FACING THE CHALLENGES OF SELF-EMPLOYMENT

 

Today’s technology makes self-employment easier than ever. But if you work for yourself, you’ll face some distinctive challenges when it comes to your business. Here are some important steps to take:

 

1.  Learn your liability.  Self-employed individuals are liable for self-employment tax, which means they must pay both the employee and employer portions of FICA taxes. The good news is that you may deduct the employer portion of these taxes. Plus, you might be able to make significantly larger retirement contributions than you would as an employee.

 

However, you’ll likely be required to make quarterly estimated tax payments, because income taxes aren’t withheld from your self-employment income as they are from wages. If you fail to fully make these payments, you could face an unexpectedly high tax bill and underpayment penalties.

 

2.  Insurance is especially important.Unfortunately, many self-employed people don't have all the insurance they need, especially in the area of health insurance.  Health-insurance is expensive, and the rates continue to rise. According to a June 7, 2018 piece in USA Today, the average health insurance premium for a family of four in America is $28,166 a year. That's 42 percent of the average family's income of $67,565. If you have a job where your employer pays all or most of your health insurance, you don't think much about the cost, although many employees are facing increasingly higher co-pays and deductibles. If you're self-employed and need to pay for your own insurance, however, it's a different story. There's no question, however, that you need health insurance.

 

3.  Distinguish what's deductible.  Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” Basically, these are costs that are commonly incurred by businesses similar to yours and readily justifiable as needed to run your operations.

 

The tax agency stipulates, “An expense does not have to be indispensable to be considered necessary.” But pushing this grey area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, accounting fees, equipment, supplies, legal expenses and business-related software.

 

4.  Don't forget retirement.  Being self-employed gives you a certain measure of freedom, but it doesn’t give you an excuse to skip out on saving for retirement.  In fact, it makes putting money away that much more crucial: Unlike an employee who might have access to a 401(k), you’re on your own.

 

There are several options designed specifically for the self employed and/or small business owner including a SEP (Simplified Employee Pension) IRA, a SIMPLE IRA, or an Solo 401(k) plan.  In addition, an individual can fund a Traditional or Roth IRA.  Consult your tax accountant or financial advisor to determine which plan is best for you.  

 

5.  Don't forget your home office!  You may deduct many direct expenses (such as business-only phone and data lines, as well as office supplies) and indirect expenses (such as real estate taxes and maintenance) associated with your home office. The tax break for indirect expenses is based on just how much of your home is used for business purposes, which you can generally determine by either measuring the square footage of your workspace as a percentage of the home’s total area or using a fraction based on the number of rooms.

 

 

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