IT MAY BE APPEALING to work for yourself, but it also comes with a hefty price tag. Here are some of the costs you’ll face.
Higher payroll taxes. If you’re self-employed, you have to pay both the employee’s 7.65% Social Security and Medicare payroll tax and the employer’s 7.65% contribution, though you can take a tax deduction for the employer’s portion.
Health insurance. You’ll need to purchase your own health insurance, though that has become easier, thanks to the health care exchanges. Your premiums are tax-deductible if you’re self-employed. If you’re younger without a substantial nest egg, you should probably also get disability insurance. It’s best to buy disability coverage while you’re employed by someone else, or you could struggle to get coverage.
Funding retirement. Full-time employees can often contribute to 401(k) plans using payroll deduction, and the money they sock away often earns a matching employer contribution. But if you’re self-employed, all this will be on your shoulders. What to do? You might fund a SEP IRA or solo 401(k).
Larger emergency fund. Because you won’t have a steady paycheck, you should probably follow the standard advice and keep the full six months of living expenses in conservative investments held in a taxable account.
No sick days or vacation time. That bigger emergency fund may come in handy if you don’t have income for a while because of illness, a lack of customers or you take time off.
Accounting and legal issues. Depending on the complexity of your business, you may need to hire an accountant. You might also want to set up your business as an S corporation or limited liability company, which can protect your personal finances from claims against your business by creditors. Both options are described at the end of the safety net chapter. On top of that, you need to make sure you make estimated tax payments to both the federal and state government.
One financial incentive to go it alone: On their federal tax returns, individuals can typically deduct 20% of their qualified business income from a partnership, S corporation or sole proprietorship, starting in 2018.
Next: Working Abroad
Previous: Losing Your Job
Articles: Solo Effort, Seeking Certainty, Starting Young, Flying Solo, On Our Own, Less Green and Going It Alone