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Self-Employed?  These Tips Can Help You Prepare for What's Ahead

Self-Employed? These Tips Can Help You Prepare for What's Ahead

March 01, 2022
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If you are a freelancer, consultant, gig economy worker or self-employed, it’s important to know your options when it comes to retirement and savings.

The pandemic changed the way many of us work and it had a most dramatic effect on women workers, with greater job losses among women than men according to Pew Research[1].  The job losses among women were most acutely felt among those without a college degree and the reasons vary, from lack of access to childcare and how women are overrepresented in certain health care, food preparation and personal service occupations that were sharply curtailed at the start of the pandemic.

With this abrupt change in working conditions, many women who had the choice to work remotely, decided to try a freelance or “gig” position, which, according to Good Morning America[2] is an umbrella term that applies to “all people who effectively work as their own bosses, whether on app-based platforms or as entrepreneurs and freelancers”.

DoorDash, a popular delivery app, says in the past year, more women have signed up as “Dashers” to make up for lost income and to cover expenses.[3] While the flexibility can be a lifeline for women with families to care for, it doesn’t come with benefits like retirement savings that a corporate position might.

How can you plan for retirement, savings and other life milestones as a self-employed worker? Here is our advice:

  • Don’t get behind. Often, as a 1099 employee (freelance or consultant arrangement) where you are self-employed, taxes such as income, social security and Medicare aren’t taken out of your paycheck[4] and are your responsibility. Start a strategy to save these taxes and pay them on a quarterly basis so you aren’t hit with a large tax bill in April.
  • Work with a financial professional and accountant to understand your tax obligations and applicable deductions. The Social Security Administration outlines taxes you owe - and deductions owed to you - if you are self-employed.[5] Take advantage of home-based business deductions such as homeowner’s insurance, homeowner’s association fees, cleaning services or cleaning supplies, mortgage insurance and interest and utilities such as electricity, internet, heat and phone.[6]
  • Learn about the SEP IRA – For sole proprietors or freelancers, the SEP is one huge advantage of working for yourself. Contribution limits are the highest of any type of IRA: up to $61,000 for 2022. That’s way more than the $6,000 max the IRS lets you save in a traditional or Roth IRA and nearly three timesas much corporate worker bees are allowed to save in their 401(k)s. The downside: There’s no Roth version of the SEP, so you’ll pay taxes on distributions in retirement. But… you’ll get the upfront tax deduction on your contribution, too!

There are a lot of rules about how much you can sock away in a SEP. (For example, your annual contributions can’t exceed the lesser of 25% of your compensation or $61,000, according to the IRS.[7]) And if you have employees, you’re required to contribute to their plans, at the same proportion of salary as you do yourself. You do get a tax deduction for your largesse. A SEP IRA is for you if… you run a company with no employees (except yourself) or have just a few that you want to reward with a retirement plan. The high contribution limits make a SEP an excellent way to amass tax-deferred retirement funds if you’re behind in your savings. We’ll go into more detail about a SEP IRA our next blog.

As we enter year three of living and working within a pandemic, our situations are different than they may have looked in 2020, but the basics of financial planning haven’t changed. Be prepared and know your options so you can work toward your goals.

 

Katy Ufferman (ChFC) is a chartered financial consultant with Maxwell Financial Management and leads the firm’s practice dedicated to helping women with their investments and retirement planning. Read her latest blog at https://www.maxwellfm.com/blog.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

[1] https://www.pewresearch.org/fact-tank/2022/01/14/some-gender-disparities-widened-in-the-u-s-workforce-during-the-pandemic/

[2] https://www.goodmorningamerica.com/living/story/women-turn-app-based-delivery-platforms-work-flexibility-80395932

[3] https://www.goodmorningamerica.com/living/story/women-turn-app-based-delivery-platforms-work-flexibility-80395932

[4] https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee#:~:text=Generally%2C%20you%20must%20withhold%20and,on%20payments%20to%20independent%20contractors.

[5] https://www.ssa.gov/pubs/EN-05-10022.pdf

[6] https://www.uschamber.com/co/run/finance/home-based-business-tax-deductions

[7] https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps#:~:text=Contributions%20an%20employer%20can%20make,2021%20and%20%2457%2C000%20for%202020)