On Retirement

How self-employment made my season bright

Jan 13, 2013 @ 12:01 am

By Mary Beth Franklin

I spent part of my Christmas holidays estimating my tax liability for 2012.

Exciting stuff, huh?

But rather than the usual gnashing of teeth that accompanied many of my tax-filing season computations in the past, I was pleased with my initial tally of income and ex-penses in my first year as an independent contractor.

After writing for a consumer audience for decades, I was thrilled to have the opportunity to reach a new audience of financial advisers through my column for InvestmentNews. But I wanted to tackle this new challenge on my own terms, as a consultant, not as an employee.

It has been an exciting endeavor that fits well with my pursuit of another goal: a certified financial planning credential (six courses completed, one to go).


As I tackled this transitional career, I followed the advice that I doled out to my readers over the years by carefully planning for the tax implications of self-employment.

I am lucky. My husband is a full-time federal employee, so he covers our health insurance needs.

And his long-term civil service will provide us both with retiree health benefits for life.

Being self-employed, I must pay both the employer and employee portions of the Social Security and Medicare payroll taxes, though I enjoyed the 2% tax holiday on the employee portion last year. But I also get to take advantage of this dual role in saving for retirement.

I opened a solo 401(k) before the end of the year, allowing me to contribute up to $22,500 because I am over 50. Plus, before I file my 2012 tax returns, I will also be able to contribute up to 20% of my net self-employment income, which is my net income minus half of my FICA taxes.

The maximum contribution for a solo 401(k) for 2012 is $55,500. That beats the maximum allowed under a simplified-employee-pension individual retirement account, which doesn't include a catch-up provision for those 50 and older.

And because of the dual-contribution formula, I can contribute more to a solo 401(k) than I could to a SEP IRA at the same income level.

The long-term-care insurance premiums that I pay for me and my husband are also deductible, up to the Internal Revenue Service maximum for our ages. That is something I was never able to deduct on my federal return, because — luckily — our medical expenses never exceeded 7.5% of our adjusted gross income.

If I paid our medical insurance premiums, that would also be de-ductible as a business expense.

The equipment and furniture that I purchased last year to outfit my home office qualify for a first-year write-off, though I could choose to depreciate them. And my day-to-day office supplies and unreimbursed travel expenses are deductible.

Unlike presidential candidates, I am not in the habit of disclosing my tax returns (or tying family pets to the roof of my car, for that matter). But I think it can serve as a helpful reminder to advisers working with clients who are transitioning into retirement.

Part-time consulting or other home-based businesses can hold some attractive income-generating and tax-planning opportunities on the way to full-time retirement.

mbfranklin@investmentnews.com Twitter: @mbfretirepro


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