A stroll through the Mission this morning showcased many people taking the self-employment route. From daycare providers keeping a watchful eye on neighborhood kids to housecleaners toting supplies to landscapers ready to till the soil, these hardworking individuals are drawn to the dream of flexible hours and freedom from having a boss. While those are definite pluses, there are also some possible minuses to consider, so make sure you correctly add things up and make an informed decision about whether to be self-employed … or not.
What you need to know about being self-employed
Of the 3,749 tax returns done for free the first half of this year at MEDA, over 500 have been for self-employed individuals–a 60 percent increase from last year.
Almost every week, the tax team sees a client who has made a mistake in handling their self-employment taxes.
“Some of our clients get a big surprise and owe thousands in unpaid taxes. We see the issues, take a deep breath and start the client’s education on what you need to do when you work for yourself,” explains MEDA Tax Site Coordinator Owen Thompson.
You must also each quarter pay 100 percent of your legally required Social Security and Medicare taxes. For every $100 you earn, you pay about $7.50 into these programs; if you work for someone else, your employer matches that amount. In contrast, when you are self-employed, you must pay both parts: about $15 out of every $100.
What many fail to realize is that you must pay quarterly federal and state income taxes when you are self-employed. There is a 2 percent penalty if you fail to pay these quarterly taxes. One reason self-employed individuals should pay quarterly taxes is so they know their true net income, necessary for creating a household budget.
Keep in mind that you will not receive worker’s compensation, unemployment insurance, paid vacation time, overtime pay or medical insurance. So, you must factor in these additional personal costs when determining an hourly rate to charge for your labor.
The aforementioned information is vital, and it’s not just MEDA’s free tax preparation team that makes sure clients understand how this all works. The Business Development and Workforce Development teams are equally well versed in self-employment taxation, advising clients of such information during free workshops and one-on-one coaching sessions.
Growth in self-employment
According to a June 2015 article in Bloomberg Business: “The number of self-employed workers surged by 370,000 in May, according to the U.S. Labor Department’s survey of households. And nearly one-million workers have gone to work for themselves since just February.”
One reason for the increase of self-employed individuals, especially in San Francisco, is ridesharing services–any service that arranges one-time shared rides on very short notice. It seems like every corner in San Francisco has someone waiting for a ride they’ve just set up from an app. Being a driver for a ridesharing service can be appealing, with its allure of quick money and flexible schedules.
Be careful: there can be pitfalls to ridesharing work.
Firstly, many ridesharing drivers fail to track their miles. After all, the company tracks the miles, right? Not so fast: the company does not count the miles in between rides, when the driver is going to pick up passengers. At a 57.5 cents per mile IRS write-off, you could be paying a good chunk of change unnecessarily–potentially costing you hundreds of dollars a year, and even thousands for full-time drivers.
Secondly, most insurance companies will kick you off your policy when they find you are using your vehicle for work. Since the ridesharing companies’ umbrella insurance policies cover you only when you have a customer in your car, this leaves a gap in coverage that can prove costly if you have an accident outside of work hours. As of now, Metromile is the only insurance company MEDA knows of that will cover a ride-sharing driver during those miles when they’re not covered by the company’s policy—and it’s available solely to Uber drivers at this time.
Making an informed decision
Deciding how to make a living means more than deciding what lifestyle you want. It means calculating in all factors, as showcased above, so that your decision is an educated one. Also, you want to make sure there are no surprises at tax time.
Flexibility of schedule versus increased financial paperwork? Having a boss versus being your own boss? A quick buck that comes with additional taxes?
It’s your call.