Contract work vs. salary

[dr.girlfriend]

Spinning off of my other post...

What do you have to keep in mind when switching from salary to contract? You have to withdraw your own Social Security, etc., right? But do you actually pay a higher tax rate (I remember something about self-employment income). Can you deduct business expenses? Is your only option for retirement savings Roth, or can you do an IRA-type thing on your own?

If we go through with this we'll get an accountant, I'm just trying to get some idea of what's ahead.

[SJ]

Here is my standard list of expenses to track/keep in mind:

Common Home Office Expenses:

Rent
Insurance
Repairs & Maintenance
Utilities
Other Expenses

Other Self-Employed Expenses:

Vehicle Expenses (either mileage or proportional car expenses)
Health Insurance Premiums
Retirement Contributions

Regular Self-Employment Expenses:

Advertising
Business Travel
Commissions
Communications
Contract Labor (this is where we put payments to freelancers)
Interest Payments
Legal & Professional Fees
Meals & Entertainment (can only deduct 50%)
Office Expenses
Rental Expenses
Repairs & Maintenance
Supplies
Taxes & Licenses
Utilities

[SJ]

We do use a CPA, but I also use Quickbooks to track all of our business income & expenses, invoices outstanding, payables, etc. It is great to run reports and it helps the CPA a lot at tax time. We save receipts for all of the business expenses listed above. DH used to work out of a home office which offered extra deductions, but last November moved to a rental space/studio.

Because we have a fair number of expenses (we have been really investing in equipment and have been hiring more freelancers as we expand) there is a fairly big difference between DH's gross income and his net income/profit. We put 20% of all receipts into a separate savings account for taxes and pay quarterly estimates to both IRS and state. The CPA can help you figure out how to calculate this so you are covered under the safe harbor.

You can deduct 100% of health insurance premiums if you are self-employed. We chose to go with a High Deductible plan coupled with a HSA which works great. So we deduct 100% of DH's premiums, plus can put up to $3100 in the HSA each year which is another deduction.

Retirement plans are a huge plus of being self-employed. You can put up to 20% of your net income into a SEP IRA (up to $49K) and the contribution is 100% deductible. There are other plans (Self-Employed 401K) but I think the SEP is the easiest (no filings, etc.) and best way to start. The CPA should be well versed in this as well. We do a SEP IRA and a Roth IRA for DH.