When I moved from Washington, D.C., to Las Vegas a few summers ago, I had to adjust to more than the scorching desert climate and the presence of slot machines at my local grocery store. My status with Kiplinger also changed from employee to contractor. In other words, I became self-employed.
A recent report from accounting-software provider FreshBooks predicts that the number of self-employed Americans could triple by 2020, with millennials leading the way. Technological advancements make it easier than ever to work remotely or start a business, and as your own boss, you have plenty of opportunity to shape a fulfilling career.
Self-employment comes with extra flexibility—a trait that millennials prize—but it can also make your financial life more complicated. My husband is an Air Force pilot, and my ability to keep working while I move around the country with him (we’re now in Alamogordo, N.M.) is invaluable. But I’ve faced new challenges in a variety of financial tasks.
Tackling taxes and income. The new tax law makes working for yourself more attractive. Now, owners of pass-through businesses—basically, ones that aren’t C-corporations, subject to corporate tax—can get a 20% deduction against business income if their taxable income falls below specified limits.
But it’s up to you to ensure that the IRS is getting its share of your income (you’ll need to pay your state, too, if it collects income tax). Estimated federal tax payments are due on four dates throughout the year; you can use Form 1040-ES to calculate how much you owe. Don’t forget about the self-employment tax: 12.4% of your first $128,400 of net earnings goes to Social Security, and 2.9% of your net earnings goes to Medicare, although you get to write off half of what you pay.
If you have a regular job with an employer plus a side gig for which an employer does not withhold tax—say, driving for Uber—you’ll need to pay any tax due on those earnings, too.
Make sure you’re taking advantage of other tax deductions for business owners. I use a room in my home exclusively and regularly as an office, so I can deduct a portion of my mortgage interest (rent payments are also deductible), home insurance, utility bills and other expenses. Another deduction allows you to write off expenses for business use of your car. Keep detailed records, and save receipts, bills and other documentation. If your income is unpredictable, it’s important to map out your regular expenses and have a substantial savings account so you can pay them in lean months.
Subbing in benefits. Without an employer to provide benefits, you’ll have to fill the gaps. A Roth IRA is a good place to start. Roth contributions are not tax-deductible, but you’ll pay no tax on withdrawals in retirement. The maximum Roth IRA contribution for 2018 is $5,500 for those younger than 50 whose income falls under certain limits. You can also use retirement accounts designed for the self-employed. I have a SEP (simplified employee pension) IRA that allows me to save the lesser of $55,000 or 20% of my net self-employment income for 2018. You may be able to save a greater portion of your income in a solo 401(k), but setting it up and managing it can be more complex.
If you’re married and your spouse has health insurance through an employer, joining his or her policy may be the best move. Otherwise, look for an individual health policy. You may be eligible to deduct the premiums on your tax return, too. You can shop for plans and speak with insurance agents free at ehealthinsurance.com.
Retirement Savings Plans for the Self-Employed (opens in new tab)
Lisa has spent more than15 years with Kiplinger’s Personal Finance and heads up the magazine’s annual rankings of the best banks, best rewards credit cards, and financial-services firms with the best customer service. She reports on a variety of other topics, too, from retirement to health care to money concerns for millennials. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.
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