It’s no question that the pandemic has resulted in major shifts in the workforce. Whether it be the large-scale layoffs in March 2020 or the Great Resignation that more recently impacted personnel changes, we know that millions of Americans have left their jobs due to burn out and/or to pursue starting their own businesses in the hope of finding something that brings more personal fulfillment. In 2021, there were over 5 million new business applications submitted, which is an astonishing 55% jump from 2019.1
If the idea of starting up your own business has been on your mind, you have more than likely asked yourself if it’s the right thing to do financially—or at the very least are curious about all the differences between working for a company or being self-employed. We highlight the pros and cons for both options below.
First and foremost, taxes are the greatest change when making the switch from employee to self-employed. Most employed individuals are familiar with various line items for federal and state taxes, Social Security, and Medicare amongst many other potential employer-provided benefits (more on those other benefits later). When you’re self-employed, you, of course, still pay federal and state taxes, but in place of the regular line items for Social Security and Medicare, the IRS adds a self-employment tax. Typically, the Social Security and Medicare amounts are figured by employers, but self-employed individuals (or their tax professionals) need to calculate out what their self-employment tax looks like. The self-employment tax rate is 15.3% which consists of two parts: 12.4% for Social Security and 2.9% for Medicare. And, just as employers do, you can deduct the employer portion of your self-employment tax to calculate your adjusted gross income.2
Sticking on the topic of deductions, self-employed individuals can deduct expenses for their business that can reduce taxable income. Things like phone bills, internet bills, home office expenses, business travel, and health insurance are all common examples of deductible items for the self-employed, and these are all things you can’t typically deduct as an employee. While finding deductions can sound fun, it also means a lot more work on the administrative side by tracking each of these items and having proper documentation to help you make sure you’re maximizing your deductions.
As an employee, you can maximize your pre-tax or Roth 401(k) contributions up to the IRS limit of $20,500 or $27,000 for those age 50 and above (2022). When you’re self-employed, you are eligible to make contributions to a solo 401(k) as both the employee and the employer. This means you can contribute up to $20,500 for your employee contribution then contribute up to 25% of your compensation on top of that for the employer match.
With regard to savings, one item that could be considered a small perk of being self-employed is having the freedom to choose which custodian you utilize for your retirement savings.
Going back to the topic of benefits, employees are usually offered benefits through their employers, such as paid time off, health and life insurance, free/discounted fitness memberships, retirement plan matching or employee stock awards, donation matching, paid family leave, adoption assistance, and sometimes even retailer specific discounts. These benefits can certainly provide peace of mind beyond their monetary value for some and don’t exist when you’re self-employed.
One huge benefit of being self-employed is the amount of flexibility it provides. You can decide to work from home, a local café, or even beachside. You choose your own hours and aren’t limited to the amount of paid time off you’re allotted each year when you feel like taking a vacation. You’re also your own boss, so there’s no risk of having a supervisor managing you and potentially causing friction. On the flip side, there also aren’t any paid holidays or sick days. Without the oversight of a manager and being fully responsibility for the growth of your business, it takes a great amount of motivation and focus to be self-employed, which could also result in longer hours. There may be periods, especially in the early stages, where earnings may be lower or inconsistent, so making sure you’re prepared will be of utmost importance. Being okay with failure before finding success is a common theme amongst entrepreneurs, and remember that what you gain in freedom, you may also lose in security.
Being an employee typically means stable income; however, this also means your livelihood is dependent on your company’s success. The stability of working as an employee can be more than a steady source of income—it can also mean long-term career development and opportunities and more convenient access to building long-term professional relationships.
It’s quite clear that there are many considerations for anyone thinking about making career changes, but there’s no reason you should have to think things through on your own. It’s ultimately a personal choice, but we recommend getting in touch with your advisor or clicking here to connect with an advisor at Merriman to discuss what makes sense for you and your lifestyle.
Disclosure: The material is presented solely for information purposes and is not intended as specific advice or recommendations for any individual. The information presented here has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.
The first question on many retirees’ minds is how to pay for expensive healthcare costs and health insurance when you’re no longer covered by the employer plan you relied on throughout your career. Medicare is the U.S. government’s answer for supporting healthcare costs throughout retirement. While you might have already enrolled in Medicare or are at least looking forward to beginning benefits at age 65, you may not know how Medicare premiums work. Let’s explore Medicare premiums and an important potential speedbump known as IRMAA.
What Is IRMAA?
To provide some background, approximately 75% of the costs of Medicare Part B (Medical Insurance) and Part D (Prescription Drug) are paid directly from the General Revenue of the Federal Government, with the remaining 25% covered through monthly premiums paid by Medicare enrollees. If you receive Social Security or Railroad Retirement Board benefits, your Medicare Part B premiums are typically deducted automatically from your monthly benefits. For those who don’t receive these benefits, you’ll receive a bill to pay your premiums instead. Medicare premiums increase as your income grows through Income-Related Monthly Adjustment Amount (IRMAA), which is an additional surcharge for higher income individuals on top of the 2021 Medicare Part B baseline premium of $148.50.
Medicare premiums and any surcharges are based on your filing status and Modified Adjusted Gross Income (MAGI) with a two-year lookback (or three years if you haven’t filed taxes more recently). That means your 2021 premiums and IRMAA determinations are calculated based on MAGI from your 2019 federal tax return. MAGI is calculated as Adjusted Gross Income (line 11 of IRS Form 1040) plus tax-exempt interest income (line 2a of IRS Form 1040). The table below details the base premium amount you’ll pay for Medicare in 2021 depending on your MAGI and filing status, inclusive of any additional IRMAA surcharge.
Fortunately, the Social Security Administration (SSA) tracks these numbers for you and uses MAGI data from the IRS. For every year that they determine IRMAA applies to you, you’ll receive a pre-determination notice explaining what information was used to make the determination and what to do if individuals feel the finding is incorrect, like due to a life-changing event as defined by the SSA. After 20 or more days, the SSA sends another notice with additional information regarding your appeals rights. For the instances you feel an incorrect determination was made, you can request a “New Initial Determination.”
Am I Eligible to Request a New Initial Determination?
There are five qualifying circumstances where an individual may be eligible to request a “New Initial Determination.” They are:
An amended tax return since original filing
Correction of IRS information
Use of two-year-old tax return when SSA used IRS information from three years prior
Change in living arrangement from when you last filed taxes (e.g., filing status is now “married filing separately” but you previously filed jointly)
Qualified life-changing event(s)
According to the SSA, a Life-Changing Event (LCE) can be one or more of the following eight events:
Death of spouse
Divorce or annulment
Loss of income-producing property
Loss of employer pension
Receipt of settlement payment from a current or former employer
A common scenario we often see is with new retirees age 65 or over where income is much lower in retirement than it was two years ago, but the SSA determines that the IRMAA surcharge should be applied to your premium costs given the lookback period. Fortunately, an exception can be requested under the “work stoppage” LCE, and we can help you navigate that process. Luckily, this is typically irrelevant after the first or second year of retirement since post-retirement income is often significantly reduced and naturally falls below the IRMAA threshold. Another common scenario for retirees is having portfolio income that pushes you above the IRMAA tiers. However, it’s important to point out that portfolio income from things like capital gains or Roth conversions are not allowable exceptions to request for the IRMAA surcharge in a high-income year.
If you don’t qualify to request a new initial determination based on the 5 qualifying circumstances noted above, you also have the right to more formally appeal the determination, which is also known as requesting a reconsideration.
Requesting a New Determination
If any of the above life-changing events apply, individuals are likely eligible to request a new initial determination by calling their local Social Security office or, alternatively, completing and submitting this form for reconsideration along with appropriate documentation. We highly recommend calling the Social Security hotline at 800-772-1213 to discuss if more than one LCE applies to you, if you have questions about why IRMAA applies to you, or if you have questions about requesting a reconsideration.
We know that Medicare can be tricky and that this only scratches the surface, so we also encourage you to contact us if you have any questions. We regularly serve as a resource for questions around enrolling for Medicare along with many of the other factors involved in planning for retirement, and we are happy to help you as those questions move to the forefront.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
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