Posted on 01/30/2013 1:04:51 PM PST by Kaslin
Dear Carrie, I'm 55 and in a position to leave my full-time job and work freelance from home. I'm trying to weigh the financial benefits vs. costs. Any tips? --A Reader
Dear Reader, When thinking about working at home, most people focus only on the pluses: no commute, flexible schedule, more personal time, little or no cost for things like transportation, wardrobe and eating out. It all sounds great. And it can be. By working freelance from your home, you'll certainly cut down on a lot of work-related expenses.
But what might you be giving up? Most full-time jobs come with a package of benefits that may far outweigh the everyday costs of going to work. And what additional expenses might you be taking on?
Working for yourself means a lot of freedom, but it also means a lot of responsibility. Many of those responsibilities are financial, so you're wise to consider them carefully before you start planning your going away party.
You are your own benefits provider
This is probably one of your biggest costs. If you've had group health insurance through your employer, you may be in for a shock at just how expensive an individual policy can be. You may be able to get health insurance through a professional organization, but chances are it will still be considerably more than you're used to paying.
Likewise, if you've been getting life insurance through work, you'll now be on your own for that as well. At 55, even the cost for a term-life policy can be significant.
And what about sick days and vacation pay? When you work for yourself, there's no one to cover for you.
You pay all Social Security and Medicare taxes
When working for a company, it's easy to forget that your employer picks up half the bill for Social Security and Medicare taxes. And we're quite used to having the other half deducted from our paycheck. But working for yourself, you pay the whole amount in the form of self-employment taxes. For 2013, that tax is 15.3 percent on earnings up to $113,700. If you earn more than that, you'll still pay a 2.9 percent Medicare tax on any additional earnings -- plus a 0.9 percent surtax on incomes over $200,000 for singles and $250,000 for married filing jointly. This can add up to quite a tax bite.
The cost of doing business can increase your bills
Insurance and taxes are probably the biggest costs, but the everyday cost of doing business can add up, too. Since you'll be working from home, you'll use more water, heat and electricity. Utility bills are bound to go up.
You'll also have to pay for office equipment, supplies and any additional computer and Internet needs. Generally, an employer has experts available to help with downed computers or malfunctioning printers. Once again, you'll have to be your own resource and foot the bill for both purchase and repairs.
Retirement savings is up to you
With no 401(k) contribution automatically deducted from your paycheck --and no employer match -- you'll have to be especially vigilant about saving for retirement.
If you do go freelance, I'd suggest looking into a couple of small business retirement plans. One is a Simplified Employee Pension Plan (SEP-IRA), which is easy to open and requires very little paperwork. A SEP lets you make fairly high annual contributions -- potentially much higher than an employer's 401(k). The maximum is 25 percent of your gross self-employment income (20 percent of net income) with a cap of $51,000 for 2013. Just note that if you decide to hire an employee, you would be responsible for contributing an equal percentage to their account.
The other is an Individual 401(k) -- either traditional or Roth. This plan requires a bit more paper work but allows even higher annual contributions - 100 percent of earnings up to $17,500, plus 20 percent of net self-employment income up to a total of $51,000. If you're 50 or older, you can contribute an additional $5,500 to a traditional 401(k) (not to a Roth), for a potential annual total of $56,500. And you can borrow against your savings.
Both plans have the same tax advantages and withdrawal rules as an IRA. And both let you vary contributions -- or skip them entirely -- according to your yearly business needs.
Plus, you can contribute to a small business plan and a traditional or Roth IRA in the same year, increasing your potential to save.
You'll need a good accountant
Understanding the costs shouldn't necessarily dissuade you from working for yourself. On the plus side, many of these expenses -- home office, health insurance premiums, even a portion of the self-employment tax -- may be tax deductible. Just be sure you have a good accountant to help you take full advantage of all the deductions allowed.
An employment change like the one you're contemplating will take discipline in terms of work and money management. But it can also be exciting and rewarding -- both personally and financially -- as long as you go into it with your eyes wide open. Best of luck.
I’ve been self-employed for 25 years, and I’ve generally found the opposite: large corporations are reliable in payments, small ones are the ones that may have cash flow issues and stall on getting a check out.
Sorry, but no.
But when you find her, do not hesitate for an instant; gals like us don’t last on the open market for long, LOL!
You are your own benefits provider
Not if you spouse is working and you qualify under their plan.
And what about sick days and vacation pay? When you work for yourself, there’s no one to cover for you.
um... you stay at home or leave when you want, that’s one of the great things about working for yourself.
You pay all Social Security and Medicare taxes
um... no. No you don’t pay ANY social security or medicare taxes! that’s one of the BIGGEST reasons to work for yourself. And the best part is... you will still get BOTH by appling for the benefits under your spouses name.
The cost of doing business can increase your bills
yawn, big deal, and the small extra costs are tax deductable.
Retirement savings is up to you.
um... yeah that’s sort of the whole point! and you’ll have a lot more money to save by working for yourself.
bah, a good business generates all the new business it needs through referals from happy customers.
And as far as getting paid goes.. um.. might want to try getting paid in advance. It sort of solves that issue.
***** “12 laying hens (raised from chicks by me) equaled 1/4 pig butchered. I was just giving an example. :)”
We have tons of Wild Hogs round here ... they don’t lay eggs... so laying hens are my pick.
TT
Wild hogs scare the cr@p outta me! Ran into one near a dumpster while stationed in Germany in another lifetime.
I was IN the dumpster before he spotted me! *SHUDDER*
Working for onesself is the only way to go.Its up to you how much money you want to make and if you love what you do then you never work another day as long as you live.Its got its good days and for crap days for sure.
You pay all Social Security and Medicare taxes
um... no. No you don’t pay ANY social security or medicare taxes! that’s one of the BIGGEST reasons to work for yourself. And the best part is... you will still get BOTH by appling for the benefits under your spouses name.”””
Don’t know where you get this idea.
Form SE is filed with your 1040 income tax forms & you are the employer & the EMPLOYEE-—you pay all of it.
Granted, you pay on your net income, not your gross, but you still must pay ‘both halves’.
I have run my own business for over 20 years and I don't pay a dime in social security or medicare, because I don't earn a salary and don't even receive a paycheck, I earn my income in the form of all the profits generated and it is reported as such.
Any business owner who is paying social security and medicare is doing so voluntarily because they want to collect, and if you don't pay into the system you can't collect. BUT if they like me have a spouse who has a job that is paying into the system, they can collect both as from their plan, the same as a housewife can collect off her husbands plan even though they never paid into the system.
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Always mention that you know how to cut costs without cutting corners. When you're your own boss, it is a valuable skill.
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