Savings, Debt and Retirement

[Fragile Bird]

Self employed people in the US pay more tax?

I'll answer this on the assumption that payroll deductions in the US are similar to those in Canada. Someone can correct me if they are not. :)

The answer is 'sort of'.

There are three basic deductions that come off your pay cheque: income tax, unemployment insurance, and government pension (CPP in Canada, Social Security in the US). Income tax is deducted based on your tax bracket, and is the largest amount that will be deducted. That's no different whether you are employed or self employed. If you don't pay yourself a regular salary, the tax department will order you to make regular payments based on what you earned the previous year. In Canada the payments are quarterly.

You also have a sum deducted for pension, CPP in Canada. If you have an employer, you pay half the required contribution and your employer pays the other half. If you are self-employed, you pay the entire contribution.

Unemployment insurance is also deducted from your pay. In Canada, your employer contributes more than you do, 1.4 x the amount you pay. If you are self-employed, you aren't eligible for unemployment insurance, unless you have voluntarily decided to opt in and qualify to do so.

So if you are self employed you pay both the employee portion of deductions + the employer portion of deductions.

I don't know if Americans have other deductions as well.

[Which Tyler]

This thread fills me with dread.

I have no money at all. My income is decent, but our cost of living and quality of life doesn't leave a lot of money to save.

At near 39 I should be thinking of retiring and shit but I just know it is never going to happen.

Far from alone, and in broadly similar circumstances; approaching 40, and everything I earn above basic keep (far from luxurious) goes to paying down the medium-term debt at ~20%APR Far more important

[Which Tyler]

This thread fills me with dread.

I have no money at all. My income is decent, but our cost of living and quality of life doesn't leave a lot of money to save.

At near 39 I should be thinking of retiring and shit but I just know it is never going to happen.

Far from alone, and in broadly similar circumstances; approaching 40, and everything I earn above basic keep (far from luxurious) goes to paying down the scary amounts of medium-term debt at ~20%APR
Far more important/urgent.

[Datepalm]

Argh, I need to sort out my pension and savings stuff. I worked through college and am naturally scrimpy, so I saved up something, but I was making such remarkably crap pay it doesn't add up to much, (still, no debt) but I should probably at least put that into bonds or something. I've also been through, oh, six or seven workplaces where I was eligible for a pension and I need to find and consolidate all those. Thread is a timely reminder, actually. 

[lessthanluke]

I'll answer this on the assumption that payroll deductions in the US are similar to those in Canada. Someone can correct me if they are not. :)

The answer is 'sort of'.

There are three basic deductions that come off your pay cheque: income tax, unemployment insurance, and government pension (CPP in Canada, Social Security in the US). Income tax is deducted based on your tax bracket, and is the largest amount that will be deducted. That's no different whether you are employed or self employed. If you don't pay yourself a regular salary, the tax department will order you to make regular payments based on what you earned the previous year. In Canada the payments are quarterly.

You also have a sum deducted for pension, CPP in Canada. If you have an employer, you pay half the required contribution and your employer pays the other half. If you are self-employed, you pay the entire contribution.

Unemployment insurance is also deducted from your pay. In Canada, your employer contributes more than you do, 1.4 x the amount you pay. If you are self-employed, you aren't eligible for unemployment insurance, unless you have voluntarily decided to opt in and qualify to do so.

So if you are self employed you pay both the employee portion of deductions + the employer portion of deductions.

I don't know if Americans have other deductions as well.

Gotcha. In the UK at least you can get a lot of tax benefits from being self employed. I can claim money back for petrol, clothes, food etc etc. National Insurance is way lower too.

[Pebble thats Stubby]

Husband and I have been very lucky.

 

We both have final sallery pensions.   (althogh mine will be greatly reduced since I'm planning to retire when Hubby does - He's 8.5 years older than me)

 

We have both paid into our pensions since we where 18,  so although I have 21 years compnay service I have only 19.5 years pensionable service.

 

We did have a huge ammount of savings, but since buying the new house that ate that up and we now have a mortgauge again.   however this will be paid off when we sell our other house and have a nice bit left over.   - We will have to invest this somewhere

 

although with the mortguage we are no longer saving the equilant to my take home pay (was doing this for about 7 years)   we are still saving a considerable chunk.   once we have 10k put aside we will prob start taking whacks of the mortgauge - if we have not sold the house by then.

 

Yes I know it would make more finachal sence to let out the old house instead of selling,  but we had bad experiance before and want the secuirty of being mortgauge free.   we don't need to take the risk or have the added hassel.

[Inigima]

Gotcha. In the UK at least you can get a lot of tax benefits from being self employed. I can claim money back for petrol, clothes, food etc etc. National Insurance is way lower too.

 

You can do this in the US too, but paying both halves of FICA (I think it's FICA, right?) is still a kick in the ass.

[Mlle. Zabzie]

Hold on, hold on, on the self employed thing in the US, yes, you pay SECA, which is basically both the employer and the employee share.  To make it more fair, though, you do get to deduct half of your SECA.  It's not exactly the same, but it's not like it's a complete out of pocket.

 

http://www.ssa.gov/oact/progdata/taxrates.html

[Mexal]

So here's a question for you experts.

 

I'm currently contributing to a Traditional 401(k). I pay 6% and my employer matches 6%. I've been with the organization for 3.5 years and have roughly 34k in it. As I'm up for promotion and expect a pay bump, I started wondering if contributing to a Before-Tax 401(k) was the right move with another 35 years of working to go and with the assumption that I should in theory jump up a tax bracket. The additional rub to this is that I cannot take out the money I've already contributed and roll it over to a Roth 401(k) but I can start contributing immediately to a Roth 401(k) and then rollover the money from the traditional (if I can) when I leave my current employer. 

 

Thoughts?

[NestorMakhnosLovechild]

So here's a question for you experts.

 

I'm currently contributing to a Traditional 401(k). I pay 6% and my employer matches 6%. I've been with the organization for 3.5 years and have roughly 34k in it. As I'm up for promotion and expect a pay bump, I started wondering if contributing to a Before-Tax 401(k) was the right move with another 35 years of working to go and with the assumption that I should in theory jump up a tax bracket. The additional rub to this is that I cannot take out the money I've already contributed and roll it over to a Roth 401(k) but I can start contributing immediately to a Roth 401(k) and then rollover the money from the traditional (if I can) when I leave my current employer. 

 

Thoughts?

 

 

Unfortunately, it's basically impossible to answer these questions without knowing more about your current income, your likely employment prospects and career-long salary growth, and how much taxable income you can reasonably anticipate at the time you are going to begin drawing down your traditional 401(k). My suggestion is that you sit down and talk with an independent, fee-based financial adviser to discuss your options and see what makes sense given your specific situation. 

[Mexal]

Unfortunately, it's basically impossible to answer these questions without knowing more about your current income, your likely employment prospects and career-long salary growth, and how much taxable income you can reasonably anticipate at the time you are going to begin drawing down your traditional 401(k). My suggestion is that you sit down and talk with an independent, fee-based financial adviser to discuss your options and see what makes sense given your specific situation. 

 

Fair. I'm fairly confident that if I started a few years ago, it'd make sense to do a Roth. I'm a consultant with a pretty good salary, good upward mobility options and a specific skill set that will transfer well if I go industry side so I feel reasonably confident I'll be in a better place over the next 10-15 years.

 

I think my issue is I'm not sure if it's worth starting the contributions now or if I'm giving up money cause I can't continue the compound interest from the past 3-4 years I've been contributing. 

 

Anyway, I'll prob talk to a financial adviser, definitely need some advice on this and want to have it figured out this year to not lose too much lost time if it makes sense. Thanks.

[Kelli Fury]

Self employed people in the US pay more tax?

There is a hefty tax called the payroll tax. If you are an employee, you pay half of it, and your employer pays half. If you are self employed, you pay all of it. This puts my effective tax rate at like 23%, someone making the same amount for someone else pays about half what I do to the IRS

[lessthanluke]

There is a hefty tax called the payroll tax. If you are an employee, you pay half of it, and your employer pays half. If you are self employed, you pay all of it. This puts my effective tax rate at like 23%, someone making the same amount for someone else pays about half what I do to the IRS

Ah this doesn't exist as far as I'm aware in the UK.

[Iskaral Pust]

So here's a question for you experts.

 

I'm currently contributing to a Traditional 401(k). I pay 6% and my employer matches 6%. I've been with the organization for 3.5 years and have roughly 34k in it. As I'm up for promotion and expect a pay bump, I started wondering if contributing to a Before-Tax 401(k) was the right move with another 35 years of working to go and with the assumption that I should in theory jump up a tax bracket. The additional rub to this is that I cannot take out the money I've already contributed and roll it over to a Roth 401(k) but I can start contributing immediately to a Roth 401(k) and then rollover the money from the traditional (if I can) when I leave my current employer. 

 

Thoughts?

 

This is just another area where US tax code is a huge pain.  Deciding on pre-tax vs. Roth deferrals requires a big guess on future tax rates and which tax bracket you will be in when you get there, and how much of your savings will be taxable for income tax.  A high earner coud have a relatively low proportion of their retirement income from tax-deferred sources like 401k, pension, etc (on which you pay future income tax) and a large proportion from investments that are not subject to future income tax.  That would suggest you max your pre-tax sources and then do post-tax too.  In addition to Roth, there are also post-tax contributions to 401k, which can be converted to Roth, but the current expanded scope for those looks likely to be curtailed in the future, so it's hard to rely on it being available as a long term savings option. 

 

Also, if you are looking at Roth or post-tax 401k contributions you can also consider other post-tax options.  For example, I recently decided to use a long term life insurance policy as an alternate to Roth.  Life insurance investments use a post-tax premium that accrues tax free (guaranteed minimum return of 4%) and the distribution is tax free (no CGT, no income tax) provided the investment part of the policy remains within certain bounds of the insurance part of the policy.  So if you already need a large life insurance policy to protect your family, this is a good vehicle for long term saving commitment, but terrible if you have variable income and might need to cancel the policy early.  Getting 4% minimum guaranteed return tax free is like getting 6% minimum guaranteed return in a taxable account.  That's a pretty good deal -- I just need to make sure I choose a premium level that I can afford each and every year.  Early cancellation involves big losses.

[MercenaryChef]

There is a hefty tax called the payroll tax. If you are an employee, you pay half of it, and your employer pays half. If you are self employed, you pay all of it. This puts my effective tax rate at like 23%, someone making the same amount for someone else pays about half what I do to the IRS

I assume you write off as much as you possibly can as business expenses to try to offset some of it.

Joint filing withe her was an adventure.

[Iskaral Pust]

Ah this doesn't exist as far as I'm aware in the UK.

 

What Kay is describing is the equivalent of the national insurance tax in UK (I think that's what it's called).

We all pay basic state income tax here.  We also pay national insurance tax for our social security pension and our Medicare old-age health insurance from the govt (and we pay an additional small tax for unemployment insurance too).  Regular employees pay their national insurance tax and employers pay a matching amount.  If you are self-employed you have to pay both shares, and the additional share is deductible.  (the math is fucking convoluted in our tax system)

 

But there is no big inequity here.  Employers set employee wages knowing how much they have to pay for total benefits.  If regular employees had to pay both shares of national insurance, then employers would be able to give them an equivalent pay raise to cover it.  The total cost of compensation is the same either way.  It's not as if employers are covering this cost out of the goodness of their hearts -- it's required of them and they factor it into what wage they offer.  Same with healthcare and other benefits -- if you're lucky enough to get them, it was factored into a lower wage offered by your employer.  They just look at total cost of wage and all benefits.

 

The self-employed get to deduct lots of expenses, just like UK.  But they have less access to affordable personal benefits because they don't have the benefit of pooling a large number of people, plus they don't qualify for some areas of tax-exempt benefits because of a long history of dentists, doctors, accountants and lawyers exploiting tax rules intended for plumbers, construction contractors, etc.

 

I'm not a tax expert but that's my understanding of the system from some self-employed friends (lots of doctors in my neighborhood, many of whom are self-employed contractors to the hospitals and clinics).

[Kelli Fury]

I assume you write off as much as you possibly can as business expenses to try to offset some of it.

Joint filing withe her was an adventure.

I do but since my contract with the shop I work at is so good I do not have a lot of legitimate expenses to write off. Other than my machines and power supply (and my fine art supplies), all my supplies are paid for by the shop. I get to write off my cell phone and spotify service and convention expenses (but again, my booth fees are generously paid by the shop), but not a whole lot in general, when it tips over the standard deduction, it isn't by much.

[lessthanluke]

Isk. Self employed people also pay way less national insurance than non self employed in the UK

[Fragile Bird]

On another note, the very rich really are different than you and I.

KPMG is being investigated in Canada for what Revenue Canada calls a tax sham. The family that has received all the publicity is a wealthy South African family who say they immigrated to Canada in the late 1990s without being fully aware of what the tax situation was. They went to KPMG for advice on how to reduce their tax burden. (In the late 1990s and early 2000s Canada was hell bent on getting out of debt, and we all paid a lot towards retiring the debt and balancing the budget. The top marginal tax rate was 29% and kicked in at a mind numbing $59,180. With provincial tax and a top-earner surtax (top earner - anyone making over $59,180) many people topped out at about 54 or 55%)

KPMG sent up a tax vehicle in the Isle of Man. The family "gave" all their money to this Manx corporation, more than $26 million. The Manx corporation then started "gifting" them money every year. Since there is no gift tax in Canada, they didn't declare any of it. Revenue Canada is now demanding a lot of unpaid tax.

That's one way to set up your retirement fund.

http://www.cbc.ca/news/business/kpmg-offshore-sham-deceived-tax-authorities-cra-alleges-1.3209838

ETA: Back then you were presumably earning 10% on your investments, $2.6 million, with potential tax payable of more than $1.3 million. KPMG charged 15% of the tax saved. Even if they only earned a modest 6%, that's $1.56 million and tax of more than $780,000.

[Swordfish]

My only financial plan is to pay off our apartment as soon as possible.

Mortgage is 30 years, but I expect to make it 10-12, which would save me lots of money in interests.

The best part is that, every time I pay a part of it ahead of time, my monthly mortgage amount goes down, letting me put more money aside.

 

At least that's the plan, and in theory it should work like a charm but, as someone said - life happens so I'll have to see how things go. ;)

 

 

I see a lot of people with this strategy, and honestly, it makes little sense to me for a younger person with inadequate savings to focus on paying off the mortgage first.  It CAN make sense, but if you have a 30 year fixed with a low interest rate, then your focus should probably be first on savings and second on paying off the mortgage early.  Because..  compounding.

 

This is not true in all situations, but paying off the mortgage first is simply not always what makes sense.