Self-employed

Self-employed 401k retirement account

Self-employed workers cannot contribute to a 401K plan of the type with which most people are familiar. However, there are various vehicles available to self employed individuals to save for retirement. Many set up a Simplified Employee Pension Plan (SEP) IRA, which allows them to contribute up to 25% of their income, up to $44,000 (2006) per year. And, there is a vehicle called the Self Employed 401K or SE 401K for self employed people. The contribution limits vary slightly depending on how your business is organized but are generally higher than the other types of plans.

Self-employment law in the United Kingdom

A self-employed person in the UK can operate as a sole trader or as an incorporated limited liability company. It is also possible for someone to form a business that is run only part-time or concurrently while holding down a full time job. This form of employment, while popular, does come with several legal responsibilities. When working from home clearance is required from the local authority to use part of the home as business premises. Should the business hold records of customers or suppliers in any electronic form it is required to register with the Data Protection Registrar. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government operated Business Link centres.

Taxation in the US

In the US 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 pays tax after receiving his taxable income.

The self-employed in the United States are usually required to pay estimated income taxes quarterly. They pay both the employee and employer portions of the FICA tax and Medicare taxes, since they are considered both the employer and the employee. An employed person pays 7.65% (6.2% for FICA and 1.45% for Medicare) through a paycheck deduction, and the employer pays the other 7.65%. The self-employed person pays both sides of this tax, or 15.30% total. This tax is reported on Schedule SE of the IRS Form 1040.

Many self-employed choose to incorporate to reduce this tax. Before incorporation, a self-employed person making $100,000 in business profit would pay 15.30% of that profit in self-employment tax, or $15,300. But with an incorporated business, the business can pay the owner $50,000 in salary and $50,000 in dividends (called "distributions"). The owner pays 7.65% of the $50,000 in salary and his/her corporation pays the other 7.65%, for $7650 total. Distributions are not subject to self-employment tax, so there is no FICA/Medicare tax on the $50,000 in distributions. Thus the business owner may save $7,650 in taxes. However, tax laws can be tricky, and do change, so it is usually advisable to seek the advice of a competent accountant in taking the decision to incoporate for the purpose of saving tax.

Self-employed persons are sometimes eligible for more deductions than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses. However, again, the advice of an expert may be worth the money it costs.

Self-employed persons report their business income or loss on Schedule C of IRS Form 1040.

Taxation in the UK

Self employed may be subject to more taxes than the average employee. In addition to both the employee and employer National Insurance contributions, there may be VAT, business rates and other taxes payable to central and local governments.

Both in the US and the UK governments are cracking down on disguised employment, often described as the pretence of a contractual intra-business relationship to hide what is otherwise a simple employer-employee relationship.

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