What's Next: Pre-Jump Checklist

Column for What’s Next website PRE-JUMP CHECKLIST

By Mark Levine Congratulations. Your business plan is set. The needed startup money is in the bank. You’ve signed your lease and ordered your Aeron chair. A couple of clients are ready for the plucking like low hanging fruit. Now all you’ve got to do is walk into the president’s office and declare your independence.

Not so fast. There are some essential steps you still need to take before you can safely go solo. When you become self-employed, you don’t just break a set of chains; you also shred a safety net that’s stronger and more pervasive than you may realize. Not only that but going out on your own dramatically alters your tax status and credit worthiness.

TAKE THE TIME NOT THE MONEY You already know you’re going to kiss paid vacations goodbye. What you may not realize is you’re about to work for the world’s strictest task master. Taking weekends off will soon become an issue, let alone skipping town for two weeks in the summer. Even if vacation pay accrues and you could pocket the cash when you leave, don’t do it.

Take the time off now, before you go out on your own. When you’re independent free time is more precious than money…and a whole lot rarer.

NETWORK ON YOUR BOSS’S DIME Making contacts, mixing, meeting and greeting, will all be doubly important when you’re flying solo, not just for getting business, but for maintaining your sanity. Unfortunately, in the future whatever after hours networking you do will subtract from a nano-personal life. The best way to compensate is to take in every luncheon, conference and convention you can before you leave your current job. Make as many initial contacts as you can now when it’s on your boss’s dime. You can follow up on them later by calling to say you’ve hung out your own shingle.

GET A CHECK UP You’re savvy enough to have figured out a way to replace your current health insurance coverage—either by signing on to your spouse’s plan, buying into another group, or funding a health savings account. But new coverage means new waiting periods, especially for preexisting conditions. And your health savings account may not have much of a balance for at least a year. That’s why you should have every procedure prudence demands before you give up your current coverage. Have a heart to heart with your primary care physician and, if need be, complain of everything from chest pain to fecal blood to justify every test you might need. Fill prescriptions early and often.

DO SOME PRETAX PLANNING Your accountant actually has office hours outside of March and April and now is the time to take advantage. Selfemployment not only means paying estimated taxes, it means covering all of your Social Security contribution, not just the half you spring for today. Those first few tax bills will create a great deal of pain unless you’ve planned ahead. The same goes for funding a pension plan. There are no such things as matching funds anymore. Have the cash on hand to make your next year’s contribution early before invoices start piling up.

BORROW SOONER RATHER THAN LATER The time to take out a home equity loan to serve as an emergency fund, or to refinance your mortgage, is now, when you’re still employed. Sure, banks have gotten a whole lot more liberal with lending rules, but they still like to see you’ve actually got an income. Besides, once you’re self-employed it will be in your interest to downplay your reportable income to minimize taxes, making you a less desirable borrower. That means not just taking out any home loans before you quit, but also any other personal loans wholly or partially based on income. While you’re at it, extend the limits on your credit cards now too.

USE YOUR ABILITY TO GET DISABILITY It’s foolish for any income earner not to have disability coverage. For someone who’s self-employed, it’s inexcusable. You’ll have no paid sick days, no one to cover for you, no employee provided coverage—no matter how short

term or insubstantial—standing between you and financial disaster if you’re rear ended by a drunken high schooler one night. The problem is it’s very difficult for those who are self-employed to get affordable effective coverage.

Under the least expensive “any occupation” coverage, an insurer can refuse to pay benefits to a software engineer who, despite a severe head injury, can still flip burgers. “Own occupation” coverage addresses that issue, but the cost is prohibitive. The middle ground and smartest option is “income replacement” coverage. But once again, the problem for a self-employed individual is the difficulty in documenting actual income. The answer is to purchase “income replacement” coverage while you’re still employed.

APPLY TO PROCRASTINATION U One area where showing less income on paper will actually help you is in qualifying for college financial aid and government educational loans. While the rules and standards of schools and loan programs vary, one thing is certain: the lower the parents’ income, the larger the kid’s aid and loan package. Parental assets are also factored into the mix, so if you’re planning on investing some of your savings or home equity in the new business, that will also result in more for your child. All this putting off applying for aid or loans until you’ve gone into business for yourself.

HOLD OFF ON THE NEW WHEELS If you’re thinking about a new car it may make sense to wait until you’ve launched your business. For someone who’s self-employed, leasing could be a better deal than buying. Lease your car and use it entirely for business and you can deduct all the costs. Leasing also lets you pay far less out of pocket both initially and monthly, conserving your cash. By having your business lease and operate the car you take what would have been a significant personal purchase and turn it into an ongoing deductible expense.

TIME RENOVATION PROJECTS TO STRADDLE YOUR LAUNCH Home improvement projects are, in the best of times, complex. Scheduling them around the time you’re launching a business just adds another layer to the complexity. The first secret is to obtain the financing for the project while you’re still employed, in order to get the easiest and best loan deal. The second secret is to then delay actually having the work done until after you’ve gone solo. That’s because if you work from your home, a percentage of the project’s cost, equivalent to the percentage of the home’s total square footage used for business purposes, could be deductible.

Granted, timing all of these issues while simultaneously managing the launch of your new business is a little like juggling chain-saws. But you might as well get used to it: that’s pretty much the definition of self-employment.