Being self-employed in the NDIS offers a huge range of benefits to support workers and the participants they care for. A big headache for support workers venturing into self-employment is understanding how being a business affects their money.
The reality of being self-employed, despite its many benefits, is not without its challenges and when it comes to those challenges, money is number one.
This article aims to highlight the 5 things support workers in the NDIS need to be aware of when it comes to managing your money in self-employment. At the end of the day, the more successful and money smart professional support workers there are, the better.
Be precise with your pricing
With the NDIS being so new and the range of services ever expanding, finding the right fit for your pricing can be a tough exercise. As the choices grow, participants will be looking for access to combinations of quality, reliability, suitability and affordability.
First things first, you need to be clear and precise on exactly what products or service/services you will be delivering. Time spent getting clear on the details and mapping out cost (especially your time) is always well worth the effort. As with any new product or service, a good starting point is always to look at competitor rates to get a good gauge on the going rates. The benefit of doing this exercise in the beginning is that you will be able to precisely articulate the value of you service to your clients.
Within the NDIS is a controlled price list that sets out maximum charge rates for some supports to ensure that participants receive good value, you can learn more about these here. Learn how the pricing list works and where you fit into the box to understand how it will affect your pricing. An important aspect of pricing that many self-employed business owners struggle with and that is hyper relevant to support workers, is working out how much will end up in your pocket. As a business owner, there are a range of expenses that you will need to factor into your pricing to ensure you’re not left out of pocket.
Here are a few things to remember with your pricing:
- Factor tax into your rate: Remember that you are going to be paying tax (at a rate dependant on your income) and may also incur GST if you are registered for it (many services in the NDIS are GST exempt).
- Factor in super: Paying super is your responsibility and you may end up paying it out of your total income.
- Include your expenses: Depending on the type of product or service, the expenses involved may vary considerably. Don’t forget to consider travel times, car, phone and other expenses that will all need to be paid.
- Don’t forget the fixed costs: A great benefit of being an individual in business is that you can often dodge a lot of the costly fixed expenses like rent, utilities, mailboxes etc. However, costs like insurance, internet, phones, home office space etc. all need to be considered.
- Safety nets and profit: I talk about each of these factors in more detail next, but having a safety net for your business is important and building profit is the cherry on top.
Be prepared for tax
Have you ever worked as an employee, getting excited as the end of the financial year approaches, anticipating how much you will get back in your tax return? It’s a great feeling to get a nice little kicker mid-way through the year.
For the self-employed, things work a little differently to employees and managing tax effectively can make all the difference. You see, when you are self-employed, there is no employer to put aside a portion of your income and pay it to the tax office, it’s up to you to do that for yourself.
Despite the adage that there are two certainties in life, death and taxes, each year many self-employed businesses get into trouble with an expensive tax bill they weren’t expecting or cannot afford. That feeling of excitement employees feel at tax-time is often the complete opposite for the self-employed, especially if they haven’t planned for and made provisions to meet their tax obligations.
The reality is that tax-time doesn’t need to be the doom and gloom most business owners see it as. If you manage your tax properly in you business, you can find yourself once again looking forward to tax-time with excitement and anticipation.
Here are a few of the key strategies to be prepared for tax.
- Understand that not everything you make is yours to keep: Yep, it’s a simple reality that out of everything we make in business, there is going to be tax attached to it. Accepting that reality and planning for it can be a liberating experience.
- The first-year tax trap: In your first financial year of business, the tax office isn’t going to charge you until you have submitted your first tax return. Now to be clear, the financial year runs from July to June, and it often takes months after June to submit your tax return. In your second year in business, the tax office will estimate what your yearly bill will be and charge you each quarter. The trap for first year business owners is that you are likely going to have to pay up front for the tax on your entire first year in business, plus the first quarter of your second year. If you haven’t planned for it, that first tax bill can be crippling.
- Build a tax war chest: The best way to turn tax in a positive experience, is to build up a war chest throughout the year. Create a plan where putting savings aside for tax becomes just a part of your weekly activities. The benefits of having that money put aside and allocated for tax are huge and can relieve the major cause of stress and anxiety in business.
- Don’t raid your war chest: As tempting as it may be, don’t raid your war chest. Try and think of the money as already being paid to the tax office, keep it out of sight and out of mind and remember anything you take out of your war chest, you’re likely going to need to put back in.
Super is up to you
As a business owner, superannuation is no longer a guarantee and instead becomes more of an investment strategy. The benefit here is that it becomes your choice how to manage your super and you can take control of planning for your future in the way that suits you best. The pitfall for the self-employed is that people see contributing to their super as being very important but don’t often get around to actually contributing to it.
Briefly, here’s how it works: The Superannuation Guarantee Act is a law that makes it compulsory for employers to pay a designated percentage, currently 9.5% of a workers pay to a superannuation fund of their choice. While some self-employed professionals fall into the law, the majority are excluded from compulsory super payments. As a result, paying super becomes a voluntary contribution. This gives the business owner a lot of flexibility to better manage their cash-flow and investments, but it’s important that it doesn’t get forgotten.
Here are a few tips to make the most of super:
- Get professional advice on a strategy that suits your needs: Having a plan from a trusted advisor makes it all a lot easier from the beginning. They will be able to assess your situation and give you the right information based on your situation.
- Understand voluntary contributions: When an employer pays super, it is classed in a certain way with the super companies and taxes etc are applied to it. When you make a voluntary super contribution as a self-employed business, there are a range of tax exemptions that may apply. To ensure your superannuation payments are classed correctly, speak with your fund and find out how to make payments that will be classed as voluntary contributions.
- Create a consistent approach: Making a plan and sticking to it are very different things. Create a consistent method that fits in with your weekly activities to put savings aside from your business and make the contributions.
Building in a safety net
Business can be a roller coaster and there will undoubtedly be some rocky patches as you go through self-employment. Building in a safety net, a back-up or rainy-day savings is always part of a good money management strategy.
What for? Well, in a perfect world, you won’t need the money and you can pull it back out and go on a holiday (P.S. there’s no such thing as holiday pay in self-employment) or to invest back into the business. The reality is that cash-flow is often lumpy at best and by building a small buffer into your money strategy can take the edge off any desperate times.
The safety net doesn’t need to be a huge amount of money and it’s not designed to plan for a catastrophic event, we have insurance for that. These back-up funds are there in case we have an invoice coming in late and there are some bills to pay or you have taken some time off and it’s taking longer than expected for work to ramp back up. It might even be that your work is seasonal or reliant on the weather in which case having a ‘rainy day’ savings can take on a very literal meaning.
Here’s a few tips for building a safety net:
- Keep it out of sight: Yep, this is about protecting yourself from yourself. If your savings are somewhere visible, it can be impossibly tempting not to touch them. My preference is to have savings stored completely separate to my everyday accounts, it’s amazing how quickly you can forget it’s actually there, and a great feeling every time you remember that it is there.
- Be mindful: One of the simplest benefits of having your backup savings stored elsewhere is that you have to actually think about it to access it. When money is ‘saved’ in your everyday account, it’s impossible to stop it getting eaten up in the day-to-day expenses of business and life. The tip here is to be mindful when you are accessing your rainy day savings and only use it when you really need it.
Building profit into your business
Profit is the icing on the cake for the self-employed. Yes, we do what we do because we love it and despite being really hard work, the fulfilment and flexibility that comes with being your own boss is un-matched. But at the end of the day, when the financial year rolls to an end, having profit left in the business, no matter how large, is the extra reward or bonus for all your hard work.
Believe it or not, profit doesn’t happen by accident. If your heading towards an end of financial year and you’re hoping once the accountant has been through the numbers there is going to be something left over… Well, there rarely is.
Building profit into your business is about taking pro-active steps to allocate a small portion of your income to profit. By creating this profit habit, you will be able to map out your profit as a small percentage and save it up for the year. As the end of the financial year approaches, you won’t need to cross your fingers and hope for the best, you will be able to check your profit account and see exactly how big your bonus is this year.
Here are some tips to help make profit happen:
- Choose a percentage of your income to save as a profit: Making the decision that you are going to build a profit percentage into your everyday activities is the first step. There is no need to go too big too early, simply choose a small percentage to start with even if it’s just 1% or 2% to start.
- Apply it to everything you earn: Keep track of all your income coming in and put your profit aside as you go. If you do it regularly, the amounts will be small and you won’t notice them missing, if you leave it too long, the amounts will build up and so will the temptation to use the money for something else. Being consistent is the key to building profit into the business.
- This is not for a rainy day: It will become important to remember that this money is being put aside for profit and should stay as profit until the end of the financial year. If you have implemented the previous step of creating a rainy day savings, you should use that money to put out any spot fires or smooth out lumpy cash-flow.
- Enjoy the spoils: You’ve worked hard, stuck to a plan and executed it consistently, there is profit in the bank and it’s time to enjoy the fruits of your work. Enjoy the reward and savour the experience.