You Just Quit Your Job to Go Self-Employed: What to Do First, From a CPA

Congratulations. If you're going to freelance or work solo for a while, here's what I'd do first, in this order. Don't cash out your old 401(k); leave it where it is or move it with a direct rollover. Start setting aside money for taxes from your very first payment, because nobody is withholding for you anymore. Line up health coverage within 60 days of losing your work plan. Open a separate bank account, get a free EIN, and start simple bookkeeping. Then pick a retirement plan for your new business, usually a Solo 401(k) or a SEP-IRA. Here's each step.

Your first-30-days checklist

1. Decide what to do with your old 401(k). Don't cash it out.
2. Open a tax savings account and move a share of every payment into it.
3. Put your first estimated tax payment date on your calendar.
4. Choose health coverage: a spouse's plan, COBRA, or the Marketplace (watch the 60-day window).
5. Open a separate business checking account and get a free EIN.
6. Pick bookkeeping software and connect your business accounts.
7. Choose a retirement plan for your self-employment income before year-end.

Step 1: Decide what to do with your old 401(k)

It's tempting to cash out and use the money as a cushion. Cashing out generally means income tax on the whole amount, plus a 10% additional tax if you're under 59½ and no exception applies. You usually have four choices:

Roth 401(k) money generally goes to a Roth IRA or a Roth account in your new 401(k), not to a traditional IRA.

Direct rollover vs. 60-day rollover

• Direct rollover: your old plan sends the money straight to the IRA or new plan (or makes the check payable to the new account). No taxes are withheld. This is almost always the one you want.
• 60-day rollover: the plan pays you, and you have 60 days to deposit it into an IRA or plan. The plan must withhold 20% for taxes. To roll over the full amount, you have to make up that 20% from other money. Whatever you don't deposit is taxable.

Example with made-up numbers: your 401(k) holds $50,000 and you take a check. The plan withholds $10,000 and sends you $40,000. To avoid tax on any of it, you'd need to deposit the full $50,000 within 60 days, finding the missing $10,000 yourself. A direct rollover avoids all of this.

The once-per-year IRA rollover rule

You can do only one 60-day rollover from an IRA to another IRA in any 12-month period, counting all your IRAs together. That limit doesn't apply to direct trustee-to-trustee transfers, to rollovers from a 401(k) to an IRA, or to Roth conversions. Moving an old 401(k) into an IRA doesn't use up your one rollover.

The age-55 exception

If you leave your job during or after the year you turn 55, withdrawals from that employer's 401(k) aren't hit with the 10% additional tax (regular income tax still applies). The exception doesn't carry over to IRAs. If you think you might need some of that money before 59½, consider leaving at least part of it in the old plan instead of rolling it all into an IRA.

Step 2: Set aside money for taxes and plan estimated payments

When you had a job, your employer withheld income tax and your share of Social Security and Medicare from every paycheck. Now you're responsible for both, through estimated tax payments. I like a separate savings account just for taxes: every time a client pays you, move a set percentage over.

Who has to pay: generally, you need to make estimated payments if you expect to owe $1,000 or more when you file.

When they're due (for income earned in each period):

If a due date falls on a weekend or legal holiday, it moves to the next business day. You don't have to start paying until you have self-employment income, so if you quit this fall, your first payment may be the one due January 15, 2027.

Safe harbor: how to avoid the underpayment penalty. You generally won't owe a penalty if your withholding and estimated payments add up to at least the smaller of:

• 90% of this year's tax, or
• 100% of last year's total tax (110% if last year's adjusted gross income was over $150,000, or $75,000 if married filing separately).

For your first year on your own, the prior-year option is usually the easiest. You already know last year's number. It's on your return.

Worked example: safe harbor vs. what you'll actually owe

This is an example with made-up numbers, not a real client. I'm using 2026 tax rates and brackets for illustration, federal only, no state tax.

Sam is single and leaves a W-2 job at the end of 2026. Sam's 2026 return shows $12,000 of total tax and $110,000 of AGI, so the 100% safe harbor applies. Sam expects $100,000 of profit from self-employment in 2027 and has no other income.

Safe-harbor plan for 2027: pay $12,000 total in four $3,000 payments: April 15, June 15, and September 15, 2027, and the January 2028 payment. That protects Sam from the underpayment penalty.

What Sam will actually owe for 2027:

The penalty is handled, but the bill isn't. This is a common first-year trap. Safe harbor tells you the minimum to pay on time. It doesn't tell you how much you'll owe. In this example Sam's total federal tax comes to about 22% of profit, and state tax would add to that. A tax savings account that gets a transfer from every deposit keeps that April bill from turning into a crisis.

Step 3: Line up health insurance within 60 days

Losing job-based coverage opens a window you don't want to miss.

• Marketplace (HealthCare.gov or your state's exchange): losing job-based coverage generally qualifies you for a Special Enrollment Period. You can apply up to 60 days before or 60 days after losing coverage.
• COBRA: lets you keep your old employer's plan for a limited time, usually at full cost. When COBRA runs out, you get another 60-day Marketplace window. Dropping COBRA voluntarily, by just stopping payments, does not open one.
• A spouse's employer plan: often the most affordable route, but it affects the deduction below.

Premium tax credit: Marketplace premium help is based on your estimated household income for the year, which is hard to guess in year one. Starting with 2026, the credit is again unavailable above 400% of the federal poverty line, and there's no longer a cap on how much excess advance credit you may have to repay. Estimate your income carefully and update the Marketplace when it changes.

Self-employed health insurance deduction: if you have a net profit, you can generally deduct premiums for medical, dental, vision, and qualified long-term care insurance for yourself, your spouse, and your dependents on Schedule 1 of Form 1040. Two key limits: - The deduction can't be more than your business's net profit. - You can't take it for any month you were eligible for a subsidized employer plan, including your spouse's, even if you didn't enroll.

Step 4: Open a business bank account and get a free EIN

Bank account. The IRS says one of the first things you should do is open a business checking account and keep it separate from your personal one. Your statements become a clean record of income and expenses, and bookkeeping takes a fraction of the time.

EIN. An Employer Identification Number is your business's tax ID, and you can get one online directly from the IRS in a few minutes. You never have to pay for an EIN. As a sole proprietor with no employees, you can technically use your Social Security number, but an EIN lets you keep your SSN off client W-9 forms. If you're forming an LLC, form it with your state first, then apply.

Step 5: Keep the structure simple for now

If you start doing work for yourself and do nothing else, you're a sole proprietor and report your business on Schedule C. A single-member LLC is a state-law decision, mainly about legal separation (ask an attorney how much protection you'd get); for federal taxes it's taxed the same as a sole proprietorship by default.

You'll hear about electing S corp status to save self-employment tax. It can make sense later, once your profit is steady and well above a reasonable salary for your work, but it adds payroll and a separate return. It's rarely a month-one decision. Get a few months of clean books first, then look at it.

Step 6: Set up bookkeeping on day one

You don't need anything fancy. You need consistency:

1. Pick software and connect your business bank account and business credit card.
2. Categorize every month, not every April, and reconcile to your bank statement.
3. Note the business purpose for meals, travel, and mileage when it happens. (More on this in Receipts Are Not a Tax Strategy.)
4. Run a simple profit-and-loss report each month. Your estimated taxes and retirement contribution both depend on it.

If you'd rather not do this yourself, my monthly bookkeeping keeps your books current and tax-ready.

Step 7: Pick a retirement plan for your solo business

For a solo freelancer, it usually comes down to two plans:

If you're also starting a new W-2 job with a 401(k), the $24,500 employee limit is shared across both. A SIMPLE IRA is the other option you'll see, but it's mainly built for businesses with employees, generally has to be set up by October 1, and allows less ($17,000 of deferrals for 2026). I go through the full comparison, with hiring rules and a worked tax example, in SEP-IRA vs. Solo 401(k): Which Fits You?

Should I roll my old 401(k) into an IRA or leave it?

It depends on your old plan's fees and investments, whether you might need the money before 59½, and whether your new Solo 401(k) accepts rollovers. If you left your job during or after the year you turned 55, leaving the money in the old plan keeps the age-55 exception to the 10% additional tax. Whatever you choose, use a direct rollover so nothing is withheld.

Can I roll my old 401(k) into a Solo 401(k)?

Often, yes, if your Solo 401(k) plan accepts incoming rollovers. Not every provider's plan does, so check before you start. A direct rollover from the old plan avoids the 20% withholding.

How much should I set aside for taxes?

There's no single right percentage. It depends on your profit, deductions, filing status, and state. Self-employment tax alone is 15.3% on most of your profit, and income tax comes on top. In the example above, total federal tax was about 22% of profit.

Can I deduct my health insurance premiums?

Usually, if you have a net profit and weren't eligible for a subsidized employer plan (yours or a spouse's) for the months in question. The deduction goes on Schedule 1 of Form 1040 and can't exceed your business's net profit.

Before you make any big moves

This is general information, not advice for your own tax situation. Your old plan's rules, your age, your state, and your income all change the answer, especially on the 401(k) decision. If you'd like help getting your first year set up the right way, reach out through my contact form and I'll take a look.