Self-Employed: Tax Issues

Being self-employed has many advantages beyond being your own boss. But it also comes with challenges, especially how to handle taxes. As we head into the final quarter of 2017, here are some things to know.

Retirement plans for the self-employed

If you are self-employed, you don’t have access to an employer’s 401k plan, but there are other avenues to save money for retirement. These contributions are deductible to your business and grow tax-deferred.

Several retirement plans can be used by the self-employed:

  • SEP IRA plan
  • SIMPLE IRA plan
  • SIMPLE 401(k) plan
  • “Solo” 401(k) plan

The type of retirement plan you choose depends on your business, income flows, and specific circumstances. Talk to us so we can consider the complexities and make sure you have the right plan, as there are pros and cons to each type.

Business deductions

When you have your own business, you can deduct all your current operating costs of running that business. To be deductible, expenses must be both “ordinary” (common and accepted in your field of business) and “necessary” (appropriate and helpful for your business). Keep your receipts.

Because business deductions will lower your taxable income, you should take advantage of any and all deductions! If in doubt, ask us. You can deduct a variety of business expenses, including start-up costs, home office expenses, marketing and advertising, and computer and office equipment.

Healthcare expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which allows you to deduct up to 100% of the cost of health insurance that you provide for yourself, your spouse, and your dependents.

In addition, if you are enrolled in a high-deductible health plan, you could establish and contribute to a health savings account (HSA), which is a highly tax-advantaged account that you can use to set aside funds to pay qualified medical expenses, either this year or many years in the future.

Contributions made to an HSA account are generally tax deductible, they grow tax-free, and can be taken out without tax when used for the qualified medical expenses. Depending on your state, HSA contributions may not be subject to state taxes.

Estimated tax payments

The self-employed must make quarterly estimated tax payments (with IRS Form 1040) to cover federal tax liability. You may have to make estimated tax payments to your state as well. Estimated tax payments are generally due each year on the 15th of April, June, September, and January. Watch out – if you don’t make estimated tax payments on time, the IRS may charge penalties and interest, which can add up to a large tax bill at the end of the tax year.

When you work for an employer, payroll taxes for Social Security and Medicare are split between you and the employer. For the self-employed, you pay the total of both halves – as both employee and employer. But then you get to deduct half the costs, for the “employer” half.

The self-employment tax rate on net earnings (up to $127,200 in 2017) is 15.3%, with 12.4% going to Social Security and 2.9% allotted to Medicare. Any amount over the earnings threshold is generally subject only to the Medicare payroll tax. However, for self-employment and wage income above $200k you pay an additional 0.9% additional Medicare tax. (For married filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000.)

If you file Form 1040 Schedule C, as a sole proprietor, independent contractor, or statutory employee, the net income listed on your Schedule C is self-employment income and must be included on Schedule SE, which is filed with your Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.


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– Samuel Johnson (1709-1784)