I’m Self-Employed! Retirement Plans, Insurance and Tax Considerations are Afoot

by Silicon Valley Blogger on 2008-05-2726

My transition to true self-employment.

As a self-employed individual, I’m finding that I’ve got new things to tackle and look into as part of this new “designation.” I’ve actually never been truly self-employed before, although I had been a software contractor in the past during the dot com era when hourly wages were through the roof.

At that time, I had wanted to maximize my earnings by simply focusing on the work at hand rather than fuss with employment issues that would’ve been a distraction as a self-employed individual, so I went the easy route and declared myself a temp employee for agencies that “pimped” me around as an independent contractor. In that scenario, I was still an employee, specifically a “W-2 Pass Through employee” since I’d go through an agency that stood as my employer of record. They tackled all the billing, collection, paperwork, and administration tasks that were part and parcel of contract employment. They also had a cafeteria benefits plan to cover me. To me, this was a great set up, as it gave me the freedom to be a consultant or contractor who could charge by the hour without having to worry about all the issues of a 1099 and self-employment status.

Well it’s a different story today. I am now pretty much fully self-employed. I have mentioned before that I have been busy with this blog and have been on the lookout for freelancing opportunities, and it looks like a few things are panning out. Naturally, I’ve been focusing more on a few financial issues that beset many of us who are in this boat.

home office, work at home

Financial Considerations For The Self-Employed

Because I’m not an expert in self-employment by any means, I am just feeling my way through the following matters at the moment. I can only share with you the decisions I’ve made and what I felt fits our scenario the best (at the moment). Everyone’s situation is different, so I’m sure that others contemplating something like I’ve done or those who are already in this situation will need to do their due diligence to make the appropriate financial decisions for themselves. Still, you may find this basic check list helpful, once you strike out on your own.


Health Insurance
I no longer have that safety net we all know and love that our employers grant us. As soon as I walked out the door several months back, insurance coverage for my entire family changed. It’s ironic that just a few years ago, we were enjoying the perks of a superb insurance plan care of my spouse’s job. Then he quit and we shifted our coverage to my employer. Now that I have quit the 9-to-5 myself, we took to weighing and deciding whether we should opt for COBRA or self-insurance for the family. Ultimately, we went with COBRA. It turns out to be more affordable for our entire family and we get to keep the same health service providers that we know and love.

Disability Insurance
My spouse and I used to have group disability insurance through our employers. Again, such coverage is now gone. I had been shopping for additional disability insurance in the past so this is already in my “to do” list. I just need to get around to doing something about it.

Liability Insurance
Yep, got this already taken care of. It’s something I believe one should carry whether or not they’re self-employed. Either hike your homeowner’s and car insurance to cover liability, or get a separate umbrella policy. For those who are small business owners and who consider this a high priority, going the LLC route may be a good solution as well.


Music to my ears. Now that we’re self-employed, a lot of things become deductible, such as our home office, equipment, materials, even (possibly!) the health insurance I just mentioned. Under certain circumstances, health insurance may be tax deductible for business owners, but I’m still researching this aspect. The bottom line is that I’ll need to keep even more records and will have to be even more organized (not my strongest points). Needless to say, get advice from your tax guy about your change in status from employee to business owner.

Estimated Taxes
Watch out for estimated taxes and figure out if you’re subject to them. Determine if you’ll need to make estimated taxes based on the type of company or business structure you’ve adopted.

Self-employment Taxes
Self-employment taxes are something new that you’ll need to worry about now, which are applied to your business net profit for the year. You’ll now have to pay both the employee and employer portions of Medicare and Social Security taxes. This tax rate is 15.3% broken down as 12.4% for social security and 2.9% for Medicare. More details here.

Retirement Plans

I’ll sure be missing my trusty 401K but I’ve been researching new retirement plans for myself as a business owner. I read through some material on retirement plans for the self-employed, which frankly made my head spin because of all the options that are available. Here is a table that shows some of the comparisons made among various retirement plans. For a shorter and sweeter summary, check this table out:

Retirement Plan Options* For The Self-Employed

Plan Contribution Limits Phaseout Limits Comments
SEP 20%*/$46,000 None Simple to establish and administer
Keogh 20%*/$46,000 (or more) None Can be designated a profit-sharing plan, or a defined benefit plan. Generally requires a professional to set up, especially if you want a defined benefit plan.
Solo 401(k) $46,000/$51,000 if age 50 or older at year end None High contribution limits mean you can lower your tax bills and generate more tax-deferred earnings for your retirement stash.
Roth IRAs $5,000 for singles, $10,000 for couples $101,000-116,000 for singles, $159,000-169,000 for joint filers Contributions are nondeductible, but earnings grow tax-free. You can contribute an extra $1,000 if you will be 50 or older as of Dec. 31, 2008.
Spousal Deductible IRA $5,000 $159,000 to $169,000 If your spouse participates in a retirement plan at work but you do not, the joint AGI limits on a spousal IRA (for you) are $159,000 to $169,000. If you yourself already have another type of business retirement plan set up, such as a SEP or a 401(k), then your joint AGI phaseout is $85,000 to $105,000. An extra $1,000 can be added to the account annually if you will be age 50 or older at year end.

Based on 2008 limits.
* 20% of self-employment income or 25% of compensation for employees.

My plan is to establish a new retirement account (which will be funded by my business earnings) at one of my favorite mutual fund institutions, but I’ll have to speak to one of their retirement specialists about this. Chances are, I’ll be doing the simplest thing for now: I’ve only gotten around to opening a SEP-IRA (in addition to our regular IRAs), but going forward, I have my eye on some newer 401K programs.

This reminds me that I better get myself upgraded to using business accounting software like QuickBooks. Now that my main sources of income happen to be my new business ventures, I really need to make sure that I take this self-employment stint much more seriously.

Image Credit: AllFreelance.com

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 21 comments… read them below or add one }

Sara May 27, 2008 at 6:33 pm

Rock on! Love the picture… I’m glad you talked about liability insurance. It’s not worth risking everything you have to save a few bucks each month. Plus, million-dollar umbrella policies can be shockingly affordable.

David Carter May 27, 2008 at 6:46 pm

Its probably twice as hard saving when you are self employed b/c your income probably isn’t consistent. Good luck.

Sabrina May 27, 2008 at 7:37 pm

I like Peachtree for accounting software. Best of luck to you.

Frugal Dad May 28, 2008 at 5:49 am

Sounds like you are on track – definitely get that disability insurance in place quickly. Statistically you are more likely to become disabled than to die (until much later in life!).

Thanks for putting this together. My dream is to one day become self-employed, and I’ll need something like this as a roadmap.

AndyS May 28, 2008 at 6:57 am

Excellent post and great for those thinking of getting on the self employed path. Hopefully one day I will be able to pursue pf blogging on a full time basis. Until then your journey is my motivation.

The Baglady May 28, 2008 at 9:03 am

hmm hmm, that solo 401k seems like a good deal if you make a buttload of money (around $120k). I didn’t know it existed until I read this. Thanks SVB!

Luke @ Money & Fitnes Blog May 28, 2008 at 9:20 am

Great article and definitely a big help. Can you tell me more about Cobra and the costs involved for an entire family?

Silicon Valley Blogger May 28, 2008 at 9:48 am

whatever you end up paying for COBRA would be something you’d have to ask your HR department about. When I quit my job, as part of dealing with leaving the company, I talked quite a bit with my company’s HR department and discussed the COBRA option. I then compared that against getting private health insurance for the family and decided that COBRA (for the next year) would be the better option for us.

Luke @ Money & Fitnes Blog May 28, 2008 at 11:21 am

Thanks for the information. I didn’t realize Cobra was just a short term (Or for a year) solution at this point for your family. I have an S Corp setup but am very seriously considering going back to an LLC. What that means is like you, I have to worry about my own insurance. My wife works and has insurance but the price for a family way too high for someone under 30 and healthy (Knock on wood).

rocketc May 28, 2008 at 1:22 pm

That health insurance is a bugger isn’t it.

I would strongly consider a health savings account paired with a high deductible ($10K+) combination.

jim May 29, 2008 at 5:41 am

You should also try to join professional organizations in your area that you’d be eligible for, they often have health insurance options that you could take advantage of. COBRA is only for then next 18 months (or however long since you left), so the clock is somewhat ticking.

JJF June 8, 2008 at 2:20 pm

Terrific information. I appreciate you covering these related self employed topics.

Here is some more information about self employed retirement plans I found after reading your blog.

Lazy Man and Money June 24, 2008 at 10:56 pm

If you ever compare the retirement programs in more detail, I’d be interested in reading about it. I’m in a similar situation.

I’m starting to think more about taxes than I have in the past.

Bob Richards June 30, 2008 at 2:51 pm

Before you put money into a retirement plan other than a Roth, consider the following carefully—today’s top tax rate is 35%. It MUST increase in the future. Politicians will put this off until the country is desparate by there is no denying the numbers. So it’s not wise to get a tax deduction today at 35% and then pay tax on the funds later at 45% (or more?).

Cindy Morus, Your Money Mender July 3, 2008 at 2:07 pm

I just found out that although the Federal Government requires your ex-employer to offer you COBRA for 18 months, the ex-employer can actually offer it for longer. A chat with HR would definitely be in order.

One other thing on COBRA is if you come down with “something”, you may find an individual/family plan outrageously expensive if not impossible to get. So, if you’re healthy now, you might want to explore getting the insurance now.

BTW, Regence Blue Cross/Blue Shield of Oregon just raised rates 26% for individuals and 16% for small group plans. Holy cow!

Self Employed August 14, 2008 at 4:53 pm

For all the discomfort of relinquishing those company provided “benefits,” I actually see it in a positive light. You’ll never get rich working for somebody else and the bennies are just extra glitter on the golden handcuffs they’ve been holding you down with.

It may be disconcerting having to plan for health insurance, retirement, etc on your own but I think the juice is worth the squeeze in the long run.

Also give some thought to a chat with a tax advisor specializing in small business. You may be surprised how much better off you are being independent and how you can leverage that upside to offset the cost and inconveniences of funding your own healthcare and retirement concerns.

retiredebtfree01 October 10, 2008 at 12:11 am

I think this information will be useful to everyone. Can you provide any tips on future retirement plans?

JGVFinance December 6, 2008 at 11:34 pm

Being self employed needs some real hard work and and it will make you work even harder to save. Gather more info before going deeper into it and… Good Luck.

JGV December 9, 2008 at 9:30 pm

Whenever one would leave their jobs for a business of their own, it sometimes become so hard initially. But if you work hard and have thought about all the preparations and plans to make it a success then everything should fall into place.
But sometimes there si the saying “Even the best laid plans can go busted”. But still if you can persevere and work hard on it will work out most of the time.

Anyways, Good Luck,

Life Insurance

RP December 10, 2008 at 2:27 am

It’s harder to save money when your are self employed because the income is not fixed still saving is one of the best way in preparing for retirement.Great article you have here!

Ragu November 17, 2010 at 5:39 pm

The great thing about owning a business is the fact that you can deduct work expenses, like gas, that you wouldn’t dream about deducting if you were an employee.

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