[Editor’s Note: Today’s guest post is from Robert Lindstrom, CFP and Founder of Provision Financial Planning, a fee-only financial planning firm. We have no financial relationship.]

 

Solopreneurs who are also practitioners have a unique set of challenges and opportunities.  You have to both work in the business as a professional and on the business as an entrepreneur.  Your personal and business lives are more likely to be intertwined and “busy” is probably an understatement.

The topics in this article can apply to doctors, attorneys, accountants, and other professionals.    The key point is that you must be self-employed and not have any employees.  

Let’s take a look at a few of these unique topics. 

 

Tax Considerations

Business Entity

Some of the specific tax recommendations will depend on your company’s entity structure and income.  If you’re already established and expect a high income, consider whether or not an S-Corp can make sense for you.

QBI Deduction

There is a good chance you are considered a Specified Service Business, which means you can be phased out of the Qualified Business Income deduction.  This phase-out begins when taxable income hits $160,700 for taxpayers filing Single and $321,400 for taxpayers filing Joint in 2019. You should pursue strategies to get below this number if possible.  For example, you can maximize business and personal deductions because the phaseout is based on your taxable income, which is affected by personal deductions.  

Retirement Accounts

An overlooked opportunity for solopreneurs to reduce taxable income is the Solo401(k), discussed in the benefits section below.  

If you expect your business to lose money or not make a lot early on, now is the time to consider Roth conversions and/or capital gain harvesting.  You may be able to do these tax-free depending on which tax bracket you end up in.  

 

Estate Planning

Life Insurance

First things first here.  DO NOT count on the sale of your business to take care of your family if space debris falls on you.  This should be done with life insurance and probably with term life insurance.

Buy/Sell Agreement

The next thing to determine here is whether or not your business would have any value if you were no longer a part of the equation.  If you think there is, you can enter into a buy/sell agreement. You can try to find a peer that is in a similar situation so you’ll be helping them do the same.

Have a Contingency Plan in Place

Even if you don’t think your estate can sell the business, you need a plan of some kind.  You do estate planning to reduce the burden on your family. You should do the same for your clients or patients.

For this contingency plan, consider partnering up as before with someone in a similar situation.  You’ll want to carefully consider your industry’s rules around privacy and confidentiality.

At the very least you’ll want to prepare communication ahead of time to send to your clients or patients.  You’ll also want to keep a list of all vendors that should be notified, especially vendors that have personally identifiable information.  Ideally, the person that agrees to help transition your clients or patients will be able to help them find a good replacement.

These are the types of things you should discuss with an attorney for legal advice.

 

Insurance and Benefits

Health Insurance

Common benefits that you get as an employee are now up to you to tackle.  Health insurance is the first one. If your spouse works, this will often be the best option.  If your spouse doesn’t work, you need to plan for this to be one of your major expenses.  

Don’t overlook the HSA if you end up with a High-Deductible Health Plan.  The triple tax benefits make this type of account one of the best deals for taxpayers in the Internal Revenue Code.  Get the tax deduction as you contribute, let it grow tax-free by paying current expenses out of pocket if you can afford it, and use the funds tax-free on qualifying medical expenses.

financial planning self employed

Robert Lindstrom, CFP

Life Insurance

Of course, there are always exceptions, such as poor health, but it generally doesn’t make a whole lot of sense to keep any Group Life Insurance from an old employer.  If you are healthy and purchasing additional Group Life Insurance, you were probably overpaying anyway. You can get individual term insurance that is less expensive than group.  Try to always get the new policy in-force before canceling any existing life insurance if possible. If you have any health issues, it can make sense to purchase Group Life Insurance and convert it when leaving an old employer.

Disability Insurance

Chances are you already needed individual disability insurance.  If you don’t have it, it’s now time to get it. The bad news? This type of insurance has a financial component of underwriting or when you make a claim.  If you’re just starting out, then your income is probably going to be lower so you won’t qualify for as much coverage.

First, check-in with any associations you are a member of to see if there is group coverage available.  This may be your best option for now. As mentioned, there is a good chance you need to protect more income than a group policy will cover anyway so you may want to go ahead and purchase an individual policy.  Adding benefit increase riders may be wise in this situation.

 

Retirement

We’ve talked about some downsides of self-employment when it comes to replacing common employer benefits.

Individual 401(k)

Not so with retirement.  You now have a bonanza on your hands.  Enter the Solo401k or i401k.  

A Solo401k is only available to you if you are the sole employee, or only you and a spouse are the only employees.  Once you hire someone else you won’t be eligible for this plan anymore and would move on to something like an ERISA 401k or SEP IRA.  Plan accordingly.

A Solo401k allows you to put up to $57k away into this plan in 2020.  It is also capped at 20% of earned income.  For the self-employed, earned income is net income after deducting one half of your self-employment tax.

Just like a normal 401k, contributions for yourself equal the deferral amount, which is $19,500, or $26,000 if you are over age 50.  Similarly, you have the option to make contributions to either a Traditional or Roth account.  

Depending on the business’s profitability, you’ll be able to put significantly more in as an employer profit sharing contribution.  This can be powerful if you’re trying to qualify for the QBI deduction or otherwise lower your AGI.  

Mega Backdoor Roth IRA

If you are already getting the full QBI deduction or aren’t trying to, you can consider the Mega-Backdoor Roth.  Current rules only allow you to contribute the deferral portion to the Roth account. As we discussed already, this is only $19,000.  You can make up the difference by putting the money into an after-tax account just like the standard application of the Mega-Backdoor Roth.  The awesome part of doing this in a Solo401k is that there is no discrimination testing because there are no other employees. Make sure the plan documents are friendly to this strategy.

Determining whether the profit-share or the after-tax contributions make the most sense for you depends on current tax rates, future expected tax rates and how your income interacts with the QBI deduction.

There are some ancillary benefits to this as well.  For instance, you can consolidate any old traditional IRAs into this account so you can do ongoing Backdoor-Roth IRAs.

 

Balance/Prioritization

As a “practicing owner,” one of the biggest issues you’ll face is finding balance, and this will manifest itself in two primary ways.  

  1. Balancing working in your business with working on your business.  There is no doubt the most important time spent is with patients or clients. As an owner, that doesn’t change.  But it does mean the books still need to be reconciled each quarter, your records monitored for compliance, confirming cybersecurity is intact, making sure you’re bringing in new business, etc…
  2. Balancing business and personal.  Keeping this balance right is tough for any business owner, but it only becomes more apparent for the solo business owner.  If you’re married, just ask your spouse. You don’t have anyone else to talk to all day about what’s going on in the business, good or bad.  So what are you going to do when you go home? Tell your partner all about it.

You will have to experiment to find the right balance for you.  You’ll have to accept that sometimes you won’t get work done because your family needs you.  Your family will also have to accept that sometimes you need to get certain work done. Joining peer study groups will give you the chance to talk shop.

In this article, I tried to stay focused on those issues applicable to solo practice owners, although there is some overlap.  There are many more issues and opportunities you will need to consider that affect all business owners that are not unique to solopreneurs.

 

What are the biggest challenges you face as a self-employed business owner? What financial advice do you have for other solo-practice owners? Comment below!