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Can there be anything more exciting than being self employed?
Self employment means having no boss. Being you own boss carries
a tremendous responsibilty that can bring with it tremendous
rewards as well. Visit the top websites below to get more self
employment ideas.
A self-employed person works for himself/herself instead of as
an employee of another person or organization, drawing income
from a trade or business. This is less stable than working as an
employee but tends to earn a higher hourly income or rate.
In its simplest form, the individual and his business are one
and the same entity. This makes the owner personally liable for
all the debts of the business. To avoid this, he may choose to
incorporate his business, protecting his personal assets from
creditors or others taking legal action against the business.
Self-employed workers cannot contribute to a 401K plan, unless
they self-incorporate and set up a 401K plan for the company,
but this requires some significant paperwork. Most self employed
set up a Self Employment Plan (SEP) IRA, which allows them to
contribute up to 20% of their income, up to $40,000 in
contributions, to the SEP per year. This is significantly higher
than 401K plans.
If a self-employed person's client goes bankrupt, the bankrupt
company's actual employees usually have first rights to whatever
cash the company had. Next is the IRS, and then all the external
creditors, including the self employed worker.
Self-employed workers are paid directly by clients or by their
business, and some proportion of these payments will be due to
the government as income tax. Unlike an employee of a company, a
self-employed person must pay tax after receiving his taxable
income.
In order to avoid resulting interest payments to the IRS for
paying taxes in arrears, self-employed workers in the United
States usually pay estimated taxes quarterly, and at the end of
the year, the tax return determines if these estimated payments
were enough. Another tax implication is that a self-employed
worker must pay both the employee and employer portions of the
FICA tax (so instead of 6.2%, they must pay 12.4% until they
make enough that FICA is no longer paid). Self-employed workers
must also pay 2.9% instead of 1.45% for Medicare on all income.
On the other side, self-employed workers can take far more
deductions than an ordinary employee. Anytime a self-employed
worker visits a client, the trip expenses are deductible (the
deduction for driving any car is $0.385 per mile plus any tolls
incurred).
Other expenses such as uniforms, computer equipment, cell
phones, etc. can be deducted if there is a legitimate business
use for these items. Since the chances of being audited by the
Internal Revenue Service are relatively slim, many self-employed
workers likely overstate their deductions. One deduction that
has a reputation for raising a "red flag" at the IRS is the
deduction for a home office.
Many people would simply put a desk in an attic, perhaps with an
old computer on it, and try to take a deduction (for
depreciation). Home office deductions are legitimate, although
it has to be a legitimate office. The IRS will also overrule
other flagrant deductions, such as buying a Yacht and naming it
after your company. If you're an accountant or dentist, such a
deduction likely won't be valid.
If someone is self-employed, but works for only one client, and
is otherwise indistinguishable from a regular employee, then the
IRS will probably require the company to treat him as a regular
employee.
The US Internal Revenue Service provideds Schedule C and SE of
Form 1040 to assist self-employed workers in payment of the
proper amount of tax.
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