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The Financial Realities of Becoming Your Own Boss

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.

  1. 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.

  2. 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.

  3. 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.

1Intuit Forecast: 7.6 Million People in On-Demand Economy by 2020,”, 08/13/2015.

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Important Disclosures

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner or investment manager.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

Investing involves risk including loss of principal.


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