Jan 29, 2018
Making an income is not just for daily life and paying your taxes: remember to plan ahead for retirement and emergencies, and save even more come April 15th by making smart pre-tax investments.
In our fourth installment of Taxes for Tutors, we turn to wise ways that freelance tutors can save more from their federal taxes, and use those savings to plan for retirement and those unavoidable rainy days.
Freelance tutors without any full-time employment won’t generally have access to an employer-offered retirement account or pension (unless you had previous full-time employment). As independent contractors, freelance tutors can set up their own retirement accounts.
You’re essentially your own employer, so you have recourse to an independent 401(k) plan. Unlike traditional IRAs with a yearly maximum contribution of $5,500 ($6,500 for over 50), in your independent 401(k), you can defer the first $18,000 of your annual income ($24,000 for those over 50), plus an additional 25 percent of your annual salary (up to a maximum of $53,000, for those of you making serious bank). You can even use some of your retirement savings in improving your business. One major downside, however, is all the administrative paperwork that an independent 401(k) requires.
A popular alternative is the SIMPLE IRA, with a maximum annual pretax contribution of $12,500 ($15,500 for over 50). The SIMPLE IRA is particularly easy administratively for solo tutors, but can get a bit complicated if you hire an employee (like hiring an associate tutor to help you with your blossoming tutoring business).
Check out this handy guide for more on the above plans and the many retirement options available to freelance tutors.
Freelance tutors are responsible for providing their own health insurance (and for their employees, if any), and we highly recommend tutors set aside enough of their income to pay for an independent health plan.
One way to save for health-related costs – and reduce your yearly taxable income – is to defer some of that pre-tax income to a Health Savings Account (HSA), up to $3,400 for an individual and $6,750 for families (in 2017). HSA funds rollover year-to-year and earn annual interest tax-free, and can even be invested.
An HSA is available only to individuals with high-deductible health plans: at least $1,350 for an individual or $2,700 for a family (in 2017), and there are rules to keep in mind about spending HSA funds. In any case, an HSA account is a great way for freelance tutors to pay less in tax and maximize their future savings for retirement or any medical mishaps.
OK, our last tip is not specifically tax-related (although we do recommend you save roughly 25 – 30 percent of each paycheck for potential tax liability). But freelance tutors are especially vulnerable to the ups and downs of the business cycle. Try to save up at least 3 – 6 months’ worth of your monthly income, to set aside in a “rainy day”/long-term planning savings account.
Getting access to higher savings interest rates is a major financial plus, too. Research what options exist for high-yield savings accounts for putting away your extra funds. Remember that online-only banks often offer higher interests rates for checking and savings accounts than the usual brick-and-mortar banks do, plus some offer free access to any ATMs.
For more on financial planning for freelance tutors, check out our finance guide and the whole series of Taxes for Tutors:
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