4 finance tips for the self-employed
Could unemployment be the start of a beautiful career? For laid-off workers and recent retirees, the recession has inspired some of them to embrace their inner entrepreneur and start their own businesses or go freelance. In fact, about one in 9 workers today are self-employed. If that’s you, here’s what you need to know:
1. Pay taxes quarterly
Warning: The companies that pay you probably won’t withhold taxes, so checks may seem bigger than they really are (since you’ll have to pay those taxes eventually). To abide by IRS rules and avoid an overwhelming payback come tax time, you should pay taxes quarterly. And make sure you pay enough self-employment tax. Click on both of those links for guidance on how to estimate what you owe. If you’re still baffled, hire a tax preparer (see tip #4).
2. Deduct, deduct, deduct
Good news: When you work for yourself, you’re eligible for tax deductions like half the Social Security and Medicare taxes you pay, all of your medical insurance premiums, and—thanks to the new Small Business Jobs Act (SBJA)—the health insurance you buy for you and your family. Also try deducting office supplies and equipment, home office expenses, and business expenses like travel, meals, entertainment, union dues, subscriptions, and technology like your computer, BlackBerry, or cell phone. Keep all your receipts! (But note that—thanks again to the SBJA—you no longer have to log work vs. personal calls; you can just deduct it all. Phew!)
3. Retire the right way
- Simple IRAs. A step up from IRAs, these allow you to set aside (and deduct) up to $12,500/year. One catch: You have to sign up before October 1 of the current tax year.
- SEP-IRAs. A simplified employee pension, or SEP, may be right for people with higher incomes, since you can contribute up to 25% of your first $275,000 in income, or $55,000. (Naturally, you can always set up a much smaller account.) You can open a SEP right up to the April 15 tax deadline.
- Individual 401(K). Also known as a Solo 401(k), this works like a 401(k) added to a SEP-IRA. The rules are complex, so definitely consult an accountant.
4. Try a tax preparer
Self-employed folks may want to find a preparer with top credentials, like a CPA (certified public accountant). A cheaper option is an enrolled agent, which you may be able to find at a chain like H&R Block. Ask what the preparer charges; preparers at the same company could have different rates. And remember to review the forms carefully: You are responsible for making sure all the info on your return is accurate.