Being self-employed means you have lots of things on your plate. It’s easy to get overwhelmed, but you’re not alone in this. Here’s a short guide on common ways to manage benefits, taxes, and take control of your personal finances.
Taxes
Preparing for taxes when you’re self-employed can be tough. Set aside part of each paycheck so you’re ready for Tax Day. And save yourself the stress when alarmist emails about tax filing deadlines start arriving every spring.
Since you’re controlling this instead of an employer, you can adjust your withholding any time. Added an extra shift for a few weeks? Save a little more to cover taxes from this added income. Hours temporarily reduced and need more immediate cash available? Reduce your withholding amount accordingly for the weeks or months impacted.
Each time you get paid, a percent of your paycheck is put aside for taxes automatically –– meaning no more tax surprises.
Health and Dental
The Affordable Care Act standardized many elements of finding and purchasing health insurance coverage. ACA-compliant plans all cover essential health benefits, and services including the Health Insurance Marketplace let you compare plans from different providers and choose the benefits and level of expense that’s right for you. Comparing plans helps ensure you’re getting the best available price, and even lets you check for tax credits that might help you pay for healthcare coverage if you qualify –– over 90% of people do.
For health and dental insurance, you can change providers or plans each year during the period known as Open Enrollment. You may also be eligible to change your coverage through an exemption for Qualifying Life Events if your employment changes significantly or you experience other major life changes.
Retirement
Investing for your retirement can seem overwhelming. The most important thing: just get started. Investing a little bit each time you get paid builds a positive habit and lets your money start working for your future. Just like with your taxes, set aside a percent of each paycheck whenever you get paid. And the best part? This account is yours! It’s not tied to a job or where you live. Wherever life takes you, your retirement plan goes with you.
For retirement, you can choose accounts with tax-savings advantages, including a Roth or Traditional IRA, and start building a portfolio that fits your needs. What’s the difference between the two? It’s all about when your contributions or withdrawals get taxed by the IRS.
For a Traditional IRA, you can take a tax deduction for the year you contribute to the plan: if you save $1,000 in an IRA this year, you can exempt that $1,000 from your Federal income taxes. Which is great! This account can grow tax-free until you withdraw it (more on withdrawal rules in a second). When you withdraw, you pay income tax on money taken out of your Traditional IRA, just as if it was a regular paycheck.
From either type of IRA, the money is “locked-in” to some extent, in that there are penalties in the form of additional tax burdens if you withdraw funds prior to age 59 ½. Anything you withdraw from your ROTH IRA after that minimum age is tax free. You paid income tax on this money when you first earned it, and any growth or interest earned is yours to keep.
All this sound complicated? You’re making one decision (ROTH vs. Traditional IRA). Based on your income, career, and retirement plans, a financial professional or a service like Catch can help you decide the best option. But the good news: doing either is much better than doing nothing. Let this be the year you think beyond a standard savings account—or not saving at all and hoping for the best.
TL;DR? Just get started saving.
Savings
So, should you ditch a savings account entirely and put everything into retirement? No –– remember, you should avoid penalties for early IRA withdrawals if at all possible. So those funds are yours, but don’t think of them as accessible for regular expenses or unusual purchases.
Besides, you’ve been responsible –– you made it this far in an article about your finances. You’ve started planning for retirement and setting aside money for taxes. That’s enough to wear anyone out. You know what you deserve? Yep, a vacation.
But plunking down the cost of flights, hotels, and other expenses is a lot for most anyone’s paycheck. Planning ahead and saving isn’t just about retirement and being responsible. It’s also a path to having more fun––and not breaking the bank to do it.
Those monthly habits you’re honing to save for taxes, retirement, and to pay for healthcare coverage –– these are mental muscles you’re building. Flex them for more fun and immediate reasons too. Who looks good? You do.
Start Building Your Financial Future Today
We get it: saving and planning for the future is complicated, and often even a little intimidating. Also, it goes against parts of our human nature that push us towards immediate gratification. It can’t all happen at once. Just take small steps in the right direction.
