Opinions expressed by Entrepreneur contributors are their own. Freelance life unquestionably brings freedom and flexibility. You can work full-time or part-time for who you want, when you want. Depending on your work choices, this type of career can be lucrative and satisfying. For freelancers , both payment and tax withholding processes are different from a traditional job. These small business owners tend to get their income in a non-taxed way. That means that what they bill a client is what they get paid. Because no state or federal income tax gets taken out from your payment, you might take a financial hit when it comes time to do your taxes. However, there are some ways to save for retirement and invest in ways that reduce your tax burden on a quarterly and annual basis. Open and contribute to a SEP-IRA The SEP (Simplified Employee Pension) Individual Retirement Account (IRA) is surpassing other retirement accounts in popularity. Part of the reason for that growth has to do with increased flexibility for your retirement plan. You can deposit more into a SEP-IRA than you could with a Roth IRA , which has a stricter contribution limit. Another advantage of opening a SEP-IRA is the amount you can contribute. You can contribute up to 25 percent of business profits after you subtract business deductions and half of your total self-employment taxes. Most brokerages offer a calculator to help you determine this figure when you sign up for the account. If you incorporated your freelance business as an S-Corp and pay yourself a salary, then the calculations are different. Try a solo 401(k) Another option is to open a solo 401(k), which often allows for a larger contribution than even the SEP-IRA. You’ll also have opportunities to make post-tax “Roth” contributions that aren’t available with a SEP-IRA. Although that won’t benefit your tax obligation today, it will help your long-term savings plan. Someday you’ll want to retire and start tapping into that money. The only downsides are that the paperwork is more complex and there may be more fees involved. Have multiple retirement accounts — if it makes financial sense You might be able to maximize the benefits of various account types by opening a few and adding to each over the course of your freelance career. How you decide which ones to open should be based in part on your tax bracket and marital status. Check with your tax professional on whether to add a Roth IRA or traditional IRA to your retirement account portfolio. Make catch-up contributions Although this tax tip might not apply to everyone, it does help those freelancers who are 50 and older. Freelancers in this demographic can make what’s known as a catch-up contribution to their 401(k) plans. The extra contributions can help to reduce taxable income and generate considerable tax savings. Because the amount continues to change each year and is also tied to your tax bracket, the best approach is to read the IRS guidelines. […]
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