7 Pros and Cons of Investing in a 401(k) Retirement Plan at Work

A 401(k) retirement plan is one of the most powerful savings vehicles on the planet. If you’re fortunate enough to work for a company that offers one (or its sister for non-profits, a 403(b)), it’s a valuable benefit that you should take advantage of.

But many people ignore their retirement plan at work because they don’t understand the rules, which may seem confusing at first. Or they worry about what happens to their account after they leave the company or mistakenly believe you must be an investing expert to use a retirement plan.

Let's talk about seven primary pros and cons of using a 401(k). You’ll learn some lesser-known benefits and get tips to save quickly so you have plenty of money when you’re ready to kick back and enjoy retirement.

What is a 401(k) retirement plan?

Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis.

A 401(k) is a type of retirement plan that can be offered by an employer. And if you’re self-employed with no employees, you can have a similar account called a solo 401(k). These accounts allow you to contribute a portion of your paycheck or self-employment income and choose various savings and investment options such as CDs, stock funds, bond funds, and money market funds, to accelerate your account growth.

Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis, which reduces your annual taxable income and your tax liability. You defer paying income tax on contributions and account earnings until you take withdrawals in the future.

Roth retirement accounts require you to pay tax upfront on your contributions. However, your future withdrawals of contributions and investment earnings are entirely tax-free. A Roth 401(k) or 403(b) is similar to a Roth IRA; however, unlike a Roth IRA there isn’t an income limit to qualify. That means even high earners can participate in a Roth at work and reap the benefits.

RELATED: How the COVID-19 CARES Act Affects Your Retirement

Pros of investing in a 401(k) retirement plan at work

When I was in my 20s and started my first job that offered a 401(k), I didn’t enroll in it. I was nervous about having investments with an employer because I didn’t understand what would happen if I left the company, or it went out of business.

I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages.

I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages. Here are four primary pros for using a retirement plan at work.

1. Having federal legal protection

Qualified workplace retirement plans are protected by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law. It sets minimum standards for employers that offer retirement plans, and the administrators who manage them.

ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors.

ERISA was enacted to protect your and your beneficiaries’ interests in workplace retirement plans. Here are some of the protections they give you:

  • Disclosure of important facts about your plan features and funding 
  • A claims and appeals process to get your benefits from a plan 
  • Right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged 
  • Payment of certain benefits if you lose your job or a plan gets terminated

Additionally, ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors. Let’s say you have money in a qualified account but lose your job and can’t pay your car loan. If the car lender gets a judgment against you, they can attempt to get repayment from you in various ways, but not by tapping your 401(k) or 403(b). There are exceptions when an ERISA plan is at risk, such as when you owe federal tax debts, criminal penalties, or an ex-spouse under a Qualified Domestic Relations Order. 

When you leave an employer, you have the option to take your vested retirement funds with you. You can do a tax-free rollover to a new employer's retirement plan or into your own IRA. However, be aware that depending on your home state, assets in an IRA may not have the same legal protections as a workplace plan.

RELATED: 5 Options for Your Retirement Account When Leaving a Job

2. Getting matching funds

Many employers that offer a retirement plan also pay matching contributions. Those are additional funds that boost your account value.

Always set your 401(k) contributions to maximize an employer’s match so you never leave easy money on the table.

For example, your company might match 100% of what you contribute to your retirement plan up to 3% of your income. If you earn $50,000 per year and contribute 3% or $1,500, your employer would also contribute $1,500 on your behalf. You’d have $3,000 in total contributions and receive a 100% return on your $1,500 investment, which is fantastic!

Always set your 401(k) contributions to maximize an employer’s match, so you never leave easy money on the table.

3. Having a high annual contribution limit

Once you contribute enough to take advantage of any 401(k) matching, consider setting your sights higher by raising your savings rate every year. For 2021, the allowable limit remains $19,500, or $26,000 if you’re over age 50. A good rule of thumb is to save at least 10% to 15% of your gross income for retirement.

Most retirement plans have an automatic escalation feature that kicks up your contribution percentage at the beginning of each year. You might set it to increase your contributions by 1% per year until you reach 15%. That’s a simple way to set yourself up for a happy and secure retirement.

4. Getting free investing advice

After you enroll in a workplace retirement plan, you must choose from a menu of savings and investment options. Most plan providers are major brokerages (such as Fidelity or Vanguard) and have helpful resources, such as online assessments and free advisors. Take advantage of the opportunity to get customized advice for choosing the best investments for your financial situation, age, and risk tolerance.

In general, the more time you have until retirement, or the higher your risk tolerance, the more stock funds you should own. Likewise, having less time or a low tolerance for risk means you should own more conservative and stable investments, such as bonds or money market funds.

RELATED: A Beginner's Guide to Investing in Stocks

Cons of investing in a 401(k) retirement plan at work

While there are terrific advantages of investing in a retirement plan at work, here are three cons to consider.

1. You may have limited investment options

Compared to other types of retirement accounts, such as an IRA, or a taxable brokerage account, your 401(k) or 403 (b) may have fewer investment options. You won’t find any exotic choices, just basic asset classes, including stock, bond, and cash funds.

However, having a limited investment menu streamlines your investment choices and minimizes complexity.

2. You may have higher account fees

Due to the administrative responsibilities required by employer-sponsored retirement plans, they may charge high fees. And as a plan participant, you have little control over the fees you must pay.

One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.

One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.

3.  You must pay fees on early withdrawals

One of the inherent disadvantages of putting money in a retirement account is that you’re typically penalized 10% for early withdrawals before the official retirement age of 59½. Plus, you typically can’t tap a 401(k) or 403(b) unless you have a qualifying hardship. That discourages participants from tapping accounts, so they keep growing.

The takeaway is that you should only contribute funds to a retirement account that you won’t need for everyday living expenses. If you avoid expensive early withdrawals, the advantages of using a workplace retirement account far outweigh the downsides.

Source: quickanddirtytips.com

The 2020 Tax Deadline Is July 15—Here’s What You Need to Know

A woman has her laptop sitting on her table before her as she looks on the screen.

Still scrambling to get your taxes done? Don’t worry—this year’s tax season is a bit longer than usual. While the tax deadline has traditionally been April 15, the 2020 tax deadline has been extended to July 15 due to COVID-19. 

What does that mean for you and your taxes? We’ve got information you need to know about this year’s tax deadline. 

Is the Tax Deadline Extension for Everyone?

According to the IRS, the tax deadline extension applies to individual returns as well as corporate and trust returns. And because this extension is automatic, you won’t have to fill out any additional forms to qualify.

Also, keep in mind is that this tax deadline extension is for federal taxes. State taxes, on the other hand, might have a different deadline. So you’ll probably want to check your state tax deadline, just to be sure. 

What About Quarterly Estimated Tax Payments?

Are you a freelancer? Do you own a business? That means you’ll have to make quarterly estimated tax payments this year. According to the IRS website, here are the deadlines:

  • If your payment period was January 1 – March 31, your tax deadline is July 15
  • If your payment period was April 1 – May 31, your tax deadline is July 15
  • If your payment period was June 1 – August 31, your tax deadline is September 15
  • If your payment period was September 1 – December 31, your tax deadline is January 15, 2021

What Should I Do Before the Tax Deadline?

If you were a bit behind on filing your taxes this year, the good news is you have a bit more time. Here are some things you should do before the July 15 tax deadline comes around.

Make Sure You Have Everything—Yes, Everything

If you haven’t already, now’s the time to get all your documents in one place. And yes, we mean everything. When it comes to your taxes, you don’t want to leave anything out. It could cause a huge headache later on. 

Make sure you have the following:

  • Personal information for both you and your dependents
  • Income and investment documents
  • Medical bill receipts
  • Business and self-employment records
  • Charitable donations
  • Homeownership records

Decide If You’ll Do Your Taxes Yourself or If You’ll Hire a Professional

Taxes aren’t easy. And they can take a lot of time. If you don’t have a whole afternoon to dedicate to doing your taxes, you might want to hire a professional to do them for you. It could be nice to have someone who has a sound understanding of tax rules and regulations to take care of your taxes for you.

But if you can’t fit the expense of hiring a professional into your budget, you can definitely do your taxes yourself. A lot of people file their taxes themselves, so why can’t you? Luckily, there are a lot of tools out there that’ll help you file your taxes for free.

Whichever you decide, make your choice now. You want to get started a few months in advance of the tax deadline, just in case. Better safe than sorry!

Make a Plan for Your Tax Return

No matter how much you’ll get in your tax return, it can’t hurt to have a plan for how you’ll use it. Due to the financial uncertainty from COVID-19, it couldn’t hurt to put a good amount of your tax return in your savings. And since unemployment is on the rise, it could be a nice cushion to fall back on if you find yourself without a job.

Your tax return could also come in handy if you have any major bills to pay. No matter how you decide to use your tax return, make sure you use it in a way that’s useful to you.

The Bottom Line

Take advantage of the 2020 tax deadline extension. It’s not an excuse to put off your taxes later, but it is a great opportunity to give yourself a little more time to complete your taxes. If you want to learn more about how COVID-19 can impact your finances in general, check out our COVID-19 Financial Resource Guide.  


The post The 2020 Tax Deadline Is July 15—Here’s What You Need to Know appeared first on Credit.com.

Source: credit.com

Two Years Without Health Insurance (and What I’m Doing Now)

Two years ago, I was unsatisfied with my options for health insurance. The premiums were rising even as the quality dropped in the form of an ever-increasing deductible. I am guessing that you might feel the same way these days – most of us Americans are in the same boat.

I felt like I was being squeezed from both ends and it was starting to piss me off. So I decided to take some action, by doing the math for myself using a spreadsheet. I needed to answer the question, “Is this insurance really as bad a deal as I think it is?”

Sure enough, the risks and rewards of the coverage did not justify the premiums, so I decided to try an experiment and simply drop out of the market and insure myself. In other words, just rolling the dice and going through life with no form of health insurance at all.

Doubling down on the bikes, barbells and salads, I did my best to eliminate any risk factors that are in my control, while accepting that there are still much less likely but more random factors that are not.

Figure 1 – DIY Health Care

Almost two years and $10,000 in premium savings later, I have found the experiment to be a success: I have slept well and not worried about the fact that I could be on the hook for a big bill if I did ever need major care. And as luck would have it, I also enjoyed the same good health as always over this time period – probably the best in my life so far because the extra healthy living has been working its magic.

But.

This situation has not been quite ideal, because my life is not a very useful model for everyone to follow. Most people don’t have the luck of perfect health, many have a larger family than I do, and very few people are in a financial position to self-insure for all possible medical bills.

Also, I found myself wishing I had a doctor that actually knew me, who I could call or visit on short notice if I ever did need help.

Finally, I wanted to switch back to having some form of insurance so that I could learn about it and write about it as time goes on. But was I really willing to be part of that unsatisfying and broken insurance model?

Then something magical happened: I learned about the new and vastly improved world of Direct Primary Care physicians.

What is DPC?

DPC is a fairly new trend in the US, but it is also a return to a very old tradition: a direct relationship between you and your doctor, with no insurance company in the way. 

As a customer, you pay for a monthly subscription (somewhere around $100), and in exchange you get unlimited access to super elite, personalized medicine for the vast majority of your medical needs. Diagnoses, prescriptions, skin conditions, stitches, even fixing a broken bone if you don’t need surgery. All covered, with no co-pay and in an environment that feels to me like Presidential-level health care, in striking contrast to some of my past experiences where I felt like an anonymous numbered ticket in a sloshing sea of bureaucratic institutional medicine.

Oh, and direct email, phone and text message contact with your doctor, prescriptions over phone or video call, and in some cases even house calls depending on the practice and the situation.

Through some sort of magic, the Direct Primary Care model offers much better medical care and much lower prices, at the same time.

How could it be? It’s because of the incentives.

Figure 2: The Insurance Model for Health Care

In our famously broken US healthcare model, an insurance company is wedged in between you and your doctors, and it has different objectives than you do.

You just want the best overall health for yourself, and when the shit does hit the fan and you need medical care, you want it to be quick, effective, and at minimum cost. And you don’t want to be hounded with years of stressful stray bills after an expensive medical procedure.

Your Doctor wants to help as many people as possible and make a good living, without having to wade through a sea of paperwork or stress or lawsuits.

Your Insurance company wants to make as much profit as possible, which means maximizing the amount they collect from you, and minimizing the amount they pay to your doctor. In theory, they benefit from helping you to stay healthy. But they have also developed elaborate contracts (putting in as many loopholes as possible to allow them to drop your coverage or deny claims), become masters of delaying payments, limiting which procedures and tests they will authorize doctors to do, and just generally throwing the biggest monkey wrench into the system that they can.

Over the decades, there has been a complex battle of lawmaking, lobbying, compromise and complexity to try to regulate away some of these problems. Sometimes the new laws help, sometimes they don’t, but the end result will never be optimal simply because there are a lot of people involved, and big crowds of humans make for slow and shitty decision making.

The Direct Primary Care Model

Figure 3: The Direct Primary Care Model

With DPC, it’s just you and your doctor. You both have the same incentives, but now the model works much better because there is no chaotic and expensive force in the middle to mess things up.

And because you operate on a subscription, the doctor gets paid whether you come into the office or not. At the same time, you are free to come in whenever you do need something, at no additional cost. So she has an incentive to keep you healthy, so that you have no need to come into the office in the first place. 

On top of this, you get to decide together what is the best course of healthy prevention and treatment, without the overhead and complexity of constantly fighting with insurance companies. This drastically cuts the costs by eliminating the large staff of paper-pushers and attorneys that you normally need to operate a medical office, and frees up the doctor to spend more time with each patient during each visit.

How could the doctor possibly make a living with such low fees?

As it turns out, a small practice with one or two doctors and a few credentialed medical assistants can handle over 1000 subscribers while still giving each person much more time than they get under the old model. At $100 per month, this is $1.2 million in annual gross subscriber income, which is enough to pay everybody well, and rent a suitable clinic space. And as you scale up the operation, some economies of scale on things like space and equipment make it even better.

Just as importantly, running a practice like this tends to make a dramatic improvement in a doctor’s quality of life. It’s better medicine, with more flexibility and less hassle and stress. No wonder this model is growing rapidly and has become a favorite of physicians who happen to be MMM readers, as I hear from more of them every month.

Direct Primary Care is now a nationwide movement, with many hundreds of practices spanning the country and many more opening each year. Today’s screenshot of https://mapper.dpcfrontier.com/ shows the current state of the market. 

Direct care locations everywhere

In fact, it turns out this whole trend might even be a Mustachian-originated phenomenon, as I joined my own local practice called Cloud Medical, met the founder Dr. David Tusek, and he revealed halfway through our introductory visit that he was both a founder of DPC pioneer Nextera Healthcare in 2009, and a lurking reader of this blog for several years before I discovered him right here in my own town. 

A note for locals: if you are considering joining Cloud, mention that you would like the MMM discount to save a further $12/month! (we have no affiliation, they are just looking to expand the practice and I’ll remove this notice if they fill up)

My experience (so far) with Cloud Medical

Cloud Medical’s Longmont office – definitely a step up over past medical office experiences! (although they do need to add a proper bike rack)

I signed up with Cloud this past summer, about five months ago. Although I have been feeling great, I figured it was time to put myself through an extensive battery of “middle-aged man” tests just to make sure I am not missing any hidden problems. 

With the doctor’s guidance, I did a very thorough blood test, plus an electrocardiogram scan of my heart performance and ultrasound Carotid artery scan which involves a practitioner lubing up your neck and sliding a Star-Trek-style probe around on it while recording images of your body’s most critical plumbing to check for signs of clogging. Plus the usual checks of an annual physical exam. All clear.

I also finally got around to a long-awaited diagnosis and prescription for my Adult Attention Deficit Disorder condition, something which took me seven years to get organized enough to achieve, paradoxically one of the crippling effects of ADD. Although this is a very personal health detail, I mention it here because there are many friends and readers who also suffer from this condition, and I encourage you to learn more about it and seek help if appropriate. It can be life-changing.  I found this process was much easier in a DPC environment, because of the more personal nature of the doctor-patient connection. 

This DPC model addresses perhaps 90% of typical medical needs in-house, and a “menu” of optional specialists knocks out another 5%. 

Cloud and other DPC practices have a “menu” of standardized prices, typically much lower than traditional offices. Full PDF here.

But there is still a chance you will need the more rare (and expensive) services of a hospital or specialist. In this case, your DPC physician can provide referrals and guidance to allow you to get the right help at a discounted, direct-pay price, or even handle your needs with a conventional insurance company.

Part Two: But What About Bigger Expenses?

Health share options, with the one I chose (Sedera) in the center.

At this point, you can add another layer of protection: High deductible conventional insurance, or a health share membership which offers a similar end-result while being careful not to be classified as insurance. 

A Disclaimer before we begin:

I think of health shares as a form of “emergency medical bill reimbursement”, rather than full fledged insurance. They are suitable for mostly-healthy people who want financial protection in the event of a major medical event. But they are not insurance, and often not too useful for someone with an existing, expensive condition.

Update 11/12: This blog post has triggered lots of fine-print-reading and discussion among readers, which led us to follow up with various insurance and health share companies.

The final word on one issue of debate: most conventional insurance and health shares do not cover voluntary abortions, while they do cover medically necessary ones, just under the different name of “Maternal Complications”.

Health shares in particular also don’t offer much ongoing drug reimbursement, which includes a lack of coverage for birth control. While I disagree with this policy, from a practical perspective it just means you need to budget for this expense separately.

For situations where a health share membership falls short, the subsidized and regulated insurance available through employer-based plans or the state exchanges via the Affordable Care Act, are probably a better bet.

But with all that in mind, I still chose one for myself, so let’s get into it!

Health sharing groups started out catering only to members of certain religions. Then a provider called Liberty Health Share opened up the market slightly while still requiring some fairly specific spiritual affirmations.

The latest incarnation is a company called Sedera* , which has addressed some of the shortcomings of earlier companies, has far less religious basis, and now seems to be the place that most of my more analytical friends and their families are ending up. Even my DPC physician Dr. Tusek is now recommending Sedera.

Sedera is worth a whole separate article in itself, and in fact I am starting a dedicated page for questions and answers and discussion on the experience. But for now, we’ll take a shortcut and just say that I was convinced and willing to give it a try, so I signed myself up as a Sedera customer.

A quick comparison of the closest standard insurance plan I could find on the standard Colorado health insurance exchange, versus what I got from Sedera (click for larger version):

For me, Sedera cuts my monthly cost in half, even while delivering better coverage.

Another thing I like about all this is that there is no concept of “in network” and “out of network” doctors or hospitals. You can even use hospitals in other countries while traveling, and get reimbursed in US dollars after you return home. It’s simpler, cheaper and more flexible.

So in the end, by combining DPC with a health share membership, I am hopefully ending up with the best of all worlds:

  • The best personalized, advanced medicine and quick response time, possibly anywhere in the world through my DPC subscription, with unlimited “free” (zero co-pay) doctor visits.
  • Flexible coverage for any additional needs and support for decision-making and billing, even when traveling internationally
  • A financial backstop just in case things get really expensive
  • At a total monthly cost that is still lower than the most basic ho-hum plan on standard insurance
  • A further bonus – Sedera incentivizes you to be a member of a DPC, with a solid discount if you are, because they know their costs to cover you will be lower if you are healthier and have hassle-free access to a doctor.

This all sounds good to me, but it is important to state that this is an experiment. I still don’t have much experience with the US healthcare system – it helped deliver my son in 2006, and then repair that same boy’s broken arm in 2016. Conventional insurance offered some halfhearted support for both of those expenses, but aside from that I don’t have many stories to tell. 

By collecting more information from readers and from my new helpers at Cloud Medical and Sedera, we should be able to make more sense of all this. And hopefully continue to expand and improve this new, better form of health care so it is accessible to more US residents.

If it gets big enough, we might end up solving this whole problem together – better, cheaper health care for everyone.

But What About the Affordable Care Act?

I think that DPC and ACA could work together perfectly – we keep the idea of the personal relationships, the subscription-based model, and the open and competitive pricing from hospitals for all procedures. But we just don’t need conventional insurance companies. If our society wants to help less-wealthy people to afford the best health care (which I think is a great idea), we could just subsidize their DPC memberships and offer a public insurance option at low or zero cost which covers hospitalizations. The reason this is better than the ACA: direct care and no insurance companies.

Conclusion

My past articles and experiences have shown that for many of us, a big hurdle when considering early retirement or self-employment is “what about health insurance”? Hopefully the is DPC + Healthshare method will put that question to rest for many of us. After all, shouldn’t our career and life choices be separate from our healthcare?

—–

Interested in Learning More?

A long-time friend of mine (and fellow early-retiree, and co-owner of the HQ coworking space) Bill and his family have been Sedera customers and enthusiasts for about two years. So much that he even took it upon himself to meet the company’s management, sign himself up as a representative to streamline some of the inefficiencies he perceived when joining, and then teach me about the whole thing.

Because of that, I am sharing Bill’s Sedera signup link in this article. His is unique among the Sedera affiliates in that he charges zero administrative fee, typical brokers charge $25 per month and up.

https:/sedera.community/thefireguild1

*note: Sedera does pay its affiliates a small referral fee for new customers, which does not affect your monthly bill – in fact, this link offers a lower price than subscribing directly through the company’s website. Thus, we believe this is the lowest cost way on the Internet to get this coverage.

As mentioned above, I’m giving Bill his own page to maintain on this site, where he can share his ongoing research and updates and answer questions: mrmoneymustache.com/sedera

Further Reading:

I was quite moved by this piece that Cloud Medical’s Dr. David Tusek wrote about “the ten heartbreaks” that led him to work since 2009 towards accelerating this better way to do healthcare.

An interesting story from Bill’s hometown, from a doctor who took this path way back in 2013:

South Portland Doctor Stops Accepting Insurance, Posts Prices Online
(from the Bangor Daily News)

Source: mrmoneymustache.com

What Is the Self-Employment Tax?

Working for yourself, either as a part-time side hustle or a full-time endeavor, can be very exciting and financially rewarding. But one downside to self-employment is that you're responsible for following special tax rules. Missing tax deadlines or paying the wrong amount can lead to expensive penalties.

Let's talk about what the self-employment or SE tax is and how it compares to payroll taxes for employees. You’ll learn who must pay the SE tax, how to pay it, and tips to stay compliant when you work for yourself.

What is the self-employment (SE) tax?

In addition to federal and applicable state income taxes, everyone must pay Social Security and Medicare taxes. These two social programs provide you with retirement benefits, disability benefits, survivor benefits, and Medicare health insurance benefits.

Many people don’t realize that when you’re a W-2 employee, your employer must pick up the tab for a portion of your taxes. Thanks to the Federal Insurance Contributions Act (FICA), employers are generally required to withhold Social Security and Medicare taxes from your paycheck and match the tax amounts you owe.

In other words, your employer pays half of your Social Security and Medicare taxes, and you pay the remaining half. Employees pay 100% of federal and state income taxes, which also get withheld from your wages and sent to the government.

When you have your own business, you’re typically responsible for paying the full amount of income taxes, including 100% of your Social Security and Medicare taxes.

But when you have your own business, you’re typically responsible for paying the full amount of income taxes, including 100% of your Social Security and Medicare taxes.

Who must pay the self-employment tax?

All business owners with "pass-through" income must pay the SE tax. That typically includes every business entity except C corporations (or LLCs that elect to get taxed as a corporation).

When you have a C corp or get taxed as a corporation, you work as an employee of your business. You're required to withhold all employment taxes (federal, state, Social Security, and Medicare) from your salary or wages. Other business entities allow income to pass directly to the owner(s), so it gets included in their personal tax returns.

You must pay the SE tax no matter if you call yourself a solopreneur, independent contractor, or freelancer—even if you're already receiving Social Security or Medicare benefits.

You must pay the SE tax no matter if you call yourself a solopreneur, independent contractor, or freelancer—even if you're already receiving Social Security or Medicare benefits.

How much is the self-employment tax?

For 2020, the SE tax rate is 15.3% of earnings from your business. That's a combined Social Security tax rate of 12.4 % and a Medicare tax rate of 2.9%.

For Social Security tax, you pay it on up to a maximum wage base of $137,700. You don't have to pay Social Security tax on any additional income above this threshold. However, this threshold has been increasing and is likely to continue creeping up in future years.

However, for Medicare, there is no wage base. All your income is subject to the 2.9% Medicare tax.

So, if you're self-employed with net income less than $137,700, you'd pay SE tax of 15.3% (12.4% Social Security plus 2.9% Medicare tax), plus ordinary income tax.

Remember that your future Social Security benefits get reduced if you don't claim all of your self-employment income.

What is the additional Medicare tax?

If you have a high income, you must pay an extra tax of 0.9%, known as the additional Medicare tax. This surtax went into effect in 2013 with the passage of the Affordable Care Act (ACA). It applies to wages and self-employment income over these amounts by tax filing status for 2020:

  • Single: $200,000 
  • Married filing jointly: $250,000 
  • Married filing separately: $125,000 
  • Head of household: $200,000 
  • Qualifying widow(er): $200,000

What are estimated taxes?

As I mentioned, when you’re an employee, your employer withholds money for various taxes from your paychecks and sends it to the government on your behalf. This pay-as-you-go system was created to make sure you pay all taxes owed by the end of the year.

You must make quarterly estimated tax payments if you expect to owe at least $1,000 in taxes, including the SE tax.

When you’re self-employed, you also have to keep up with taxes throughout the year. You must make quarterly estimated tax payments if you expect to owe at least $1,000 in taxes, including the SE tax.

Each payment should be one-fourth of the total you expect to owe. Estimated payments are generally due on:

  • April 15 (for the first quarter) 
  • June 15 (for the second quarter) 
  • September 15 (for the third quarter) 
  • January 15 (for the fourth quarter) of the following year

But when the due date falls on a weekend or holiday, it shifts to the next business day. Your state may also require estimated tax payments and may have different deadlines.

How to calculate estimated taxes

Figuring estimated payments can be extremely confusing when you’re self-employed because many entrepreneurs don’t have the faintest idea how much they’ll make from one week to the next, much less how much tax they can expect to pay. Nonetheless, you must make your best guesstimate.

If you earn more than you estimated, you can pay more on any remaining quarterly tax payments. If you earn less, you can reduce them or apply any overpayments to next year’s estimated payments.

If you (or your spouse, if you file taxes jointly) have a W-2 job in addition to self-employment income, you can increase your tax withholding from earnings at your job instead of making estimated payments. To do this, you or your spouse must file an updated Form W-4 with your employer.

The IRS has a Tax Withholding Estimator to help you calculate the right amount to withhold from your pay for your individual or joint taxes.

How to pay estimated taxes

To figure and pay your estimated taxes, use Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations. These forms contain blank vouchers you can use to mail in your payments, or you can submit funds electronically.

When you have a complicated situation, including having business income, one of your new best friends should be a tax accountant.

For much more information about running a small business successfully, check out my newest book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. Part four, Understanding Business Taxes, covers everything you need to know to comply and stay out of trouble.

From personal experience, I can tell you that when you have a complicated situation, including having business income, one of your new best friends should be a tax accountant. Find one who listens well and seems to understand the kind of work you're doing.

A good accountant will help you calculate your estimated quarterly taxes, claim tax deductions, and save you money by helping you take advantage of every tax benefit that's allowed when you're self-employed. In Money-Smart Solopreneur, I recommend various software, online services, and apps to help you track expenses, deductions, and tax deadlines that will keep your business running smoothly.

Source: quickanddirtytips.com

The Highest Paying Trade Jobs On the Market

Pursuing a four-year degree or higher isn’t for everyone. If you fall into that group, it doesn’t mean you can’t get a high-paying job. There are a surprising number of trade jobs that pay salaries at or above careers that require a four-year degree. They pay well because they’re in demand and are expected to grow for the foreseeable future.

To earn that kind of money, you’ll need to land one of the best trade jobs. And while they may not require a four-year degree, most do require some type of specialized education, typically an associate’s degree (which you can often get from an online college). That has a lot of advantages by itself, because a two-year education is a lot less expensive than a full four-year program.

I covered the best jobs with no college degree previously, and this post is specifically about trade jobs. Choose one that interests you – and fits within your income expectations – then read the description for it. I’ve given you the requirements to enter the trade, the income, working conditions, employment projections and any required education. After reading this guide, you’ll already be on your way to your new career!

Benefits of Pursuing Trade Jobs

For a lot of young people, going to a four-year college is the default choice. But when you see how well the trade jobs pay, and how much less education they require, I think you’ll be interested.

Apart from income, here are other benefits to the best trade jobs:

  • You’ll need only a two-year degree or less, so you’ll save tens of thousands of dollars on your education.
  • You’ll graduate and begin earning money in half as much time as it will take you to complete a four-year degree.
  • Since trade jobs are highly specialized, you’ll mainly be taking courses related to the job, and less of the general courses that are required with a four-year degree.
  • Some schools provide job placement assistance to help you land that first position.
  • Since most of these jobs are in strong demand, the likelihood of finding a job quickly after graduation is very high.

Still another major benefit is geographic mobility, if that’s important to you. Since the best trade jobs are in demand virtually everywhere in the country, you’ll be able to choose where you want to live. Or if life takes one of those strange turns – that it tends to do – you’ll be able to make a move easily without needing to worry about finding a job. There’s an excellent chance one will be waiting for you wherever you go.

The Best Paying Trade Jobs

The table below shows some of the highest paying trades you can enter without a bachelor’s degree or higher. However, most do require at least an associate’s degree (AA) or equivalent education. Not surprisingly, occupations in the medical field are the most common.

The salary indicated is the median for the entire country. But there are large differences from one area of the country to another. Salary information is taken from the US Bureau of Labor Statistics, Occupational Outlook Handbook.

Trade Median Salary Education Requirement
Air traffic controllers $122,990 AA or BS from Air Traffic Collegiate Training Initiative Program
Radiation therapists $85,560 AA degree
Nuclear technicians (nuclear research and energy) $82,080 AA degree
Nuclear medicine technologists $77,950 AA degree
Dental hygienists $76,220 AA degree
Web developers $73,760 AA degree
Diagnostic medical sonographers $68,750 AA degree
MRI technologists $62,280 AA degree
Paralegals $51,740 AA degree
Licensed practical nurses $47,480 AA degree or state approved educational program

The table doesn’t list other common trades, like electricians, plumbers, elevator repair techs, welders or mechanics. To enter those fields you’ll usually need to participate in an apprentice program sponsored by an employer, though there may be certain courses you’ll need to complete.

The Best Trade Jobs in Detail

The table above summarized the best trade jobs, as well as the median salary and the basic educational requirements. Below is additional information specific to each job – and more important – why it’s a career worth considering.

Air Traffic Controller

Air traffic controllers coordinate aircraft both on the ground and in the air around airports. They work in control towers, approach control facilities or route centers. The pay is nearly $123,000 per year, and the job outlook is stable.

Education/Training Required: You’ll need at least an associate’s degree, and sometimes a bachelor’s degree, that must be issued by the Air Traffic Collegiate Training Initiative Program. There are only 29 colleges across the country that offer the program. Some of the more recognizable names include Arizona State University, Kent State University, Purdue University, Southern New Hampshire University (SHNU), and the University of Oklahoma.

Job Challenges: The limited number of colleges offering the program may be inconvenient for you. The job also requires complete concentration, which can be difficult to maintain over a full shift. You’ll also be required to work nights, weekends, and even rotating shifts. And since the pay is high and demand for air traffic controllers expected to be flat over the next few years, there’s a lot of competition for the positions.

Why you may want to become an air traffic controller:

  • The pay is an obvious factor – it’s much higher than most jobs that require a bachelor’s degree.
  • You have a love for aviation and want to be in the middle of where the action is.
  • Jobs are available at small private and commercial airports, as well as major metropolitan airports.

Radiation Therapists

Radiation therapists are critical in the treatment of cancer and other diseases that require radiation treatments. The work is performed mostly in hospitals and outpatient centers, but can also be in physician offices. Income is well over $85,000 per year, and the field is expected to grow by 9% over the next decade, which is faster than average for the job market at large.

Education/Training Required: You’ll need either an associate’s or bachelor’s degree in radiation therapy, and licensing is required in most states. That usually involves passing a national certification exam.

Job Challenges: You’ll be working largely with cancer patients, so you’ll need a keen sensitivity to the patient’s you’re working with. You’ll need to be able to explain the treatment process and answer questions patients might have. There may also be the need to provide some degree of emotional support. Also, if you’re working in a hospital, the position may involve working nights and weekends.

Why you may want to become a radiation therapist:

  • You have a genuine desire to help in the fight against cancer.
  • The medical field offers a high degree of career and job stability.
  • The position pays well and typically comes with a strong benefits package.

Nuclear Technicians

Nuclear technicians work in nuclear research and energy. They provide assistance to physicists, engineers, and other professionals in the field. Work will be performed in offices and control rooms of nuclear power plants, using computers and other equipment to monitor and operate nuclear reactors. The pay level is about $82,000 per year, and job growth is expected to be slightly negative.

Education/Training Required: You’ll need an associate’s degree in nuclear science or a nuclear related technology. But you’ll also need to complete extensive on-the-job training once you enter the field.

Job Challenges: There is some risk of exposure to radiation, though all possible precautions are taken to keep that from happening. And because nuclear power plants run continuously, you should expect to do shift work that may also include a variable schedule. The biggest challenge may be that the field is expected to decline slightly over the next 10 years. But that may be affected by public attitudes toward nuclear energy, especially as alternative energy sources are developed.

Why you may want to become a nuclear technician:

  • You get to be on the cutting edge of nuclear research.
  • Compensation is consistent with the better paying college jobs, even though it requires only half as much education.
  • There may be opportunities to work in other fields where nuclear technician experience is a job requirement.
  • It’s the perfect career if you prefer not dealing with the general public.

Nuclear Medicine Technologists

Nuclear medicine technologists prepare radioactive drugs that are administered to patients for imaging or therapeutic procedures. You’ll typically be working in a hospital, but other possibilities are imaging clinics, diagnostic laboratories, and physician’s offices. The position pays an average of $78,000 per year, and demand is expected to increase by 7% over the next decade.

Education/Training Required: You’ll need an Associates degree from an accredited nuclear medicine technology program. In most states, you’ll also be required to become certified.

Job Challenges: Similar to radiation therapists, you’ll need to be sensitive to patient needs, and be able to explain procedures and therapies. If you’re working in a hospital, you may be required to work shifts, including nights, weekends, and holidays.

Why you may want to become a nuclear medicine technologist:

  • You have a strong desire to work in the healthcare field, participating in the healing process.
  • Nuclear medicine technologists are in demand across the country, so you can choose your location.
  • The field has an unusual level of job stability, as well as generous compensation and benefits.

Dental Hygienist

Dental hygienists provide dental preventative care and examine patients for various types of oral disease. They work almost entirely in dentists offices, and can be either full-time or part-time. The annual income is over $76,000, and the Bureau of Labor Statistics projects a healthy 11% growth rate over the next decade.

Education/Training Required: An associate’s degree in dental hygiene, though it usually takes three years to complete rather than the usual two. Virtually all states require dental hygienists to be licensed, though requirements vary by state.

Job Challenges: You’ll need to be comfortable working in people’s mouths, some of whom may have extensive gum disease or poor dental hygiene. But you also need to have a warm bedside manner. Many people are not comfortable going to the dentist, let alone having their teeth cleaned, and you’ll need to be able to keep them calm during the process.

Why you may want to become a dental hygienist:

  • Dental hygienists have relatively regular hours. Though some offices may offer early evening hours and limited Saturday hours, you’ll typically be working during regular business hours only.
  • You can work either full-time or part-time. Part-time is very common, as well as rewarding with an average hourly pay of $36.65.
  • Dental hygienists can work anywhere there’s a dental office, which is pretty much everywhere in the Western world.

Web Developers

Web developers design and create websites, making the work a nice mix of technical and creative. They work in all types of environments, including large and small companies, government agencies, small businesses, and advertising agencies. Some are even self-employed. With an average annual income of nearly $74,000, jobs in the field are expected to grow by 13% over the next decade. That means web developers have a promising future.

Education/Training Required: Typically an associates degree, but that’s not hard and fast. Large companies may require a bachelor’s degree, but it’s also possible to enter the field with a high school diploma and plenty of experience designing websites. It requires a knowledge of both programming and graphic design.

Job Challenges: You’ll need the ability to concentrate for long stretches, as well as to follow through with both editing and troubleshooting of the web platforms you develop. Good customer service skills and a lot of patience are required, since employers and clients are given to change direction, often with little notice.

Why you may want to become a web developer:

  • It’s an excellent field for anyone who enjoys working with computers, and has a strong creative streak.
  • Web designers are needed in just about every area of the economy, giving you a wide choice of jobs and industries, as well as geographic locations.
  • This is one occupation that can lead to self-employment. It can be done as a full-time business, but it can also make the perfect side hustle.

Diagnostic Medical Sonographers

Diagnostic medical sonographers operate special imaging equipment designed to create images for aid in patient diagnoses. Most work in hospitals where the greatest need is, but some also work in diagnostic labs and physician’s offices. The pay is nearly $69,000 per year, and the field is expected to expand by 14%, which is much faster than the rest of the job market.

Education/Training Required: Most typically only an associate’s degree in the field, or at least a postsecondary certificate from a school specializing in diagnostic medical sonography.

Job Challenges: Similar to other health related fields, you’ll need to have a calm disposition at all times. Many of the people you’ll be working with have serious health issues, and you may need to be a source of comfort while you’re doing your job. You’ll need to develop a genuine compassion for the patients you’ll be working with.

Why you may want to become a diagnostic medical sonographer

  • The field has an exceptionally high growth rate, promising career stability.
  • As a diagnostic medical sonographer, you’ll be able to find work in just about any community you choose to live in.
  • It’s an opportunity to earn a college level income with just a two-year degree.

MRI Technologists

As an MRI technologist, you’ll be performing diagnostic imaging exams and operating magnetic resonance imaging scanners. About half of all positions are in hospitals, with the rest employed in other healthcare facilities, including outpatient clinics, diagnostic labs, and physician’s offices. The average pay is over $62,000 per year, and the field is expected to grow by 9% over the next 10 years.

Education/Training Required: You’ll need an associate’s degree in MRI technology, and even though very few states require licensing, employers often prefer candidates who are. MRI technologists often start out as radiologic technologists, eventually transitioning into MRI technologists.

Job Challenges: Similar to other healthcare occupations, you’ll need to have both patience and compassion in working with patients. You’ll also need to be comfortable working in windowless offices and labs during the workday.

Why you may want to become an MRI technologist:

  • With more than 250,000 jobs across the country, you’re pretty much guaranteed of finding work on your own terms.
  • You’ll typically be working regular business hours, though you may do shift work and weekends and holidays if you work at a hospital.
  • Solid job growth means you can look forward to career stability and generous benefits.

Paralegals

Paralegals assist lawyers, mostly by doing research and preparing legal documents. Client contact can range between frequent and nonexistent, depending on the law office you’re working in. But while most paralegals do work for law firms, many are also employed in corporate legal departments and government agencies. The position averages nearly $52,000 per year and is expected to grow by 12% over the next 10 years.

Education/Training Required: Technically speaking there are no specific education requirements for a paralegal. But most employers won’t hire you unless you have at least an associate’s degree, as well as a paralegal certification.

Job Challenges: You’ll need to have a willingness to perform deep research. And since you’ll often be involved in preparing legal documents, you’ll need a serious eye for detail. You’ll also need to be comfortable with the reality that much of what takes place in a law office involves conflict between parties. You may find yourself in the peacemaker role more than occasionally. There’s also a strong variation in pay between states and even cities. For example, while average pay in Washington DC is over $70,000 per year, it’s only about $48,000 in Tampa.

Why you may want to become a paralegal:

  • There are plenty of jobs in the field, with more than 325,000. That means you’ll probably be able to find a job anywhere in the country.
  • You’ll have a choice of work environments, whether it’s a law office, large company, or government agency.
  • You can even choose the specialization since many law firms work in specific niches. For example, one firm may specialize in real estate, another in family law, and still another in disability cases.

Licensed Practical Nurses

Licensed practical nurses provide basic nursing care, often assisting registered nurses. There are more than 700,000 positions nationwide, and jobs are available in hospitals, doctor’s offices, nursing homes, extended care facilities, and even private homes. With an average pay level of over $47,000 per year, the field is expected to grow by 11% over the next decade.

Education/Training Required: At a minimum, you’ll need to complete a state approved LPN education program, which will take a year to complete. But many employers prefer candidates to have an associate’s degree, and will likely pay more if you do. As medical caregivers, LPNs must also be licensed in all states.

Job Challenges: As an LPN, just as is the case with registered nurses, you’ll be on the front line of the healthcare industry. That means constant contact with patients and family members. You’ll need to be able to provide both care and comfort to all. If you’re working in a hospital, nursing home, or extended care facility, you’ll be doing shift work, including nights and weekends.

Why you may want to become a licensed practical nurse:

  • With jobs available at hospitals and care facilities across the country, you’ll have complete geographic mobility as well as a choice of facilities.
  • You may be able to parlay your position into registered nursing by completing the additional education requirements while working as an LPN.
  • Though most positions are full-time, it may be possible to get a part-time situation if that’s your preference.

Start On Your Career Path by Enrolling in a Trade School

If you want to enter any of the trades above, or one of the many others that also have above average pay and opportunity, you’ll need to enroll in a trade school. However, in many cases it will be better to get the necessary education – especially an associate’s degree – at a local community college. Not only are they usually the least expensive places to get higher education, but there’s probably one close to your home.

Steps to enrolling in a trade school

Whether you go to a community college, a trade school, or enroll in a certificate program, use the following strategy:

  1. Develop a short list of the schools you want to attend to give yourself some choices.
    Make sure any school you’re considering is accredited.
  2. Do some digging and make sure the school you want to attend has a job placement office with a solid record of success.
  3. Complete an application form with the school, but be sure to do it well in advance of the beginning of the semester or school year.
  4. Apply for any financial aid that may be available. You can use the tool below to get started.
  5. Consider whether you want to attend on a full-time or part-time basis. Full-time will be quicker, but part-time will enable you to earn money while you’re getting your certificate or degree, as well as spread the cost of your schooling over several years.

Tax credits can help you afford your education

Even if you don’t qualify for financial aid, the government may still be able to help by providing tax credits. Tax credits can be even better than tax deductions, because they provide a direct reduction of your tax liability.

For example, the American Opportunity Credit is available for students for qualified education expenses paid for the first four years of higher education. The credit is $2,500 per year, covering 100% of the first $2,000 in qualified education expenses, plus 25% of the next $2,000.

Another credit is the Lifetime Learning Credit. It’s a credit for tuition and other education expenses paid for courses taken to acquire or improve job skills, including formal degree programs. The credit is worth up to $2,000 per tax return, based on 20% of education expenses up to $10,000 paid.

What to watch out for when looking for trade schools

When choosing a trade school it pays not to be too trusting. While that shouldn’t be a problem with community colleges, since they’re publicly accredited, there are a large number of for-profit trade schools that are not only expensive, but they often don’t have the best reputations. That isn’t to say all for-profit schools are scam artists, but the possibility is real.

Make sure the school is accredited by your state.
Don’t rely on assurances by the school that they’re accredited by some poorly known and totally unrecognized industry trade group.

Check out the school with reliable third-party sources.
This can include your state Department of Education, the Better Business Bureau, and even reviews on Yelp or other social media sites. If the school has burned others, you could be a future victim.

Interview people already working in your chosen field.
They’re likely to know which schools are legitimate, and which have a less than savory reputation.

Don’t ignore cost!
Don’t pay $30,000 at a for-profit school when you can get the same education for half as much at a community college. This will be even more important if you will be using student loans to pay for your education. Overpaying for school means you’ll be overpaying on your student loan.

How We Found the Best Trade Jobs of 2021

Just so you know our list of the best trade jobs isn’t just our opinion, we used the following methodology in including the occupations we did:

  • The occupations frequently appear on published lists of “the best jobs without a college degree”.
  • We focused on those occupations that appeared frequently across several lists.
  • We specifically chose fields that could best be considered semi-professional. That means that while they don’t require a four-year degree or higher, they do require at least some form of education, and in most cases, a certification. We consider this an important criteria, because career fields with a low entry bar can easily become saturated, forcing pay levels down.
  • As the table at the beginning of this guide discloses, statistical information for each of these occupations was obtained from the US Bureau of Labor Statistics, Occupational Outlook Handbook.

Summary: The Best Trade Jobs

If you’re a high school student, a recent high school graduate, or you’re already in the workforce and looking to make a career change, take a close look at these trade jobs. They pay salaries comparable to jobs that require a four-year college degree, but you can enter with just a two-year degree or less.

That will not only cut the time, cost, and effort in getting your education in half, but it will also enable you to begin earning high pay in only one or two years.

Pick the field that’s right for you, choose a reputable trade school or community college, then get started in time for the next semester.

The post The Highest Paying Trade Jobs On the Market appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Deducting Health Insurance Premiums When You’re Self-Employed

In this day and age, health insurance is something that we all need to have but have different ways of getting it. Health insurance is expensive. If you work for a company that offers insurance, you won’t have to worry about deducting it from your taxes, but if you have been paying out-of-pocket for your health insurance and living on a self-employed income, you might be able to deduct the total dollar amount from your taxes. There are specific criteria you will have to meet in order to be able to make this deduction. In this article, we will discuss what the self-employed health insurance is and how you can deduct your monthly health insurance premiums. 

What is the self-employed health insurance deduction?

Because it doesn’t require itemizing, the self-employed health insurance deduction is considered an “above the line” deduction. If you are able to claim it, doing so lowers your adjusted gross income (AGI). 

This tax deduction gives self-employed people an opportunity to deduct the following medical expenses:

  • Medical insurance.
  • Dental insurance.
  • Qualified long-term care insurance. 

One benefit of this tax deduction is that it’s not only useful for your own health insurance expenses. If you are paying for health insurance for dependents, children or your spouse, you may also deduct these premiums at the end of the tax year. 

How to claim the deduction if you are self-employed

If you are self-employed such as a freelancer or an independent contractor, you can deduct any health insurance premiums that you paid for yourself, your dependents, and your spouse. If you are a farmer, you would report your income on Schedule F and if you are another kind of sole proprietor, you would report on Schedule C. You may also be able to take this deduction if you are an active member of an LLC that is treated as a partnership, as long as you are taking in self-employed income. This same rule of thumb goes for those who are employed by S-corporations and own 2% or more of the company’s stock. Self-employed people who also pay supplemental Medicare premiums, such as those for Part B coverage can also deduct these. 

You won’t be able to take the deduction if:

  • You or your spouse were eligible for health insurance coverage through an employer and declined benefits. If you have a full-time job and are running your own business on the side, this could be a situation you face. Alternatively, perhaps your spouse works a regular full-time employer and had the option to add you to a health insurance plan through their job. 
  • Your self-employment income cannot be less than your insurance premiums. In other words, you must have earned an amount of taxable income that is equal to or greater than the amount you spent in healthcare premiums. For example, if your business was to earn $15,000 last year, but you spent $20,000 in health insurance premiums, you would only be able to deduct $15,000. If your business lost money, then you won’t be able to deduct at all. 

One of the major differences between the health insurance tax deduction and other tax deductions for self-employed people is that it’s not taken on a business return or a Schedule C. It is considered an income adjustment, in which case, you must claim it on Schedule 1 that is attached to your Form 1040 federal income tax return. 

Final Thoughts

Self-employed people, such as freelancers, independent contractors and small-business owners, might have the opportunity to deduct their health insurance premiums from their taxes. As long as your business made a profit for the previous tax year and you were not eligible for a group health insurance plan, you should be able to take this deduction. If you’re not sure whether or not you meet the criteria, you may seek advice from a tax professional. You will need to fill out all of the necessary forms to qualify for a deduction. To make this process as seamless as possible, it’s important to keep track of all your business records.

Deducting Health Insurance Premiums When You’re Self-Employed is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Why It’s Harder to Get Credit When You’re Self-Employed

Around 6.1% of employed Americans worked for themselves in 2019, yet the ranks of the self-employed might increase among certain professions more than others. By 2026, the U.S. Bureau of Labor Statistics projects that self-employment will rise by nearly 8%. 

Some self-employed professionals experience high pay in addition to increased flexibility. Dentists, for example, are commonly self-employed, yet they earned a median annual wage of $159,200 in 2019. Conversely, appraisers and assessors of real estate, another career where self-employment is common, earned a median annual wage of $57,010 in 2019.

Despite high pay and job security in some industries, there’s one area where self-employed workers can struggle — qualifying for credit. When you work for yourself, you might have to jump through additional hoops and provide a longer work history to get approved for a mortgage, take out a car loan, or qualify for another line of credit you need.

Why Being Self-Employed Matters to Creditors

Here’s the good news: Being self-employed doesn’t directly affect your credit score. Some lenders, however, might be leery about extending credit to self-employed applicants, particularly if you’ve been self-employed for a short time. 

When applying for a mortgage or another type of loan, lenders consider the following criteria:

  • Your income
  • Debt-to-income ratio
  • Credit score
  • Assets
  • Employment status

Generally speaking, lenders will confirm your income by looking at pay stubs and tax returns you submit. They can check your credit score with the credit bureaus by placing a hard inquiry on your credit report, and can confirm your debt-to-income ratio by comparing your income to the debt you currently owe. Lenders can also check to see what assets you have, either by receiving copies of your bank statements or other proof of assets. 

The final factor — your employment status — can be more difficult for lenders to gauge if you’re self-employed, and managing multiple clients or jobs. After all, bringing in unpredictable streams of income from multiple sources is considerably different than earning a single paycheck from one employer who pays you a salary or a set hourly rate. If your income fluctuates or your self-employment income is seasonal, this might be considered less stable and slightly risky for lenders.

That said, being honest about your employment and other information when you apply for a loan will work out better for you overall. Most lenders will ask the status of your employment in your loan application; however, your self-employed status could already be listed with the credit bureaus. Either way, being dishonest on a credit application is a surefire way to make sure you’re denied.

Extra Steps to Get Approved for Self-Employed Workers

When you apply for a mortgage and you’re self-employed, you typically have to provide more proof of a reliable income source than the average person. Lenders are looking for proof of income stability, the location and nature of your work, the strength of your business, and the long-term viability of your business. 

To prove your self-employed status won’t hurt your ability to repay your loan, you’ll have to supply the following additional information: 

  • Two years of personal tax returns
  • Two years of business tax returns
  • Documentation of your self-employed status, including a client list if asked
  • Documentation of your business status, including business insurance or a business license

Applying for another line of credit, like a credit card or a car loan, is considerably less intensive than applying for a mortgage — this is true whether you’re self-employed or not. 

Most other types of credit require you to fill out a loan application that includes your personal information, your Social Security number, information on other debt you have like a housing payment, and details on your employment status. If your credit score and income is high enough, you might get approved for other types of credit without jumping through any additional hoops.

10 Ways the Self-Employed Can Get Credit

If you work for yourself and want to make sure you qualify for the credit you need, there are plenty of steps you can take to set yourself up for success. Consider making the following moves right away.

1. Know Where Your Credit Stands

You can’t work on your credit if you don’t even know where you stand. To start the process, you should absolutely check your credit score to see whether it needs work. Fortunately, there are a few ways to check your FICO credit score online and for free

2. Apply With a Cosigner

If your credit score or income are insufficient to qualify for credit on your own, you can also apply for a loan with a cosigner. With a cosigner, you get the benefit of relying on their strong credit score and positive credit history to boost your chances of approval. If you choose this option, however, keep in mind that your cosigner is jointly responsible for repaying the loan, if you default. 

3. Go Straight to Your Local Bank or Credit Union

If you have a long-standing relationship with a credit union or a local bank, it already has a general understanding of how you manage money. With this trust established, it might be willing to extend you a line of credit when other lenders won’t. 

This is especially true if you’ve had a deposit account relationship with the institution for several years at minimum. Either way, it’s always a good idea to check with your existing bank or credit union when applying for a mortgage, a car loan, or another line of credit. 

4. Lower Your Debt-to-Income Ratio

Debt-to-income (DTI) ratio is an important factor lenders consider when you apply for a mortgage or another type of loan. This factor represents the amount of debt you have compared to your income, and it’s represented as a percentage.

If you have a gross income of $6,000 per month and you have fixed expenses of $3,000 per month, for example, then your DTI ratio is 50%.

A DTI ratio that’s too high might make it difficult to qualify for a mortgage or another line of credit when you’re self-employed. For mortgage qualifications, most lenders prefer to loan money to consumers with a DTI ratio of 43% or lower. 

5. Check Your Credit Report for Errors

To keep your credit in the best shape possible, check your credit reports, regularly. You can request your credit reports from all three credit bureaus once every 12 months, for free, at AnnualCreditReport.com

If you find errors on your credit report, take steps to dispute them right away. Correcting errors on your report can give your score the noticeable boost it needs. 

6. Wait Until You’ve Built Self-Employed Income

You typically need two years of tax returns as a self-employed person to qualify for a mortgage, and you might not be able to qualify at all until you reach this threshold. For other types of credit, it can definitely help to wait until you’ve earned self-employment income for at least six months before you apply. 

7. Separate Business and Personal Funds

Keeping personal and business funds separate is helpful when filing your taxes, but it can also help you lessen your liability for certain debt. 

For example, let’s say that you have a large amount of personal debt. If your business is structured as a corporation or LLC and you need a business loan, separating your business funds from your personal funds might make your loan application look more favorable to lenders.

As a separate issue, start building your business credit score, which is separate from your personal credit score, early on. Setting up business bank accounts and signing up for a business credit card can help you manage both buckets of your money, separately. 

8. Grow Your Savings Fund

Having more liquid assets is a good sign from a lender’s perspective, so strive to build up your savings account and your investments. For example, open a high-yield savings account and save three to six months of expenses as an emergency fund. 

You can also open a brokerage account and start investing on a regular basis. Either strategy will help you build up your assets, which shows lenders you have a better chance of repaying your loan despite an irregular income. 

9. Provide a Larger Down Payment

Some lenders have tightened up mortgage qualification requirements, and some are even requiring a 20% down payment for home loans. You’ll also have a better chance to secure an auto loan with the best rates and terms with more money down, especially for new cars that depreciate rapidly.

Aim for 20% down on a home or a car that you’re buying. As a bonus, having a 20% down payment for your home purchase helps you avoid paying private mortgage insurance.

10. Get a Secured Loan or Credit Card

Don’t forget the steps you can take to build credit now, if your credit profile is thin or you’ve made mistakes in the past. One way to do this is applying for a secured credit card or a secured loan, both of which require collateral for you to get started.

The point of a secured credit card or loan is getting the chance to build your credit score and prove your creditworthiness as a self-employed worker, when you can’t get approved for unsecured credit. After making sufficient on-time payments toward the secured card or loan, your credit score will increase, you can upgrade to an unsecured alternative and get your deposit or collateral back.

The Bottom Line

If you’re self-employed and worried that your work status will hurt your chances at qualifying for credit, you shouldn’t be. Instead, focus your time and energy on creating a reliable self-employment income stream and building your credit score.

Once your business is established and you’ve been self-employed for several years, your work status won’t matter as heavily. Keep your income high, your DTI low, and a positive credit record, you’ll have a better chance of getting approved for credit. 

The post Why It’s Harder to Get Credit When You’re Self-Employed appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

How Blogging Paid Off My Student Loans

How Blogging Helped With Paying Off Student LoansIn July of 2013, I finished paying off my student loans.

It was a fantastic feeling and something I still think about to this day. Even though I have a success story when it comes to paying off student loans, I know that many others struggle with their student loan debt every single day.

The average graduate of 2015 walked away with more than $35,000 in student loan debt, and not only is that number growing, the percentage of students expected to use students loans is on the rise. Plus, if you have a law or medical degree, your student loan debt may be in the hundreds of thousands of dollars.

This is a ton of money and can be quite stressful.

After earning three college degrees, I had approximately $40,000 in student loan debt.

To some, that may sound like a crazy amount of money, and to others it may seem low. For me, it was too much.

At first, paying off student loans seemed like an impossible task, but it was an amount I didn’t want to live with for years or even decades. Due to that, I made a plan to pay them off as quickly as I could.

And, I succeeded.

I was able to pay off my student loans after just 7 months, and it was all due to my blog.

Yes, it was all because of my blog!

Without my blog, there is a chance I could still have student loans. My blog gave me a huge amount of motivation, allowed me to earn a side income in a fun way, and it allowed me to pay off my student loans very quickly.

I’m not saying you need to start a blog to help pay off your student loans, but you might want to look into starting a side hustle of some sort. Blogging is what worked for me, and it may work for you too.

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I believe that earning extra income can completely change your life for the better. You can stop living paycheck to paycheck, you can pay off your debt, reach your dreams, and more, all by earning extra money.

This blog changed my life in many other ways, besides just allowing me to pay off my student loans. It allowed me to quit a job I absolutely dreaded, start my own business, and now I earn over $50,000 a month through it.

If you are interested in starting a blog, I created a tutorial that will help you start a blog of your own for cheap, starting at only $2.95 per month (this low price is only through my link) for blog hosting. In addition to the low pricing, you will receive a free blog domain (a $15 value) through my Bluehost link when you purchase at least 12 months of blog hosting. FYI, you will want to be self-hosted if you want to learn how to make money with a blog.

Below is how blogging helped me pay off my student loans.

 

Quick background on my student loans.

In 2010 I graduated with two undergraduate degrees, took a short break from college, found a job as an analyst, and in 2012 I received my Finance MBA. Even though I worked full-time through all three of my degrees, I still took out student loans and put hardly anything towards my growing student loan debt.

Instead, I spent my money on food, clothing, a house that cost more than I probably should have been spending, and more. I wasn’t the best with money when I was younger, which led to me racking up student loan debt.

After receiving my undergraduate and graduate degrees, the total amount of student loans I accumulated was around $40,000.

Shortly after graduating with my MBA I created an action plan for eliminating my student loans, and in 7 months was able to pay them all off. It wasn’t easy, but it was well worth it.

The biggest reason for why I was able to pay off my student loans is because I earned as much money as I could outside of my day job. I mystery shopped and got paid to take surveys, but the biggest thing I did was I made an income through my blog.

 

I worked my butt off on my blog.

Any extra time I had would go towards growing my blog. I woke up early in the mornings, stayed up late at night, used lunch breaks at my day job, and I even used my vacation days to focus on my blog.

It was a huge commitment, but blogging is a lot of fun and the income was definitely worth it.

While I was working on paying off student loans, I earned anywhere from $5,000 to $11,000 monthly from my blog, and that was in addition to the income I was earning from my day job.

This helped me tremendously in being able to pay off my student loans, especially in such a short amount of time.

 

My blog allowed me to have a lot of fun.

One reason why I was able to work so much between my day job and my side hustling is that I made sure my side hustles were fun. Because I didn’t like my day job, I knew I just didn’t have it in me to work extra on something everyday if I didn’t enjoy it.

That’s where blogging came in.

Blogging is a ton of fun, and I have made many great friends. At times it can be challenging (the good type of challenging!) but also a lot of fun. I love when I receive an email from a reader about how I helped them pay off debt, gave them motivation, taught them about a certain side hustle, and more. Helping others along the way is another part of what really makes it worthwhile.

The fun I had blogging made it feel like a hobby, and that’s why I was able to put a crazy number of hours into it.

 

I focused on growing and improving my blog.

I knew I had to keep earning a good income online in order to pay off my student loan debt, so I made sure that I spent time growing and improving my blog as well. Since I love blogging so much, this was a fun task for me.

Improving my blog included learning about social media, growing my website, knowing what my readers want, producing high-quality content, keeping up with changes in the blogging world (things change a lot!), and more.

 

I put nearly every cent from side hustling towards paying off student loans.

One thing I did with the extra income I earned each month was putting as much of it as I could towards paying off student loans, and this way I wasn’t tempted to spend the income on something else.

So, as I earned money from my blog, I put it towards paying off student loans as quickly as I could.

This is probably easier said than done, though.

When you start earning a side income it can be very tempting to buy yourself some things. After all, you are tired, you have been working a lot, and therefore you may justify purchases to yourself.

But before you know it, you may have just a fraction of what you’ve earned left and able to put towards paying off your student loans.

It’s better to think about WHY you are side hustling and put a majority of the income you earn towards that instead.

 

I stayed positive when paying off student loans.

It was hard to manage everything. I was working around 100 hours each week between my day job and my side jobs, which left little time for sleep or seeing loved ones.

Luckily, I love blogging and that made it much easier to spend so much time on my blog. Watching my student loans get paid off and the debt going down was a huge motivator.

At first I thought it was impossible, and now I know it wasn’t!

Paying off my student loan debt has been one of the best choices I have ever made.

Do you have student loan debt? How are you paying off student loans?

The post How Blogging Paid Off My Student Loans appeared first on Making Sense Of Cents.

Source: makingsenseofcents.com