According to Intuit, independent contractors will account for 43% of the U.S. workforce by 2020—up from 36% in 2015.1
Although being your own boss can mean greater flexibility, it requires shouldering many financial responsibilities normally assumed by an employer. Here are the three biggest—and what to know about each.
Tax payments: Without an employer to withhold income and payroll taxes, you’ll need to make estimated tax payments to avoid potential penalties. You’ll also be on the hook for both the employee and employer portions of Medicare and Social Security taxes, though the employer portion is tax-deductible.
Tax deductions: Most entrepreneurs earn what’s known as pass-through income, which is taxed at individual rates. Under the new Tax Cuts and Jobs Act, many pass-through business owners will be able to deduct 20% of their qualified business income, subject to certain limitations. In addition, business-related expenses can also be deducted, including office space, retirement contributions, technology and travel.
Retirement savings: Self-employed workers can maximize their retirement savings by making both employer and employee contributions. For example, individual 401(k) plans allow you to contribute as much as $18,500 as the employee, plus up to 20% of your net earnings as the employer, for a combined maximum of $55,000 in 2018. (The employee contribution for those 50 and older is $24,500, for a combined maximum of $61,000.) You may also be able to deduct employer contributions as a business expense.
If you’re thinking of becoming self-employed, consider consulting a tax or financial advisor, who can help analyze how such a change might affect your personal financial situation.
1“Intuit Forecast: 7.6 Million People in On-Demand Economy by 2020,” businesswire.com, 08/13/2015.