From PAYE to Self-Employment – Managing Income
One thing you can say about this recession is that it has increased self-employment. But many people are ‘going out on their own’ out of necessity, rather than a true desire to be self-employed. The problem with that is that often they fail to embrace exactly what it means regarding their income.
People with real jobs get a payslip that clearly says, here’s what you earned, here’s what belongs to the taxman, and here’s what you get to keep. You can be fairly certain that the cheque you lodge to your bank is yours to spend how you decide, and barring any tax credit errors by payroll, the taxman is done with you. Many people don’t even look at the Gross Pay section, preferring to focus only on the net pay.
After switching to self-employment, you are now getting cheques where some of the money does not belong to you. This can make it very hard for a former PAYE person to manage income. A nice big cheque can bring about a false sense of security, especially if you have not yet figured out the full impact of VAT and tax.
A very simple way to ease the transition from PAYE to self employment is to remember the one golden rule: Golden Rule: Your Profit is your Gross Pay.
Let’s take architects, an industry featuring many layoffs spawning new businesses lately. Architect salaries vary wildly with an average of about €60,000. That gives a net pay of €41,556.68 or about 800 per week “into your hand”, taxes paid, based on an unmarried architect with no kids.
In order to maintain an average weekly income of 800 per week, you simply need to make sure your profit is equal to your previous Gross Pay. Actually, due to lower tax credits and different PRSI rates for self employed people, you will need your profit to be €3,000 higher than your previous gross pay to maintain your 800 per week net pay. But your previous gross pay is a good place to start when projecting your profit, which is your new gross pay. (are you getting the picture)
If you are not sure how to calculate your profit, I can tell you it is as simple as Sales minus Business Expenses. You can get an excellent readable Starting in Business guide right here from the Revenue Commissioners, page 11 clearly tells you how to calculate your profit. I would also advise you take one of the many excellent Start Your Own Business and computerised accounts courses run by various agencies all over Ireland at very low cost. Start with your local County Enterprise Board. And, welcome to self-employment!