Whilst self-employment can bring financial and lifestyle rewards – along with 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.
Managing your cash flow
While your overall annual income may be strong, the flow of money is not always regular. It can be weeks and even months between your clients 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 and seeking an overdraft from your bank.
Pay yourself a wage
Rather than treating all income you earn from your business as your personal spending money, pay yourself a weekly or monthly wage. You should also maintain separate bank accounts: one for business receipts and another for personal spending.
Deposit or transfer your business revenue into a 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, and so that you do not dip into business revenue too often. Use the following budget calculator to record all of your incomings and outgoings, which give a breakdown of where your spending goes each week, month or year.
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.
Pay a wage to members of your family working with you
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 that person will not qualify for a Social Security Pension during his or her retirement.
Plan ahead for holidays
As a self-employed 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.
Setting aside money for income tax and VAT
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.
Plan for your retirement
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.
If you are born between 1952 and 1961 you have to pay a minimum of 50 annual contributions for 35 years. The amount of the contribution on which you pay your social security contribution in 2018 is capped at a maximum of €18,168. This means that the maximum contribution you will pay in 2019 is €2725 or €52.41 a week (15% of €18,168) irrespective of the fact that you earn a higher wage from your business.
If you are born on and after 1962, you will pay a minimum of 50 annual contributions for 40 years. The amount of the contribution on which you pay your social security contribution in 2018 is capped at a maximum of €23,702. This means that maximum contribution you will pay in 2019 is €3,555.30 or €68.37 a week (15% of €23,702) irrespective of the fact that you earn a higher income from your business.
The Maximum Pension Income cap of €23,702 will increase by a formula of 70% wage inflation and 30% inflation every year if you are born on or after 1962. This means that if your income is above the current Maximum Pension Income of €23,702 you will pay a further 15% contribution of the difference between the previous and new, Maximum Pension Income as this changes from year to year.
Example: Your Social Security Contribution Payment if you are Self-Employed
In 2018, you earned €30,000 from your self-employed business. The Maximum Pension Income caps the social security contribution of 15% you have to pay on €23,702. Your annual social security contribution payment is, €3,555.30.
In 2019, the maximum cap increased by an annual €493 due to the 70% wage inflation: 30 inflation formula. This means that the Maximum Pension Income now increased from €23,702 to €24,195. Whilst your income in 2019 remained unchanged, the social security contribution you will pay is now 15% of €24,195 that is €3,629.25.
Your pension is not calculated on your gross basic wage to a Maximum Pension Income cap but on 2/3 of your gross basic wage to a maximum of the Maximum Pension Income cap. This also accounts for persons born between 1952 and 1961.
Do not neglect saving for your retirement over and above your state pension
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.
Protecting your income
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.
