8 Ways to Save for Retirement as a Freelancer

Freelance life unquestionably brings freedom and flexibility. You can work full-time or part-time for who you want, when you want. Depending on your work choices, this type of career can be lucrative and satisfying.

For freelancers, both payment and tax withholding processes are different from a traditional job. These small business owners tend to get their income in a non-taxed way. That means that what they bill a client is what they get paid.

Because no state or federal income tax gets taken out from your payment, you might take a financial hit when it comes time to do your taxes. However, there are some ways to save for retirement and invest in ways that reduce your tax burden on a quarterly and annual basis.

Open and contribute to a SEP-IRA

The SEP (Simplified Employee Pension) Individual Retirement Account (IRA) is surpassing other retirement accounts in popularity. Part of the reason for that growth has to do with increased flexibility for your retirement plan. You can deposit more into a SEP-IRA than you could with a Roth IRA, which has a stricter contribution limit.

Another advantage of opening a SEP-IRA is the amount you can contribute. You can contribute up to 25 percent of business profits after you subtract business deductions and half of your total self-employment taxes. Most brokerages offer a calculator to help you determine this figure when you sign up for the account.

If you incorporated your freelance business as an S-Corp and pay yourself a salary, then the calculations are different.

Try a solo 401(k)

Another option is to open a solo 401(k), which often allows for a larger contribution than even the SEP-IRA. You’ll also have opportunities to make post-tax “Roth” contributions that aren’t available with a SEP-IRA.

Although that won’t benefit your tax obligation today, it will help your long-term savings plan. Someday you’ll want to retire and start tapping into that money. The only downsides are that the paperwork is more complex and there may be more fees involved.

Have multiple retirement accounts — if it makes financial sense

You might be able to maximize the benefits of various account types by opening a few and adding to each over the course of your freelance career. How you decide which ones to open should be based in part on your tax bracket and marital status.

Check with your tax professional on whether to add a Roth IRA or traditional IRA to your retirement account portfolio.

Make catch-up contributions

Although this tax tip might not apply to everyone, it does help those freelancers who are 50 and older. Freelancers in this demographic can make what’s known as a catch-up contribution to their 401(k) plans.

The extra contributions can help to reduce taxable income and generate considerable tax savings. Because the amount continues to change each year and is also tied to your tax bracket, the best approach is to read the IRS guidelines.

Pay your family to work for your business

Relying on family assistance can yield more benefits than ready access to trusted help. By paying family members to work for your business, you can also help reduce your tax burden. While there are some varied rules in place for doing so, self-employed people can gain the most benefit. If you have a corporation, this option has different requirements.

The IRS provides specific guidance on this approach. Payments made to children are not subject to social security and Medicare taxes if your business is a sole proprietorship.

However, while payments to a child under the age of 21 are not subject to Federal Unemployment Tax Act (FUTA) tax, they are subject to income tax withholding, regardless of age. If you employ your spouse or parents, those payments are subject to income tax withholding as well as social security and Medicare taxes.

Add retirement and taxes into your rate for clients

While freelancing, it’s important that you create a process for regular rate increases so your clients get accustomed to it. In addition to factoring in your increased value to your clients as you gain experience, it will help fund your retirement and cover the cost of your taxes.

Calculate your estimated tax payments using different income rates while also determining how much you can put into retirement accounts to offset taxes and help build that nest egg. Divide the number you need by your number of clients. This way, you can spread the cost across your client base rather than hitting one or two clients up for the full amount.

Invest more in marketing to grow your business while writing off this expense

If you don’t have many clients, then pursue a strategic marketing plan to generate more income. While you might spend some money now, you can write off those marketing expenses in many cases as part of your deductions.

That doesn’t mean you should spend without thought. It’s important to set a financially prudent marketing budget. A tax deduction is only a small percentage of your total marketing spend, so focus on maintaining cash flow while attracting new clients.

Consider incorporating your business

Incorporating can be such a complex process that freelancers often opt for the straightforward sole proprietorship structure instead. However, despite its complexity, incorporation can yield significant benefits and perks like liability protection, tax breaks and health insurance discounts that you can’t achieve as a sole proprietorship.

Because every business is different, it’s important to do your research first and consult with a tax professional and a financial advisor. This will pay dividends not only for your ongoing freelance income, but also any attempt you make at home ownership, or for your retirement savings as well.