Working for Yourself

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 will need to purchase your own health insurance, though that has become easier, thanks to the health care exchanges. If you are younger without a substantial nest egg, you should probably also get disability insurance. It’s best to buy disability coverage while you are employed by someone else, or you could struggle to get coverage. Both health and disability insurance premiums are tax-deductible if you’re self-employed.

Funding retirement. Fulltime employees can often contribute to 401(k) plans using payroll deduction, and the money they sock away typically earns a matching employer contribution. But if you are self-employed, all this will be on your shoulders. You might fund a SEP IRA, where you could stash as much as 20% of your net self-employment income. Alternatively, consider a solo 401(k), which would allow you to save as much as $54,000 in 2017, or $60,000 if you’re age 50 or older.

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.

Next: Working Abroad

Previous: Losing Your Job

Blogs: On Our OwnLess Green and Going It Alone

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