Fall Cleaning for the Self Employed
By Wendy Wan Turk
With the evolution of the “gig economy,” freelancers and independent contractors now account for one-third of the US workforce. No longer are many beholden to a big corporation with the nine-to-five grind, but no longer are many protected by the policies and minutiae of the corporate structure. Given that you are now your own boss, what are the Fall cleaning items the self-employed individual should be thinking about?
Minimize Taxes/Maximize Deductions
Like cramming for a midterm or final exam, many self-employed people delay doing their earnings and expenses until mid-December. It’s time to really hone-in on what you are earning for the year and project your earnings for the following year. Why is it a mistake to put off your annoying bookkeeping?
You can make the most of your tax deductions-maybe you need new equipment or supplies. Make these purchases before year-end to make those deductions count. Are there accounts receivables where you expect to get paid either at year-end or the beginning of the new year? Based on your earnings projections, maybe there is flexibility with when you are paid. All these little things can add up to make a big tax difference.
Now for the glamourous stuff! When you’re looking for additional deductions to slim down the bottom line for tax time, one of the largest deductions is through retirement plan contributions. As a self-employed person, you’re eligible to use a Traditional or Roth IRA, a SEP-IRA (Simplified Employee Pension), or an Individual 401(k) plan. Each of these plans has its own limitations and deadlines, so depending on how much you earn, how much you can save, and how much you need to defer, one plan is probably better suited than the others.
Make sure you know each deadline and how each contribution should be made. For example, Individual 401(k)s must be opened before the calendar year-end, whereas SEP-IRAs can be opened by the tax-filing deadline (typically April 15 of the following year), so planning now will save a lot of stress in December.
If you have an individual health plan, use a state-sponsored ACA health care exchange, or even manage a corporate health plan, the open enrollment window has opened where you can choose a plan, change a plan, add or subtract to your benefits. Once the enrollment window has closed, you’re either locked into the plan you already have or you may have lost your opportunity to obtain or change your insurance coverage.
Why is this important? Healthcare costs have steadily risen year over year, so many are finding their existing plans to be too expensive to maintain. Others have found that old plans that had been grandfathered after the Affordable Care Act are now being discontinued permanently, and they must find new plans. And further, maybe health needs have changed—either you need more medical treatment and need a better plan, or you realize you are healthy and can self-insure a catastrophic medical emergency. Now is the time to fine tune those costs.
To Incorporate or To Not Incorporate
As you reflect on your business for the current year, it’s also a good time to preview what will be coming in the next year. The start of the new year is probably the best time to incorporate from a tax-saving, cost-distributing point of view if that has been a looming question. Depending on your profession and your projected income, incorporating can potentially save on at least some Medicare and Social Security taxes, if not more from the corporate tax reform that took place in 2018.
As the days get shorter and as everyone gets entrenched in all the holidays, organizing your self-employed finances becomes more challenging. The best time for Fall cleaning is now and will make the most impact on the bottom line. If you need help with any or all of these tips, that’s what we’re here for!
Securities offered through LPL Financial, Member FINRA (http://www.finra.org/)/SIPC (https://www.sipc.org/). Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Wealth and Investment Management are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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