s What Happens to Your Finances When You Quit Your Job to Pursue Your Side Hustle

[ad_1]

I quit my last W-2 job first thing in the morning, on the first work day of the year (after my former company resumed operations after the holidays). Before putting in my notice, I had been carefully plotting my exit for more than three months, and I was so ready that the anticipation was unbearable.

I knew that I could support myself with my side hustle, and I also enjoyed the work I was doing, so quitting a job that was not serving me was a logical move. But doing so definitely had an impact on my finances. Here’s what I experienced — and what you can expect if you also decide to become self-employed.

Taxes will attain new importance in your life

If you have an employee job, where you receive a W-2 summarizing your earnings every year, you probably don’t think about paying taxes too terribly often — likely just once a year, around April 15. But if you quit that job and enter the world of self-employment by making your side hustle your main gig, taxes are going to become a lot more vital.

For one thing, you could be on the hook for more taxes than ever before if your side hustle has taken off and you’re earning more than you used to. Plus, you get to pay taxes as both employer and employee. And self-employed folks owe estimated tax payments four times per year: Jan. 15, April 15, June 15, and Sept. 15. It’s on you to ensure you send those payments to the IRS (and your state’s government, if you live in a state that collects income taxes). I recommend finding a good accountant who can keep you on track, and get in the habit of taking your tax money right off the top of every paycheck you receive.

You’ll have to pay for your own benefits

Give up your W-2 job, and you’ll suddenly be responsible for setting up (and paying for) benefits like health insurance and a retirement plan. If your health benefits were heavily subsidized by your old employer, you’re likely to encounter some sticker shock when you hop on over to HealthCare.gov or your state’s health insurance marketplace and check out the plans on offer. The good news is that you can write off your insurance costs on your taxes.

You’ll have new options for retirement plans, too. Self-employed workers have access to different plans than W-2 workers. One good choice for you might be a Solo 401(k) — you can contribute money to one as both employer and employee, meaning you can save and invest a lot more money. Check out our list of the best brokerage firms to see what your options are.

One drawback of being self-employed is that you no longer get paid vacation or sick time. If you want paid time off, you’ll have to pay for it yourself. Consider tacking a little extra time onto your work days, and saving the money you earn for those hours to pay yourself for future days off.

Savings becomes even more important

I’d argue that having a W-2 job doesn’t actually give you a more secure employment situation in these days of at-will employment and mass layoffs. But I do think it’s even more important to have a solid emergency fund if you’re self-employed, if only to mitigate the potential for clients paying you late and suddenly losing a steady client that used to give you a lot of work. Plus, your income could be inconsistent week to week or month to month.

The common recommendation for an emergency fund is having three to six months’ worth of bills, but if you’re quitting your job, you might want to have more stashed in a savings account — just in case.

You might end up happier, with more financial flexibility

Just in case you thought self-employed finances were all gloom and doom, taxes and high health insurance premiums, don’t worry — they’re not. You get to control your own working hours and working life now! For me, the flexibility I gained by becoming a full-time freelancer has been the best part. I can work anywhere I want — most of the time, I work from home, but I’ve also worked from other countries I was visiting, as well as hotels, airports, and commuter trains.

That flexibility also extends to my working hours. I’ve spent 2023 putting money away to buy a home next year, and having the ability to work more to make my dream a reality is something I never experienced with salaried jobs. Similarly, I’ve had the opportunity to learn new skills and become a more well-rounded professional, which can only be beneficial for my future earning potential.

If you’re considering ditching your job and leaning into your side hustle, I’m rooting for you. Just be sure to consider all these financial ramifications to make the right choice.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. 

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes. 

Read our free review

[ad_2]

Related Articles

Leave a Reply

Back to top button