transcript

So you just moved from a W-2 employee to a consultant or self employed. Here's the 4 things that you need to know when making that transition so you don't make the same mistakes that I did.

My first real job was in New York City as a financial software consultant. After a couple of years, I got married, left the city, my firm asked me to stay on as a consultant to help ease the transition for the new person. So it was the same job, same pay, but there were big differences that I was not clear on. I made every mistake possible. Here's what you need to know to have a much smoother transition than I did.

#1) Track all income and expenses related to the consulting work.

For me, when it came around a tax time, it had been months since I finished this consulting gig and I completely forgot to send my income to my tax person. In my defense, we had just moved, things were not all electronic like they are now, so I was just more disorganized than I should have been. And I never received the tax form from the company, which would have reminded me to put it on my return - they sent it to the old address. It was fine. I reached out to them, I got a copy of that form, I amended my return, but definitely more stressful than it needed to be. Here's what you should do instead.

Open a separate bank account just for that consulting work so all income and expenses can come from there. It can be a backup to your documentation, which hopefully is all electronic now. And you also want to have a bookkeeping software that's going to be a great way to generate invoices and categorize expenses so when it comes time to tax time, you can actually generate reports really easily. I missed out on deductions that would have reduced my tax due by not having all of this set up.

#2) Pay your taxes throughout the year.

As you can guess, I also did not do that. W-2 income has your taxes withheld for you (and that is all I had known up to this point). Your consulting income does not. You likely need to pay estimated quarterly taxes throughout the year on the IRS and the state websites.

They don't tell you how much to pay. You have to come up with the amount, submit it. If it's too low, you may owe a penalty. So you do want to talk to your tax person just to make sure that you're clear on the process and the amounts. Another option is if you're married and filing jointly, is you could also have your spouse increase their withholding.

#3) Continue saving for retirement.

Check with your financial planner on the best vehicles that you should utilize and how much you should save. Potentially, it could be the Solo 401K, Traditional IRA, Roth IRA, SEP IRA. You could do more than one. I just saved that year to my Roth IRA. I could have done much more, but I just had no idea where to get started.

#4) Re-evaluate your insurance coverage.

You are likely going to lose a lot of benefits when you move to consulting status. I know that I was exposed during this time.You are likely tracking medical insurance, but of course there's also basic life, disability insurance, and other benefits that you want to look into to see if they're portable and you can bring them from your old job or if you need to obtain a private policy. This is just a short list of top priority things that you need to focus on.

Meet with your team of professionals to see if there's anything else that needs to be on your radar, such as planning for uneven income, building up your cash reserve because you no longer have PTO, verifying that you're setting up the best tax structure for your business. Whatever it is, they will help you get on track and have a lot less mistakes than I did. My name is Linda Rogers, Owner of Planning Within Reach.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.