Perhaps the greatest advantage of hanging out your own shingle or making that consulting business full-time is the independence that comes with being your own boss. But higher expenses and other costs come along with your newfound liberty. You may not be able to sock away as much pretax for retirement, and you may have trouble refinancing your mortgage. Your higher tax bills may shock you, too.
All in all, if you go out on your own, you may need to bring in up to 20% more than before just to break even, especially if you can’t piggyback on your spouse’s health insurance, says David Strege, a financial planner in West Des Moines, Iowa.
That doesn’t mean you shouldn’t try. There are few more gratifying accomplishments than making it on your own. But here’s what you should keep in mind as you figure out what to charge for your work and how to budget for your future.
As an employee, you will pay 6.2% of your earnings (up to $106,800 this year) for Social Security and 1.45% of your income (with no limits) for Medicare, while your employer will pay an equal amount. But when you say goodbye to the Man, you will pay the whole 15.3%.
The good news is that the taxes apply only after you deduct your expenses, and your “employer” half is deductible from your federal taxes. But if your expenses aren’t especially high, your total tax costs will go up.
Continue Reading: “Working For Yourself Means Freedom — But It Doesn’t Come Free”
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