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Saving Strategies for the Self-Employed

Being your own boss can be rewarding, but the job comes with special financial considerations that should be taken into account. Self-employed or business owners must implement saving strategies to maintain a consistent cash flow to meet their expenses, as well as be able to fund other financial objectives.

Although not exhaustive, here are five savings tips for self-employed business owners to consider.

1. Establish a business entity, and purchase commercial insurance.

Gargantuan costs arising from legal liabilities in which you are at fault can be devastating. In fact, your own personal assets may also become subject to creditors. Establishing a pass-through business entity, such as an LLC or S Corporation, insulates you from these risks. Secondly, commercial insurance provides much needed protection. Over time, these saving strategies can provide you with the financial protection you need to successfully run your business.

2. Create a salary structure to lessen your self-employment tax.

While Social Security (FICA) reduces the employee’s salary by 6.2%, the self-employed pay 14.2% on income up to $132,900 (2019). If you set up a pass-through entity, such as an S Corporation, you can designate part of your salary as a K-1 distribution. While restrictions and certain requirements apply, such as having to file a separate tax return, you may be able to lower your self-employment tax. Consider exploring this saving strategy with your tax advisor. For further discussion, check out this article highlighting how business owners pay themselves.

3. Deduct your auto expenses when used for business purposes.

When you use your personal vehicle for business purposes, you can either deduct your actual expenses or claim the standard mileage rate (58 cents, 2019). For both, detailed record keeping is essential in case of audits.

Car expenses that are deductible include depreciation, insurance, licenses, tolls, lease payments, parking fees, registration fees, and tire maintenance. You may also deduct car loan interest, provided that you deduct the portion related to the business use of the vehicle. To take full advantage of your business car expenses, consider discussing with your tax advisor which option best fits your financial situation.

4. Set up a small business retirement plan.

Running a business requires great discipline so that you can allocate your resources to meet your financial objectives. As a self-employed individual, you bear the responsibility of setting up and funding your retirement plan. Three options to consider include the SEP IRA, the Simple IRA, and the qualified 401(k) plan.

  • SEP IRA: The SEP allows employer contributions only. Contributions for employees is the lesser of 25% of compensation or the annual indexed dollar limit ($56,000 for 2019). The self-employed contribution is based on net profit and cannot exceed 20% of earned income. These plans are inexpensive, easy to administer, and set up as traditional IRA accounts.
  • Simple IRA: This option is appropriate for businesses with 100 or fewer employees who earned $5,000 or more during the previous calendar year. Unlike the SEP, employees can make salary deferral contributions up to $13,000 per year (2019). The catch-up provision allows employees to make an additional contribution of $3,000. Employer contributions include a 3% match or a 2% non-elective contribution.
  • Qualified 401(k): These plans offer greater contribution limits and more options for employers. Employees can make both Roth and pre-tax contributions up to $19,000. If you are age 50 or older, you can make an additional $6,000 catch-up contribution (2019). If the plan is not a safe harbor plan, you must conduct non-discrimination testing.

Keep in mind that retirement plan contributions can accrue sizable savings over time, so carefully determine which plan best fits your financial situation.

5. Consider a lease-back arrangement with your own business.
Renting your business premise can be very expensive. In comparison, buying can create an asset that may become more valuable than the business that funds the purchase over the long-term.

The terms of the lease-back arrangement are fairly simple. You purchase the property and lease it back to your business. Usually, both the owner and the tenant become a limited liability company (LLC) for tax and security reasons. Because you can include all of the property expenses in the lease payment (mortgage, upkeep, taxes and utilities), this saving strategy allows wealth generated by the business to return to the business owner and to build up equity rather than be distributed to the landlord. Some disadvantages include having to make a down payment, paying closing costs and meeting on-going expenses of the building. A worst-case scenario is experiencing a decrease in cash flow and not being able to pay expenses. Consider discussing the pros and cons of this saving strategy with your tax advisor.

Establishing your financial plan is essential. Consider working with a CERTIFIED FINANCIAL PLANNER™ professional to solidify your saving strategies to bolster your financial security.


Registered Representative of and Securities and Investment Advisory Services offered through Cetera Advisor Networks LLC, a broker/dealer & Registered Investment Adviser, Member FINRA/SIPC. Reid Financial Consulting, 214 South Academy St, Lincolnton, NC 28092 and Cetera Advisor Networks are unaffiliated.

While the resources for this article were taken from reliable sources, recommendations are only of a general nature and do not include either tax or legal advice. Consequently, individuals should address the circumstances of their financial situation with their financial advisor.

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