Planning for the Self-Employed
estate agents, carpenters, writers, plumbers and other independent
contractors have cut the corporate umbilical cord in exchange for
more flexible hours and the independence to pursue their own
to the U.S. Census Bureau, businesses without paid employees grew
2.3% between 1999 and 2000, from 16.2 million to 16.5 million.
However, if you’ve been thinking about joining the ranks
of the self-employed, you’d better have a financial plan.
While working for yourself affords some new freedoms, it
also presents unique financial challenges.
Here are some important things to consider:
up your business. One
of the first decisions you'll need to make is whether to be a sole
proprietor or choose some form of incorporation, such as a C
corporation, subchapter S or limited liability company. Most
self-employed individuals operate as sole proprietors, because
it's less complicated and less expensive than incorporating.
However, incorporation may be attractive if you have concerns
about legal liabilities, since the various forms of incorporation
can offer limited liability protection.
Through your decision-making process, be sure to consult
with professional advisors who can help you choose what’s best
cash flow. As an
independent contractor, you may face periods of uneven cash flow.
Without scheduled paychecks from an employer, you could end up
flush one month and penniless the next.
To ensure that you always have cash at hand, develop a
budget and a financial plan that allow for your swings in income.
Determine an average of how much revenue you can count on,
and use that as a base for monthly expenses.
During months that you make more, stash the extra cash in
an interest-earning savings account or money market account and
draw from it during months you have little or no income.
Also, you should consider paying yourself a salary and
keeping your personal and business cash in separate accounts.
Combining them can complicate tax deductions and potential
insurance. First, do some research and see if you can piggyback on
your spouse's benefit plan. Otherwise, you must make plans to
provide your own health, disability and life insurance.
Unfortunately, many self-employed individuals ignore this need
once they leave their companies.
According to the National Association for the
Self-Employed, more than 60% of America’s 41 million uninsured
are from households headed by a self-employed individual. If you can't get health insurance through a working spouse,
consider a medical savings account (MSA). An MSA allows you to
take a tax deduction for the money you put into the account to pay
for out-of-pocket medical expenses associated with a
high-deductible healthcare policy. If you don't spend all the
money you put into the account, it can stay there and earn
Finding a good, affordable disability policy to replace
lost income can be tough for the self-employed because as
disability insurers generally work with groups. One possibility is
to join an industry trade association or alumni organization that
offers access to disability insurance.
Life insurance can help provide money to pay off your mortgage or
send your kids to college if you die.
There are many types of life insurance, ranging from term
insurance (death benefit only) to cash value (cash accumulation
and death benefit) to combinations of the two.
However, be aware that getting life insurance on your own
might be a problem if you have medical issues that sometimes
aren't questioned under a group plan.
for retirement. If
you’re self-employed, you can forget about 401(k)s. They're too complicated and expensive for your purposes.
Instead, research tax-deductible vehicles, such as Keogh plans and
simplified employee pension plans SEPS, as well as traditional
individual retirement accounts (IRAS). You also may want to
consider nondeductible alternatives, such as a Roth IRA and
annuities. If you
choose to incorporate as a small business, consider getting a
savings incentive match plans for employees (SIMPLE) IRA.
Designed for companies with fewer than 100 employees
(including self-employed workers) with no other qualified plan,
SIMPLE IRAs offer income tax-deferred savings and
taxes. The bad news is that, unlike employee paychecks, taxes
aren't taken out of income received by an independent contractor.
You're responsible for paying income and Social Security taxes. As
a result, it's important that you save for taxes from each payment
you receive, before you start spending the income. Otherwise, you
may not have the money on hand to pay any taxes due when it's time
to file your quarterly estimated or annual return.
On the other hand, the self-employed may be eligible for
certain tax breaks. Contributions to retirement plans, health insurance premiums,
auto expenses, travel costs, meals, entertainment and
office-related expenses all may be deductible.
Make sure to keep all of your receipts so you can save
during tax time.
on your own can be both intimidating and exciting.
Whether you are planning for your new opportunities as a
freelancer or growing a small business, meet with a certified
financial advisor so he or she can help you manage your finances
during your pursuit of independent success.
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Does not take into account transactions fee's or expenses. Past performance does not guarantee future results.
This information is provided for informational purposes
only. The information
is intended to be generic in nature and should not be applied or
relied upon in any particular situation without the advice of your
tax, legal and/or your financial advisor.
The views expressed may not be suitable for every
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Advisors Inc. Member NASD. American Express Company
is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
This communication is published in the United States for residents of
North and South Carolina only; and this advisor is licensed only in
the states of North and South Carolina."
Roy P. Janse
Financial Advisors, Inc.
IDS Life Insurance Company
1150 Haywood Road
Greenville, SC 29615
Phone: (800) 554-0805 x141
Fax: (864) 234-7139