In today's dynamic working environment, more and more people are opting to be self-employed instead of drawing a traditional salary. Being self-employed doesn't really have to feel like running a business. As an independent contractor, you can have long-term assignments for a set employer and even enjoy regular paychecks. However, your tax treatment, your benefits and your general relationship to work will be very different from your status as a salary earner.
As a salaried employee, your income is set by your employer, although you can periodically ask for raises or promotions. When you are self-employed, you set your own rate of pay, either on a per-hour or per-project basis, in negotiation with the client. Generally speaking, most companies pay more to self-employed workers because the company doesn't have to bear the cost of payroll taxes, the cost of benefits or the liabilities that come with being an employer.
Workers typically perceive salaried positions as having better job stability. After all, as long as you don't get let go, you know you'll be getting another paycheck in two weeks. However, given the willingness of many companies to engage in layoffs, salaried positions are not as secure as they once were. When you're self-employed, you know that when your assignment ends, you have to find another one. With adequate planning, you can gain a sense of security from being your own boss.
Salaried positions frequently offer benefits like employer-provided group health insurance, paid vacation and sick leave and access to employer-sponsored tax-deferred retirement plans. When you're self-employed, you don't get any of these from your employer. You can, however, provide them yourself. Given that the value of employer-provided benefits keeps going down due to increased employee co-pays for health insurance, decreased employer matches for retirement plans, and requirements to work on vacation, among other issues, fending for yourself may not be a bad deal. In many cases, you could take more vacation time and get better benefits at about the same cost. The one big advantage to a salaried and benefited position was the ability to get group health insurance that covered pre-existing conditions. That advantage is being eliminated by The Patient Protection and Affordable Care Act's ban on pre-existing condition limitations that goes into effect in 2014.
When you have a salaried position, your employer withholds income taxes from your paycheck as well as your share of the contribution for Social Security and Medicare. He also pays his share. Expenses that you incur out-of-pocket for work, other than commuting, are tax-deductible, however you'll need to itemize deductions to write them off. They are also subject to a limit: You can only write off expenses that exceed 2% of your Adjusted Gross Income. In addition, if you are subject to the Alternative Minimum Tax, you won’t be able to write any of them off. When you're self-employed, you pay self-employment tax, which is your share of the Social Security and Medicare contribution plus the employer's equal share. In the 2013 tax year the self-employment tax rate is 15.3 percent. You will, however, be able to deduct half of your self-employment tax from your taxable income. Since the IRS treats you as if you're running your own business, you can write off just about any expense that you incur in your self-employment position. This can lead to significant tax savings if you have a good strategy. These deductions are also not subject to AGI limits and also are not reduced by the AMT.
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- IRS: Form 1040 - U.S. Individual Income Tax Return
- IRS: Form 6251 - Alternative Minimum Tax - Individuals
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