4 Ways to Keep Your Taxes Down If You Are Self-Employed

Self-employment has its perks, but being your own boss can lead to headaches come tax season. In addition to the income tax, you’ll need to pay self-employment taxes that support the Social Security and Medicare programs.

But there are ways to reduce the amount you owe.

At the start of the new year, you may receive a 1099-NEC tax form or 1099-K tax form. You also may have received other income in the form of cash or checks for work performed in the previous year from being self-employed.

One of the best ways to lower your taxes paid on self-employed income is to increase your business expenses. As a self-employed taxpayer, you can write off expenses and take certain deductions against that income to help reduce your tax liability.

However, it is very important to hold on to all receipts for any business expenses related to purchases or professional services received and to keep accurate, up-to-date records of your business’s activity.  

Here are four easy ways to keep your taxes down if you are self-employed.

1. Driving expenses

If your self-employed income is from operating a ride-hailing or delivery business through platforms such as Uber or Lyft, you will be able to take a vehicle expense deduction. This allows you to recover some costs associated with wear and tear on your vehicle to operate your business.

Be sure to keep track of your business miles, personal miles and commuting miles as you will need to provide this information to take the deduction.

2. Home office expenses

Home office expenses is another deduction that you can take advantage of if you utilize part of your home as your office space to conduct business. A home office deduction can be calculated using the simplified deduction method, which is a prescribed rate of $5 per square foot of your home that is used for business up to 300 square feet.

Or you can use the actual expense deduction method, which allows you to write off a percentage of expenses related to rent, utilities, mortgage interest, property taxes and repairs and maintenance.

Other common deductible expenses related to your home office include website services, computer software, merchant fees, electronics and other supplies needed to run your business. 

You also can deduct communication expenses, such as a portion of your internet and cellphone bill, as long as those costs are directly related to your business. For example, if 20% of your time on the phone is spent on business, you could deduct 20% of your phone bill.

3. Depreciation deductions

If you purchase equipment, such as a laptop or a leaf blower for your business, you can categorize it as an asset and take a depreciation deduction — which allows you to spread the expense over the useful life of your asset.

For example, let’s say you purchased a new ergonomic office chair at the beginning of the year for $400. You will be able to classify this as an asset and take a $57.14 depreciation expense deduction each year over a useful life of seven years, which is standard for office furniture.

You can also take a Section 179 election to fully expense and deduct the asset in the current year — instead of depreciating it — to further reduce your tax liability. This is an annual income tax deduction taken by filling Form 4562 with your tax return.

4. S Corp election

Another way to keep your taxes down is by changing your business structure into an S Corp election with the IRS. You can make the S Corp election for your corporation or limited liability company.

For example, when operating your business as an S Corp, if your business income is $100,000 per year and you pay yourself a reasonable salary of $60,000, all income that exceeds your salary — $40,000 in this case — is not subject to self-employment taxes. Only the salary of $60,000 is subject to self-employment taxes. However, if operating your business as a sole proprietor, self-employment tax is due on the entire amount of $100,000 business income.

Financial Reviewer, RetireGuide.com

Ebony J. Howard is a certified public accountant and financial reviewer for RetireGuide.com. Her background is in accounting, personal finance and income tax planning and preparation. Ebony holds a dual degree bachelor’s and master’s in accounting from Clark Atlanta University. She is passionate about making an impact in the community, sharing her knowledge in financial literacy and empowering people to achieve greater financial freedom.

Source: kiplinger.com

Medical Expenses Retirees (and Others) Can Deduct on Their Taxes

Individuals with big medical bills got a tax win in late 2020. Taxpayers who itemize on Schedule A can continue to deduct qualifying medical expenses to the extent that the total amount exceeds 7.5% of adjusted gross income. The AGI threshold was scheduled to climb to 10% beginning in 2021, but instead, Congress permanently kept the 7.5% threshold. 

You can claim medical expenses that are not reimbursed by insurance for yourself, a spouse and your dependents. To qualify as a deduction, the expense must be incurred primarily to alleviate or prevent a physical or mental disability or illness. 

The broad list of eligible expenses includes out-of-pocket payments for medical services rendered by doctors, dentists, optometrists and other medical practitioners; mental health services; health insurance premiums (including Medicare Parts B and D); annual physicals; prescription drugs and insulin (but not over-the-counter drugs); hearing aids; and transportation to and from the doctor’s office. But cosmetic surgery to improve your general appearance, hair transplants and teeth whitening are not eligible. For more information, about what qualifies, see IRS Publication 502.

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Long-Term Care and Insurance

A nurse helps a nursing home resident get tucked into bed.A nurse helps a nursing home resident get tucked into bed.

If you or your spouse requires long-term care, you may be able to deduct the unreimbursed cost for in-home care, assisted living and nursing home services as medical expenses. The long-term care must be medically necessary for a chronically ill person. A person is considered chronically ill when at least two activities of daily living cannot be performed without help for 90 days or more. Anyone in need of long-term care because of dementia or another cognitive impairment is also considered chronically ill if substantial supervision is needed to protect the individual’s health and safety. The chronic illness must be certified by a licensed health care practitioner. The cost of meals and lodging at an assisted living facility or a nursing home also counts if you are there mainly for medical care. 

If you purchased a long-term-care insurance policy, a portion of your premium payment qualifies as a medical expense. The deduction is capped based on age. For 2020 returns, the maximum per-person limits are $5,430 for taxpayers 71 or older, $4,350 for taxpayers 61 to 70, $1,630 for individuals who are 51 to 60, $810 for people 41 to 50 and $430 for those 40 and younger. These amounts are a bit higher for 2021: $5,640, $4,520, $1,690, $850 and $450, respectively.

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Home Improvements

A house that is being renovated. A house that is being renovated.

The cost of certain home improvements to accommodate a disability or physical illness may also be deducted as a medical expense—for instance, ramps, wide doorways or entrances, railings and wheelchair lifts. But an elevator is generally not deductible because it adds value to the house.

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Weight Loss Programs

A man standing on a scale.A man standing on a scale.

Weight reduction programs that are ordered by doctors to treat obesity or hypertension or alleviate another ailment are deductible medical expenses.

Diet foods, weight loss supplements or reduced-calorie beverages, however, are not. A weight reduction plan to improve your appearance doesn’t count either.

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Expenses for Service Dogs

A man petting a service dog.A man petting a service dog.

Veterinary costs for a service dog to assist the visually impaired and others with physical disabilities are eligible medical deductions. The same is true for the cost to buy and train the dog, plus feed and groom it. An emotional support animal also counts if it’s needed primarily to alleviate a mental disability or illness.

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Genetic Testing

A scientist doing a genetic test.A scientist doing a genetic test.

If you use a DNA ancestry company for genetic health testing, such as 23andMe, the portion of the DNA collection kit’s cost that pertains to genetic testing may be treated as a deductible medical expense. 

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Deductions for Self-Employed Workers

The owners of a bakery smile and laugh. The owners of a bakery smile and laugh.

Self-employed individuals get an even greater tax benefit. They can deduct the cost of health insurance and long-term-care premiums (subject to the age caps above) for themselves, a spouse and any dependents, regardless of whether they itemize on Schedule A. The costs can be claimed on Form 1040, Schedule 1, line 16, without regard to the 7.5% threshold.

Source: kiplinger.com

TurboTax’s Experts Could Help You Take Taxes Off Your To-Do List — and Get the Most Out of Your Return

Tax season is here again.

And based on what 2020 threw at us, it may feel like filing our taxes is going to be even more complicated than usual. Which is why there is no shame in calling in an expert to help navigate the murky waters of your 2020 tax returns.

You don’t even need to leave your couch to get the expert advice you need to file with confidence. If you want to file with the help of a real tax expert, or let an expert do your taxes for you from start to finish, TurboTax Live has you covered.

Yep. You can talk live on your screen with real tax experts thanks to TurboTax Live. So no matter what your unique tax situation may be, whether you have questions about big life changes, investments or deductions, a real live tax expert will be there to help.

You Did a Lot This Year: Let TurboTax Live Experts Help You Get the Most Out of It

You probably know TurboTax as the DIY way to get your taxes done right — and it still is. But TurboTax Live takes it a step further by having real tax experts available to help with your taxes — or even do it all for you.

There are several options to choose from, but all you need to do is answer a few simple questions, and TurboTax will help you find the right tax solution for you. Whether you have a single W-2, are self-employed or somewhere in between, you’ll get the right amount of help you need.

With TurboTax Live, you can talk live on screen with experts to get unlimited advice about your tax situation and get answers to your questions.

Like, what does getting married or having a new baby mean for your taxes? Or what should you do if you sold stock for the first time?

If you don’t need an expert to do your taxes for you, you can still have an expert give a  final review of your return before you file. Either way, you can be confident your return is done right.

So while yes, 2020 was a doozy, doing your 2020 taxes doesn’t need to be. Get started here to let TurboTax Live experts help, or even do your taxes for you, so you can get your maximum refund, with minimal stress.

Source: thepennyhoarder.com

What Is Supplemental Security Income – Benefits & How to Apply

The Supplemental Security Income program (SSI) is a need-based program run by the U.S. Social Security Administration. It assists individuals who, due to disabling health issues or advanced age, earn a limited income and are in need of income assistance.

Approximately 1.6% of the population — 5.3 million people — received monthly benefits from SSI in December 2020, according to Social Security Administration stats. The monthly SSI benefit changes each year. As of January 2020, it’s $783 for an individual and $1,175 for a couple. Some states supplement that amount, so beneficiaries in those states could receive higher benefits.

SSI is often confused with the Social Security Disability Insurance program (SSDI) because both provide support to Americans with disabilities who need financial assistance.

Unlike the SSDI program, SSI applicants don’t have to prove they’ve worked long enough or recently enough to qualify for benefits. And coverage isn’t limited to individuals with disabilities — qualifying U.S. residents over age 65 can apply, and in certain circumstances, low-income couples over age 65 also can apply.

It’s important to note that individuals receiving Social Security or SSDI benefits aren’t automatically prevented from receiving SSI. In cases where Social Security or Disability payments are less than the federal maximum amount, a person who is living with blindness or a disability or who is over age 65 might be qualified to receive SSI as well.

Who Can Apply for SSI?

SSI is designed to assist individuals whose income has been restricted by health status or age, so you must have a disability or blindness or be over age 65 to qualify.

Individuals with Blindness

To qualify for SSI on the basis of blindness, you must have one of the following conditions:

  • Central visual acuity less than 20/200 in your best eye with the use of corrective lenses.
  • Field limitation in your best eye, with the widest diameter of the visual field less than 20 degrees.
  • Another allowable criteria for blindness that may qualify you on the basis of disability.

Minors With Disabilities

An individual younger than 18 may qualify for SSI on the basis of disability if they have a medically established physical or mental impairment, including an emotional or learning difficulty, that results in significant functional limitations expected to either result in death or last a minimum of one year.

Adults With Disabilities

An individual over age 18 may qualify for SSI on the basis of disability if they have both of the following:

  • A medically established physical or mental impairment that prevents substantial gainful activity.
  • A physical or mental impairment that will result in death or will last for a minimum of one year.

Substantial gainful activity doesn’t need to be full-time employment. It’s generally defined as work done for pay or profit resulting in income greater than $1,175 per month.

Individuals Over 65

Individuals over age 65 are not required to have a disability or blindness, but they must have a limited income, earning less than $783 per month in what the program considers countable income, including earned income, benefits from other programs, or investment dividends.

Criteria for Eligibility

In addition to meeting specific health requirements, applicants for SSI must demonstrate financial, residency, and citizenship status. The following criteria must be met:

  • Citizenship. You must be a U.S. citizen or a qualified non-citizen.
  • Residency. You must be a resident of a U.S. state, Washington, D.C., or the Northern Mariana Islands with the intent of maintaining residency. In some cases, a student studying abroad or the child of a parent assigned to permanent military duty outside the U.S. may also qualify.
  • Income. As of January 2020, SSI applicants cannot have an income greater than $786 per month when applying as an individual or more than $1,175 per month when applying as a couple.
  • Resources. Individual applicants cannot have more than $2,000 in financial resources, and couples cannot have more than $3,000 in financial resources in order to qualify. Resources include savings and any asset that could be sold or converted to cover monthly expenses, with certain exclusions including one car used for work, your personal residence, and burial funds. Examples of countable resources include a second car, a second residence, and life insurance policies. If your resources exceed the government’s limit, you may be expected to sell them and use the funds to cover monthly expenses before qualifying for benefits. Take caution not to give away resources that you could otherwise sell. Doing so can disqualify you from SSI.
  • Legal Status. Applicants must have legal status in the U.S. and must not have violated any conditions of parole. Fugitives cannot apply for SSI, nor can individuals in prisons or living in halfway houses.
  • Domicile. When applying, you must provide proof of where you live. Individuals living in federal or state institutions usually cannot receive benefits, although exceptions may be made for federal or state-run emergency facilities, such as a shelter.

Keep in mind that some state and federal programs may affect SSI benefits. Check with your state office to determine whether receiving certain state-administered benefits, such as Temporary Assistance for Needy Families (TANF), could affect SSI eligibility.

What You Need to Apply

First and foremost, you need a complete an accurate SSI application. One of the primary reasons SSI applicants are rejected is because their applications are incomplete or they fail to provide sufficient documentation.

The SSA has the ability to verify bank balances, medical records, and work history, and inaccurate applications will be rejected.

In addition to your application, you need to bring the following materials to your SSI eligibility appointment:

  • Social Security Card.
  • Proof of Age. Birth certificates, baptismal certificates, and drivers licenses are a few of the acceptable documents.
  • Proof of Citizenship or Legal Alien Status. Documents demonstrating U.S. citizenship include birth certificates, religious records showing your legal status, U.S. passports, or naturalization papers. Documents demonstrating legal alien status include I-94s, Permanent Resident Cards, or U.S. military discharge papers if you served in the U.S. military.
  • Proof of Earned Income. To demonstrate earnings, bring payroll stubs or — if you are self-employed — last year’s tax return.
  • Proof of Unearned Income. Unearned income includes cash from friends or family, disability payments, or interest income. Bank statements, receipts, and pension statements all document these types of earnings.
  • Work Incentives Expenses. The SSI program encourages applicants to work when possible, offering several “work incentives” to help enrollees maintain employment. For example, the money used to secure a guide dog necessary for an applicant with blindness may not count toward the applicant’s total income. If you have qualifying expenses, you must bring receipts or other documentation to support them. See SSI’s Work Incentives Program page to learn more.
  • Proof of Resources. Supply your reviewer with bank statements, real estate deeds, life insurance policies, burial plot contracts, financial certificates, vehicle titles, and any other documents that show proof of financial resources.
  • Proof of Living Arrangements. Proof of living arrangements include leases, deeds, or rental receipts. The proof provided should include names, dates of birth, and Social Security numbers for all individuals living at the residence. You should also provide an itemized list of all expenses paid, such as utilities and food.
  • Medical Records. Bring copies of all medical records documenting your disability status. Be as thorough as possible; insufficient documentation can delay your approval or lead to a rejection of benefits. In most cases, the person making the final decision is not the person you meet with, so don’t rely on verbal communication to support your claim.
  • Documentation Showing 15 Years Work History (If Applicable). Provide documents detailing past employers, positions held, rate of pay, hours worked, and a description of your duties up until the date of your medical diagnosis.
  • Documents Substantiating the Disability of a Child Applicant. If you’re applying on behalf of a child, you’ll need to provide contact information for teachers, caregivers, or medical personnel who can describe the child’s disability. A copy of the child’s Individualized Education Plan (IEP) is also helpful.

How to Apply for SSI

You can apply for SSI benefits online or schedule an appointment with the Social Security Administration to apply for SSI.

To make an appointment to file your claim, call 1-800-772-1213 (unassisted or TRS calls) or TTY 1-800-325-0778.

You can also visit your local Social Security office without an appointment, but expect a longer wait time.

You may apply for benefits at any time, but the SSA recommends you apply as soon as you need assistance because it can take three months or longer to process an application. If your application is accepted, you’ll receive benefits retroactively from the date of your application.

Under a provision called the Compassionate Allowances initiative (CAL), certain medical diagnoses qualify for immediate approval. These circumstances usually involve serious or terminal illnesses, such as acute leukemia or adult onset Huntington Disease. Applications qualifying under CAL will be fast-tracked.

How SSI Determines Benefits

If your savings and assets (“resources”) are less than $2,000 — or $3,000 for a couple — SSI examines the following criteria to determine your benefit:

  • Earned Income. Common earned income items include wages, self-employed income, and royalties.
  • Unearned Income. Social Security benefits, disability benefits, and unemployment benefits are all examples of unearned income.
  • In-Kind Income. Any food or shelter you receive for less than fair-market value is counted as in-kind income.
  • Deemed Income. If you live with any individual who has not applied for SSI — such as a spouse or parent — the part of their income that you benefit from is deemed income.

Certain income is not included, such as:

  • The first $20 of your gross monthly income.
  • The first $65 of your countable income (less exclusions), plus half of the remainder of your countable income.
  • SNAP benefits.
  • Any food or shelter assistance you receive from nonprofit agencies based on need.
  • Payments you make toward loans.
  • Educational grants, tuition, fellowships, or gifts.
  • Money spent by someone else to cover your utilities.

State-Funded SSI Benefits

Most states provide state-funded SSI benefits, which can add to the total amount you receive. State-sponsored SSI is offered everywhere in the U.S. except North Dakota, Mississippi, West Virginia, Washington, D.C., the Northern Mariana Islands.

Certain states administer their supplemental security programs through the federal Social Security office. When applying for federal benefits in the following states, you can also ask about state programs:

  • California
  • Delaware
  • Hawaii
  • Iowa
  • Michigan
  • Montana
  • Nevada
  • New Jersey
  • New York
  • Pennsylvania
  • Rhode Island
  • Utah
  • Vermont

The remaining 34 states administer their own state supplement programs. Each state has its own rules and its own application procedure. The Social Security representative who receives your federal SSI application can tell you where to submit an application for your state-administered program.

What to Do if Your SSI Application Is Denied

If your application is denied, you have 60 days to appeal the decision. The appeal process is free and worth the time if you feel you’ve been unjustly rejected.

To start the appeal process:

  • Look for the Date of Mailing. Note the date on your initial determination letter. You have 60 days from this date to submit an appeal. Be prompt. Late appeals will likely be rejected.
  • Read Your Determination Letter Carefully. You need to understand why you were denied to formulate a proper appeal.
  • Look Specifically for the Technical Rationale. Look for the reviewer’s technical rationale for denying your application. Take notes, and if you don’t understand the rationale, call your Social Security office to get more information.
  • Request Your SSI File. If the explanation of denial still isn’t clear, request to see your SSI file. Make sure it contains copies of all your medical records.
  • Appeal. Don’t wait to appeal the decision. Notify SSI as soon as possible by calling 1-800-772-1213 to declare your intent to appeal. You must appeal in writing by filling out the Disability Report – Appeals, or SSA-561-U2. You can do this online or you can print the PDF form, returning it to your local Social Security office.
  • Be Thorough. Thoroughly explain any circumstances you feel SSI did not consider when making its decision. Include any documents that were not in your file or were not initially considered.
  • Seek Assistance If Needed. Ask family members or friends to assist you if you feel you need support to file your appeal. Some states have lawyer referral services that offer reduced-cost consultations, providing you the opportunity to ask questions and have your appeal reviewed. Call your state bar to ask about these services.

Final Word

SSI enrollees may be eligible for other federal and state assistance programs as well.

These programs include Medicaid, Supplemental Nutrition Assistance Program (SNAP), and state-directed medical insurance programs for children. Many of these federally funded programs are state-administered, so qualifications and income requirements vary. Contact your state Health and Welfare office or the equivalent state agency to find out about these programs.

Source: moneycrashers.com

Short Term vs. Long Term Disability Insurance

Your income is one of your biggest assets, and losing it can quickly take a toll on your financial well-being.

According to a Lifehappens.org survey, two-thirds of working Americans could not go six months before financial difficulties would set in, while 14 percent would be negatively impacted immediately.

Disability insurance can offer an important safety net because it pays you a percentage of your salary if an illness or injury ever prevents you from working.

There are two main types of disability insurance–short term disability insurance, often offered through employers, and long term disability insurance, which may need to be purchased separately.

As their names imply, short term disability insurance lasts for a shorter period of time than long term disability insurance.

But there are other key differences between short term and long term disability (or STDI vs. LTDI), including how quickly coverage kicks in, as well as costs.

Here, we’ll take a close look at both types of disability insurance to help you determine what type of coverage might work best for you.

What is Short Term Disability Insurance?

Short term disability insurance (also called short term disability income insurance, or STDI) is a type of insurance that will provide supplemental income in the event of an injury or illness that may keep you from working.

The amount of time you can receive benefits (or supplemental income), is known as the benefit period.

Short term disability policies typically have a benefit period of three to six months, though some may even last up to a year. The shorter the benefit period, the less you or your employer will pay in premiums for coverage.

Benefits vary by plan, but these policies typically pay anywhere between 50 to 70 percent of your pre-disability salary during that time.

Disability policies also have specific start dates when your payments begin. This waiting period is typically referred to as the elimination period.

Short-term disability policies often have an elimination period of 14 days (though this can range from 7 to 30 days). That means payments would start 14 days after your disability occurs (or the last day you were able to work).

Some employers have policies that require employees to take all of their sick days or, if the injury happened on the job, workers’ compensation benefits, before short-term disability is paid.

Employers may also require you to show proof from a doctor that you have undergone an illness or injury that prohibits you from working.

They also may require you to see an approved healthcare provider for regular updates on your condition while you are out of work. Many of the rules for short-term disability coverage are determined by your state.

How Do I Purchase Short Term Disability Insurance?

Most commonly, people get disability insurance through their employer. Companies often offer this benefit for no or very low cost.

In some states it’s mandatory for employers to offer this and you may pay a small fee for this from payroll deductions. Your employer is generally the easiest and most cost-efficient way to get short-term disability insurance.

If you are self-employed, or your employer doesn’t offer this benefit, you may be able to purchase short term disability insurance from a private insurer. The hitch is that few carriers offer private short-term insurance and, if they do, it tends to be costly.

You could pay anywhere from one to three percent of your annual salary for a benefit that may only last a few weeks or months.

You may find it makes more sense to invest in long term disability insurance.

What is Long Term Disability Insurance?

Long-term disability insurance (also known as long term disability income insurance or LTDI) is an insurance policy that protects employees from loss of income in the event that they are unable to work due to an illness, injury, or accident for a long period of time.

The benefit period (or the amount of time you’ll receive benefits) for long term disability insurance is often a choice of five, 10, or 20 years, or even until you reach retirement age, depending on the plan. In general, the longer the benefit period, the more you’ll pay in premiums.

Long-term disability insurance typically pays about 50 to 60 percent of your pre-disability salary, depending on the policy. In most cases, the higher that number, the higher the premium.

Some policies will also make up the gap in your income if you must return to work at a lower wage job because of an illness or injury. That coverage may also come with a higher premium.

The elimination period (the amount of time you must wait until benefits begin) for long term disability insurance usually includes several options, including 30, 60, 90, 180 days, or a full year.

In general, the longer the elimination period, the less you will pay in premiums. The most common elimination period is 90 days.

But if you can’t afford a policy with that elimination period, you may be able to reduce your premium costs by electing a longer period of time until benefits start.

You may want to keep in mind, however, that a longer elimination period means that you would have to go without income for a longer period of time, and might need to have savings or other resources to cover living expenses.

Each long-term disability insurance policy has different conditions for payout, diseases, or pre-existing conditions that may be excluded, and various other conditions that make the policy more or less useful to an employee.

Some policies, for example, will pay disability benefits if the employee is unable to work in his or her current profession. Others expect that the employee will take any job that the employee is capable of doing—that’s a big difference and could be consequential to the employee.

How Do I Purchase Long Term Disability Insurance?

Some employers offer subsidized long term disability insurance policies to employees at discounted group rates.

If your employer doesn’t offer this, you may be able to purchase long term disability insurance from a private insurer. Unlike short term disability insurance, these policies are widely available.

Also unlike short term disability insurance, private insurers typically offer individuals a range of long term disability policies to choose from.

Long term disability insurance is also sometimes available for purchase through professional associations, potentially at discounted group rates.

The cost of long term disability insurance can vary depending on the benefit period, the elimination period, your age, health, occupation, along with other factors. In general, these policies tend to run between one and three percent of your annual salary.

This is about the same as if you purchased a short-term disability policy outside of your employer.

If you were to use the insurance, however, you would benefit for years, not months, making long term disability insurance more cost-efficient than short term disability insurance.

Do I Need Short Term Disability if I Have Long Term Disability?

When possible, it can be beneficial to pair short term and long term disability insurance together.

Short term disability is intended to cover you immediately following a serious illness or injury, and long term disability insurance is intended to maintain supplemental income if your condition keeps you out of work past the end of your short term disability benefit period, even to retirement, depending on your plan.

If you have both short term and long term disability policies in place, short term disability can pay you benefits during the elimination or waiting period before your long term disability coverage begins, at which point you would transition from one policy to the next to receive benefits.

The combination can help you achieve the smallest possible income gap should you need to use disability insurance.

The best combination for you will depend on what options your employer offers, how much money you have saved in an emergency fund, and what you may be able to afford to purchase on your own.

The Takeaway

Disability income insurance offers an important way to protect your livelihood should you find you can no longer work at the same capacity you were expecting.

The primary distinction between short and long term disability insurance is the coverage period.

Short term policies generally cover just the first few months you’re unable to work. Long-term policies, on the other hand, can last for years—decades even—after you’re unable to work and may see you through retirement.

Because long term disability insurance benefits don’t start right away, it can be beneficial to pair long term disability benefits with short term disability insurance.

If your employer does not offer short-term disability coverage free or for a very low fee, another good option is to put together your own short term disability coverage by saving three to six months of expenses in an emergency fund.

That way, If you get sick or injured and have to take time off work for a few months, your savings can fill in the gaps until you get back on your feet.

If your emergency fund is currently small (or nonexistent), you may want to consider signing up for SoFi Money®. SoFi Money is a cash management account that allows you to earn, spend, and save–all in one place.

With SoFi Money’s special “vaults” feature, you can easily set up a separate emergency fund, and also sign up for recurring deposits to help build your back-up fund faster.

Start building your emergency fund with SoFi Money today.

SoFi Money®
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Source: sofi.com

How Much Is Self-Employment Tax & How Do You Pay It?

Being self-employed is awesome. You enjoy more control over your work-life balance, choose your hours, and have more say in the people and clients you work with. But before you hand in your letter of resignation, you need to understand the challenges of being self-employed. More specifically, you need to consider self-employment tax.

Like most tax rules, self-employment tax may seem incomprehensible at first. But take the time to read up on the subject, and you just might find that getting a handle on this aspect of self-employment is easier than you think.

What Is Self-Employment Tax?

If you have a job, you’re familiar with the Social Security tax and Medicare taxes, commonly called FICA taxes, which your employer withholds from each paycheck. Self-employment taxes are the equivalent of Social Security and Medicare taxes for the self-employed. If you’re a freelancer, independent contractor, or small-business owner, you don’t have an employer to withhold these taxes for you, so you’re responsible for paying them on your own.

If you had self-employment income of $400 or more during the tax year, you’re required to calculate self-employment taxes and file Schedule SE attached to your individual tax return, Form 1040.

The Self-Employment Tax Rate

The self-employment tax rate is currently 15.3%. This rate includes two components: 2.9% for Medicare and 12.4% for Social Security.

There’s no limit to the amount of your net earnings from self-employment that’s subject to the Medicare portion of the self-employment tax, but there is a cap on the Social Security portion. This cap is called the Social Security wage base, and it changes every year. For the tax year 2020, the Social Security wage base is $137,700. For 2021, it rises to $142,800.

When you work for an employer, your employer withholds half of these amounts from your paycheck — 1.45% of your wages for Medicare and 6.2% for Social Security — and matches the other half on your behalf. As a self-employed taxpayer, you’re responsible for the full tax. However, you can deduct half of your self-employment tax as an adjustment to your gross income on Line 14 of Schedule 1.

In addition to the 2.9% Medicare tax, high earners pay an additional Medicare tax of 0.9% on income above the following thresholds:

Filing Status Threshold
Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) $200,000

How to Pay Self-Employment Tax

Now that you have an understanding of self-employment tax basics, you need to know how to pay the taxes you owe.

Like federal income taxes, self-employment taxes are a pay-as-you-go system. That’s why employers withhold federal and state income taxes and FICA taxes from each paycheck rather than having you write a big check to the IRS at the end of the year with your tax return. When you’re self-employed, you’re required to make quarterly estimated payments if you owe taxes of $1,000 or more.

IRS Form 1040-ES includes a worksheet on Page 6 for calculating your estimated self-employment tax, as well as your deduction for one-half of your self-employment taxes. You can use Form 1040-ES to calculate both your estimated self-employment tax and estimated income tax for the year, divide them by four, and pay them in four equal installments. Those installments are due on April 15, June 15, September 15, and January 15 of the following year. These due dates move to the following business day if the 15th falls on a weekend or holiday.

You can make your quarterly estimated payments online using IRS Direct Pay or by mailing a check with the vouchers included with Form 1040-ES.

When you file your tax return at the end of the year, you’ll reconcile the total amount of estimated tax payments you made with the amount of income and self-employment taxes you owe. If you paid too much, you can choose whether to have your overpayment refunded to you or applied to next year’s estimated payments. If you paid too little, you’ll have to pay the difference, and you might also be charged an underpayment penalty.

What Happens If You Don’t Pay Self-Employment Taxes on Time?

If you owe at least $1,000 in combined income and self-employment taxes for the year and don’t make quarterly estimated payments, the IRS will assess a penalty for underpayment of estimated tax when you file your tax return.

The IRS calculates the underpayment penalty by first calculating how much you should have paid for each of the four quarterly installments. Next, the difference between what you paid and what you should have paid is multiplied by the effective interest rate for the period. The effective interest rate is set quarterly. For the first quarter of 2021, that interest rate is 3%.

The penalty is calculated separately for each installment, so you may be charged a penalty for one quarter but not the others.

How to Reduce Your Self-Employment Taxes

Self-employed individuals have a lot of opportunities to reduce their tax bill through tax deductions. The more deductions you have, the lower your net income — and thus your self-employment tax — will be.

In order to qualify for a deduction, your business expenses must be both ordinary and necessary. Ordinary expenses are common and accepted in your trade or business; necessary expenses are helpful and appropriate for your business.

The kinds of expenses that are ordinary and necessary for your business depend on the type of business you’re in. Some common ones include:

  • Advertising
  • Auto expenses
  • Credit card merchant fees
  • Dues and membership fees
  • Home office expenses
  • Insurance
  • Interest
  • Legal and professional fees
  • Office expenses
  • Rent or lease payments
  • Repairs and maintenance
  • Subscriptions
  • Supplies
  • Taxes and licenses
  • Telephone and cellphone service
  • Travel
  • Utilities
  • Wages

For more details on common business expenses and what is and is not deductible on Schedule C, check out IRS Publication 535.

Before you go on a spending spree to avoid taxes, remember that you don’t get a dollar-for-dollar reduction in your taxes for every dollar you spend. Unless the expense is something you actually need for your business, it’s not a smart move to spend money simply to lower your tax bill.

For example, say you’re considering spending $1,000 on a new laptop. If you’re in the 24% tax bracket, spending $1,000 will save you about $240 in taxes. If you need a new laptop, spending the money may be a smart move. But if you’re spending $1,000 to avoid paying $240 in taxes, you’re better off keeping the $1,000 in your pocket.

Consider self-employment tax just another cost of doing business. Owing taxes means you’re making money. So while every smart business owner wants to do what they legally can to lower their tax bill, spending money unnecessarily isn’t the answer.

Final Word

If you’re still confused about self-employment tax, it’s time to get in touch with a professional, such as a CPA or Enrolled Agent. You can locate one in your area through H&R Block. If you’re new to the world of self-employment, a tax pro can answer any question you have, help you estimate your self-employment taxes, and give you smart ideas for lowering your tax bill.

So add those tax due dates on your calendar and come up with a plan to estimate and pay your self-employment taxes. It’s an important part of being your own boss.

Source: moneycrashers.com

Is Your Apartment Tax-Deductible When You WFH? | ApartmentSearch

Woman holding baby while sitting at desk on computerIf you’re someone who primarily works from the comfort of their home, you might find yourself wondering, “Can I write off my home office?” This is certainly a valid question and one that can possibly save you a lot of money when tax season rolls around. Learn what (if anything) is tax-deductible when your apartment doubles as your office space!

But before we begin, please know this post is not intended as legal or tax advice; rather, it’s simply meant to provide some helpful resources for your tax journey. If you need additional support or guidance as you’re filing, we encourage you to seek professional tax prep services.

Can I write off my home office?

With so many of us working from home these days, there’s a lot of curiosity around whether this situation can yield any tax breaks. Unfortunately, you won’t qualify for the home office tax deduction as a full-time remote employee in most cases.

In other words, if you work remotely — but you’re not an employer or business owner — you won’t be able to write off your home office. With that said, this might be available as a state tax deduction for *some* remote workers, so don’t give up all hope!

Anyone who’s self-employed or runs a business out of their home will likely have better luck with this write-off. According to the IRS, there are two basic requirements to qualify for a home office deduction: (1) regular and exclusive use and (2) principal place of your business.

The term ‘regular and exclusive use’ means you regularly use part of your house or apartment exclusively for conducting your business. The second criteria (principal place of business) implies your home office is either the primary location of your business or space where you frequently meet with customers or clients.

For instance, if you run a business out of your apartment, like an e-commerce store, you may be eligible for this deduction. Likewise, if you are “self-employed” as a freelancer, you may also meet this requirement.

How do I calculate my home office deduction?

If you meet the criteria stipulated by the IRS, you’ll want to know how to deduct a home office to net the most significant savings possible. There are two ways to go about this: (1) the regular method — keeping track of your expenses throughout the year and itemizing them on your tax forms, or (2) using the simplified option (if you’re eligible for it).

The regular method involves diligent record-keeping of your year-round expenses and honest reporting in your tax form. With this method, you can write off things like the cost to paint or repair your office space, which can add up pretty quickly!

The actual-expenses approach also allows you to deduct a portion of some indirect home expenses, based on the square feet you use as your office. What this means is, if your office is one-tenth of the total square footage in your house or apartment, you can deduct 10% of your mortgage interest or rent and even some of your utilities (like water and electric bills).

The simplified version of the home office deduction can be used if your office measures 300 square feet or less. For those who qualify, the IRS will give you a deduction of $5 per square foot of your home that’s used for business, up to $1,500 for a 300-square-foot-space.

If you’re unsure which choice is right for you, know that the simplified method can work well for single-room offices or smaller operations, while actual-expenses might work better if your business takes up a larger part of your home.

Additionally, the simplified route is typically easier to compute, resulting in a smaller tax break overall. The regular method requires more thorough recordkeeping (and more time to gather your receipts), but it could provide you with a larger deduction in the end.

Find a Place for Work and Life

Are you thinking of upgrading your apartment so you can have a dedicated home office? With the help of ApartmentSearch, you can easily explore two-bedroom apartments and live-work spaces for rent near you! This way, you’ll have an extra room you can use as your very own office, which is sure to help boost your morale and productivity.

Source: blog.apartmentsearch.com

When Are 2021 Estimated Tax Payments Due?

Our tax system operates on a “pay-as-you-go” basis, which means the IRS wants its cut of your income when you earn it. For employees, the government gets paid through tax withholding each time you get a paycheck. Retirees can have taxes withheld from Social Security payments and retirement plan distributions, too. However, if you’re self-employed or don’t have taxes withheld from other sources of taxable income (such as interest, dividends, or capital gains), it’s up to you to periodically pay the IRS by making estimated tax payments.

For the 2021 tax year, you can pay all your estimated tax by April 15, 2021, or in four equal amounts by the dates shown in the table below.

Due Dates for 2021 Estimated Tax Payments

Payment When Income Earned in 2021 Due Date
1st Payment January 1 to March 31 April 15, 2021
2nd Payment April 1 to May 31 June 15, 2021
3rd Payment June 1 to August 31 September 15, 2021
4th Payment September 1 to December 31 January 18, 2022

You don’t have to make the payment due January 18, 2022, if you file your 2021 tax return by January 31, 2022, and pay the entire balance due with your return.

(Note: Even though this year’s income tax return filing deadline was moved from April 15 to May 17, the due date for the first quarter estimated tax payment was not pushed back.)

No Income Until Later in the Year?

You don’t have to make estimated tax payments until you have income on which you will owe tax. So, for example, if you don’t have any taxable income until July 2021, you don’t have to make an estimated tax payment until September 15, 2021. At that point, you can either pay your entire estimated tax by September 15, or you can pay it in two installments by September 15 and January 18.

Farmers and Fishermen

If at least two-thirds of your gross income is from farming or fishing, you can make just one estimated tax payment for the 2021 tax year by January 18, 2022. If you file your 2021 tax return by March 1, 2022, and pay all the tax you owe at that time, you don’t need to make any estimated tax payments.

How to Pay

Use Form 1040-ES to calculate and pay your estimated taxes. There are a number of ways to pay estimated taxes, including by check, cash, money order, credit card and debit card. There are many online payment options, too, such as the Electronic Federal Tax Payment System (EFTPS). The various payment methods are described in the instructions for Form 1040-ES.


Whether you make estimated tax payments or rely on withholding, you could be hit with a penalty if you don’t pay enough tax throughout the year. The penalty doesn’t apply if you owe less than $1,000 in tax. You can also avoid the penalty if your 2021 withholding or estimated tax payments equal at least 90% of your 2021 tax liability, or 100% of the tax shown on your 2020 return (110% if your 2020 adjusted gross income was more than $150,000).

Don’t Forget About Your State

Finally, unless you live in a state with no income tax, you probably owe estimated tax payments to your state, too. Due dates for state payments may or may not coincide with the federal dates (especially with COVID-related deadline changes in some states), so be sure to check with the appropriate tax agency in your state.

Source: kiplinger.com

IRS Tax Form 1099-MISC – Instructions for Small Businesses & Contractors

In an effort to help make filing taxes easier this year, we are breaking down the various IRS tax forms to help you know if you need them, and how to use them.

If you’re a freelancer or run a small business and use independent contractors, you’re probably familiar with the 1099-MISC form. Before 2021, this form was used to report income to freelancers, independent contractors, and other self-employed individuals who, as their own employer, are generally responsible for paying the employer’s and employee’s portion of taxes.

Starting with the 2020 tax year, the Internal Revenue Service (IRS) requires businesses to use form Form 1099-NEC to report those payments.

Thanks to Form 1099-MISC’s versatility, businesses and clients still use it for many different kinds of transactions. It’s very useful, but also potentially confusing because of all the data it can hold.

Understanding the IRS Form 1099-MISC Boxes

A 1099-MISC form is a catchall for all miscellaneous income that you provided or received. In an attempt to get all the necessary information for any situation, the IRS uses 17 boxes to collect data.

If you’re a payer, you need to know which fields to fill out. And if you’re filling your tax return, you’ll want to know what your numbers mean.

1. Rents

If you rented anything from another company — office space, heavy machinery, soda machines, or live tigers — total up the year’s payments and list them here.

2. Royalties

This includes all royalty payments, such as those from oil or mineral-producing properties.

3. Other Income

This can include prizes (but not gambling winnings, as they have their own 1099 variant), damages from a lawsuit, or payments for participating in medical research.

4. Federal Income Tax Withheld

The issuer uses this section if they withheld federal income taxes from the payments reported on Form 1099-MISC. Usually, this occurs when the payee refuses to provide their Form W-9 and Social Security number or taxpayer identification number (TIN).

Just to be on the safe side, the IRS requires the payer to withhold 28% of the money paid to that person and send it to the IRS. See the Form 1099-MISC instructions for further explanation on what income you can withhold taxes on.

5. Fishing Boat Proceeds

Here you report the monetary value of the catch shares that the individual received over the year, plus any other payments made that were contingent on a minimum catch.

6. Medical and Health Care Payments

If your business employed a physician to conduct yearly physicals or administer flu shots, you might have to send them a 1099-MISC. This would include any amount you paid for medications sold to you by the physician.

For example, if the physician charged you $20 per flu shot and $200 for labor, you would include the total for both the cost of the shots and the labor in this amount.

7. Payer Made Direct Sales of $5,000 or More

Box 7 used to be used to report payments made to independent contractors or freelancers. Now that those payments go on Form 1099-NEC, Box 7 is now a checkbox used to indicate that the filer made direct sales of $5,000 or more of consumer products to the recipient.

The most common users of this box are multilevel marketing companies that sell products to their sellers at wholesale prices to be resold.

8. Substitute Payments in Lieu of Dividends or Interest

This situation is extremely uncommon and involves loaning out your dividend-paying securities.

This box doesn’t include typical dividend or interest income, because those have their own forms: Form 1099-DIV and Form 1099-INT. If you need to use this section, your broker should send you the details.

9. Crop Insurance Proceeds

If you received payouts from crop insurance, the amount should be input here.

10. Gross Proceeds Paid to an Attorney

Here you must input payments over $600 that went to an attorney for legal services.

11. Fish Purchased for Resale

On the 2020 version of Form 1099-MISC, Box 11 is blank. But in the 2021 version, it will be used by taxpayers involved in a fish catching business to report cash payments for the purchase of fish that will be resold.

12. Section 409A Deferrals

Use this box if you contributed to a section 409A retirement plan but weren’t an employee.

13. Excess Golden Parachute Payments

A golden parachute payment is one made to an employee (generally an executive) who is leaving a company and is contractually able to receive a large payment upon departure. Excess payments are those amounts above what the individual received on average over the past five years.

14. Nonqualified Deferred Compensation

If you contributed to a section 409A plan but it didn’t meet specific guidelines, it can be counted as taxable section 409A income, and you must input the amount here.

15. State Tax Withheld

If any state tax was withheld, it may be listed here.

16. State/Payer’s State Number

If state tax was withheld, enter the identification number of the company that withheld the tax here.

17. State Income

This is the amount of money reported on the form that is subject to state tax.

When Does Your Business Need a 1099-MISC?

Generally, your business must file form 1099 only if you paid someone $600 or more over the course of the year. If you received more than this amount, expect a 1099-MISC from the payer.

A few exceptions include:

  • Royalties. $10 minimum reporting threshold.
  • Fishing Boat Proceeds. You must report any amount.
  • Consumer Goods. If you sold anyone any items for $5,000 or more in a market other than a permanent retail establishment (such as Amway or flea markets), you must report it.
  • Tax Withholding. If you’ve withheld taxes for someone because they were subject to backup withholding, you must report it no matter how little you paid them during the year.

Keep in mind that the IRS only requires these forms when companies pay vendors in the course of operating a business. When you pay the neighbor kid for babysitting, you don’t have to worry about reporting those payments.

Taxes Due From Income Included on 1099-MISC

In prior years, when the 1099-MISC form included non-employee compensation, recipients typically had to report business income from their 1099-MISC on Schedule C, and file Schedule SE to calculate self-employment tax. Now, most 1099-MISC income goes elsewhere on your tax return.

If your income was reported in box 3 of your 1099-MISC, it is generally not considered “earned income” and you do not need to pay self-employment tax on it. However, you do need to pay regular income tax on it.

Report income in box 3 of your 1099-MISC plus these other types of income on your 1040:

  • Prizes or Awards. This includes game show or sweepstakes winnings, but not something like an incentive-based contest you won at work.
  • Jury Duty Pay. Jury duty pay is taxable as a write-in adjustment to income on your 1040. Label it “Jury Pay.”
  • Canceled or Forgiven Debts. Your creditor is required to send you a 1099 with the forgiven or canceled amount. You might receive a 1099-C for this.
  • Barter Income. This counts even if cash didn’t trade hands. If you barter with someone who is a by-the-books type, they may send you a 1099-MISC for the value of the services or items they traded with you. Of course, this is your cue to send one for the value of the services or items you traded as well.
  • Hobby Income. This is the little bit of money you might earn from a leisure activity — one you do without intending to make any money. Because you weren’t looking for income, it’s not considered self-employment. Still, you’re required to pay regular income tax on it. After three profitable years of making money at a hobby, the IRS will consider it a small business and no longer a hobby.
  • Gambling Winnings. You may not receive a 1099-MISC — you might get a W-2G — but either way, you should include gambling winnings on your 1040. If any income tax was withheld, as sometimes happens with large payouts, you’ll also account for this on your 1040. If you had winnings, you can deduct gambling losses, but only up to the amount you won.


You may encounter a confounding situation with one or more 1099-MISC forms you receive. Here are a few of the most common:

1. I received a 1099-MISC for income I wasn’t paid until the following calendar year. What do I do?

If this happens to you, don’t worry. The IRS knows you are not the first person who’s been on the end of some last-minute accounting. As long as you “settle up” next year and accurately report the income on that year’s taxes, you will be fine. Hold onto documentation that supports when you took possession of the money, such as:

  1. Bank account records
  2. Postmarked envelopes
  3. PayPal records
  4. Invoices, paystubs, or other records of payments

2. I got a 1099-MISC for money that was paid to me, but I paid other people with that money. What do I do?

That depends on the type of expense you paid. If the payment of that money has anything to do with a rental property, you can probably deduct it as a rental expense on Schedule E.

For example, if you own rental real estate and paid money to a property manager, contractor, or another service provider, you can claim the sum of what you paid as an expense against the rental income you received on your 1099-MISC.

Likewise, if the payment was an ordinary and necessary business expense, you can deduct it on Schedule C.

However, if you received a 1099-MISC and it was actually taxable income for someone else, you’re considered a “nominee recipient.”

For example, say you and your sibling are 50/50 owners in a rental property. Your tenant issues a 1099-MISC for the $12,000 of rent they paid for for the year. However, the 1099-MISC shows you as the sole recipient of $12,000 of rental income instead of showing you received $6,000 and your sibling received $6,000.

In such a situation, you need to send a 1099-MISC to your sibling, listing yourself as the payer and your sibling as the recipient of $6,000 of rental income. You can find more instructions for nominee recipients in the IRS’s General Instructions for Certain Information Returns.

3. I haven’t received my 1099-MISC yet. Should I file my tax return anyway?

The due date for payers to send 1099 forms to recipients is typically Jan. 31 following the calendar year in which the payments were made. For 2021 forms, that deadline shifted to Feb. 1, since the normal filing deadline fell on a Sunday.

According to the IRS, if you haven’t received your expected 1099 form by early February, you should contact the payer. If you still can’t get a copy of your Form, you can call the IRS for help at 1-800-829-1040.

In some cases, you may be able to get the information that would be included on Form 1099-MISC from another source. For example, if you’re expecting a 1099-MISC for rental income, you should already have a record of the rental payments you received during the year and you can just report the taxable income based on your own records.

Unlike Form W-2, you don’t have to file Form 1099-MISC with your tax return (unless you file paper forms and your 1099-MISC includes federal income tax withheld).

If you file your tax return and later receive a 1099 for income that you didn’t include on your return, you can file an amended return using Form 1040X.

Final Word

“Miscellaneous” is like a double-edged sword when it comes to a 1099 form. It’s an easy way to cover tax issues that don’t fall into conventional categories, but it can create confusion as well.

If this is your first year owning a business and dealing with 1099s, it’s worth hiring a tax consultant to make sure you take advantage of all deductions available to you and you schedule the correct amount of estimated taxes for the following year.

Source: moneycrashers.com

Retirement Options For the Self-Employed

Being your own boss is great. You get flexibility and the ability to pursue the things you care about. But as the boss, you also have to deal with all the administrative and financial details an employer might typically take care of—like choosing the right retirement plan.

Though it may require a little more action on your part, there are different kinds of self-employed retirement plans to explore. In fact, some self-employed retirement plans actually have high contribution limits and tax benefits.

And it’s a good thing too, since more people than ever are self-employed or starting their own businesses. According to Fresh Books third annual self-employment report annual self-employment report, 27 million Americans are expected to leave the traditional workforce for self-employment in the next two years.

So what does retirement for self-employed people look like? Well, a little like retirement for the traditionally employed. The general rules of thumb still apply: You can calculate how much you’ll need to save for retirement based on your current age and when you plan to retire.

No matter what your age, it’s a good idea to do the math now, so you can hypothetically see how much money you could be contributing to your retirement and whether you’re on track for your age and retirement goals.

Self-Employed Retirement Plans

In some ways, self-employed retirement plans aren’t too different from regular retirement plans. Certainly, the principles of retirement are the same: set aside money now to use in retirement—ideally providing an income when it’s time to retire.

The most common retirement savings plan, though, is a 401(k), but a 401(k) is, by definition, an employer-sponsored retirement account. For those who are self-employed that’s not an option.

The IRS breaks down a number of retirement plans for the self-employed or for those who run their own businesses, but we’ll lay out the basics here for you to start thinking about.

Traditional or Roth IRA

One of the most popular self-employed retirement plans is an IRA—or an individual retirement account. Anyone can open an IRA either with an online brokerage firm or at a traditional financial institution. And if you’re leaving a regular job where you had an employer-sponsored 401(k), then you can roll it over into an IRA.

If you meet eligibility requirements, you can contribute up to $6,000 annually to an IRA, with an additional $1,000 catch-up contribution allowed for people over 50 years old. (These limits are for 2021—the IRS does adjust them from time to time.)

The main difference between a traditional vs. Roth IRA is when the taxes are paid. In a traditional IRA, the contributions you make to your retirement account are tax-deductible when you make them, and the withdrawals during retirement are taxed at ordinary income rates. With a Roth IRA, there are no tax breaks for your contributions, but you’re not taxed when you withdraw.

Choosing which IRA makes sense for you can depend on a few factors, including what you’re earning now vs. what you expect to be earning when you retire. Additionally, you can only contribute to a Roth IRA if your income is below a certain limit : For 2021, that’s less than $208,000 adjusted gross income (AGI) for a person who is married filing jointly, and less than $140,000 for a person who is filing as single.

Solo 401(k)

A solo 401(k) is a self-employed retirement plan that the IRS also refers to as one-participant 401(k) plans . It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee.

For 2021, you can contribute $19,500 (or $26,000 if age 50 or over) in salary deferrals as you would normally contribute to a standard 401(k). Then, as the “employer”, you can also contribute up to 25% of your net earnings, with additional rules for single-member LLCs or sole proprietors. Total contributions cannot exceed a total of $58,000.

From there, it works more or less like a regular 401(k): the contributions are made pre-tax and any withdrawals or distributions after age 59.5 are taxed at the regular rate. You can also set up the plan to allow for potential hardship distributions under specific circumstances, like a medical emergency.

You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (as an employee; you can match their contributions as the employer). 401(k) contribution limits are per person, not per plan, so if either you or your spouse are enrolled in another 401(k) plan, then the $58,000 limit per person would include contributions to that other 401(k) plan.

A solo 401(k) makes the most sense if you have a highly profitable business and want to save a lot for retirement, or if you want to save a lot some years and less others. You can set up a solo 401(k) with most wealth management firms.

Simplified Employee Pension (or a SEP IRA)

A SEP IRA is an IRA with a simplified and streamlined way for an employer (in this case, you) to make contributions to their employees’ and to their own retirement.

For 2021, the SEP IRA rules and limits are as follows: you can contribute up to $58,000 or 25% of your net earnings, whichever is less. As is the case with a number of these retirement for self-employed options, there is a cap of $290,000 on the compensation that can be used to calculate that cap. You can deduct your contributions from your taxes, and your withdrawals in retirement will be taxed as income.

A key difference in a SEP vs. other self-employment retirement plans is this is designed for those who run a business with employees. You have to contribute an equal percentage of salary for every employee (and you are counted as an employee). That means you can not contribute more to your retirement account than to your employees’ accounts, as a percentage not in absolute dollars. On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.


A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees ) is like a SEP IRA except it’s designed for larger businesses. Unlike the SEP plan, the employer isn’t responsible for the whole amount of an employee’s contribution. Individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.

You, as the employer, have to simply match contributions up to 3% or contribute a fixed 2%. This sounds complicated, but the point is it’s designed for larger companies, so that you can manage the contributions to your employees’ retirement plans as well as your own. The trade-off, however, is that the maximum contribution limit is lower.

You can contribute up to $13,500 to your SIMPLE IRA, plus a catch-up contribution of $3,000 if you’re 50 or over. And your total contributions, if you have another retirement employer plan, maxes out at $19,500 annually.

There are a few other restrictions: If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%. (There is also a SIMPLE 401(k) that does allow for loan withdrawals, but requires more set-up administrative oversight on the front end.)

Defined Benefit Retirement Plan

Another retirement option you’ve probably heard a lot about is the defined benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.

For the self-employed, your defined benefit has to be calculated by an actuary based on the benefit you set, your age, and expected returns. The maximum annual benefit you can set is currently the lesser of $230,000 or 100% of the participant’s average compensation for his or her highest three consecutive calendar years, according to the IRS.
Contributions are tax-deductible and your withdrawals during retirement will be taxed as income. And, if you have employees, then you typically must also offer the plan to them.

Defined benefit plans guarantee you a steady stream of income in retirement and with no set maximum contribution limit, if you’re earning a lot (and expect to keep earning a lot through retirement), they may be a good way to save up money.

These self-employed retirement plans can, however, be complicated and expensive to set up and require ongoing annual administrative work. Not every financial institution even offers defined benefit plans as an option for an individual. You’ll also have to be committed to funding the plan to a certain level each year in order to achieve that defined benefit—and if you have to change or lower the benefit, there may also be fees.

Other Retirement Options for the Self-Employed

While these are the most common self-employed retirement account options and the ones that offer tax benefits for your retirement savings, there are other options self-employed individuals might consider, like a profit-sharing plan if you own your own business.

Plus, don’t forget: You also have Social Security funds in retirement. Full retirement age for Social Security is considered 67 years old.

The IRS does offer what it calls annual check-ups to check on your retirement account and to go through a checklist of potential issues or fixes. However, you may want some additional human guidance, especially if you have specific questions.

The Takeaway

When you’re an entrepreneur or self-employed it can feel like your options are limited in terms of retirement plans, but in fact there are a number of options open, including various IRAs and a solo 401(k).

Looking to open a new retirement account? SoFi Invest® offers traditional, Roth, and SEP IRAs. Plus, you’ll get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.

Find out how to save for retirement with SoFi Invest.

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