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    Dissecting the Difference: Employee vs. Self-Employed

    By JJ Montanaro for USAA. Find more advice at USAA's Member Community

    As a military spouse or someone who is paying just a little bit of attention, you’re probably aware that military spouse employment is, in military lingo, an “opportunity for growth or challenge.” Last year’s Blue Star Families Military Family Lifestyle Survey included it as a top military family issue. One factor that undoubtedly plays a role in the situation are the frequent moves that characterize military life.

    In recent years, I’ve run into a lot more spouses who have created their own workaround: entrepreneurship. Start your own business, and you could create “employment” that moves where you move. However, as anybody – including myself --  who has been down the path knows, it’s not exactly the same as working for someone else. There are drawbacks and benefits to self-employment. For example, I didn’t necessarily excel with the freedom to do what I wanted, when I wanted, but that’s a different story.

    Right now, I’ll highlight six financial differences you should understand as you pick your path: 

    1) Start-ups require capital. 

    The last thing you want to do as you look to create additional income is create a financial hardship for your family. Some entrepreneurs get so excited about their new business idea that they can’t wait to get started. Enthusiasm is good, but not if it means piling up credit card or other high-interest debt to finance your business. Saving up enough money to start on the right foot could be a better plan. 

    2) Businesses file tax returns. 

    As an employee, you may be blissfully ignorant of all the back office workings and considerations that go into your employer’s tax strategy and filing. As a business owner, these realities will hit you head on. They could come in the form of quarterly estimated taxes, the requirement to separately track and maintain your personal and business finances and, of course, a myriad of different tax forms and filing requirements.

    3) The Self-Employment Tax. 

    As an employee, you probably noticed the Social Security and Medicare tax on your paystub. You may not have known, however, that your employer was kicking in on your behalf. As a sole proprietor, this will become quickly apparent. In fact, you’ll be kicking in for both sides, which will boost your tax to a very robust 15.3%.  

    4) What’s a business entity?

    As long as the paycheck doesn’t bounce, most employees don’t spend a lot of time worrying about how their employer is organized. Whether it’s a partnership, corporation, or LLC is not typically the concern of the average employee. On the other hand, while most businesses start as sole proprietorships, there could be other, more practical setups to reduce liability, minimize taxes, or raise capital.   

    5) You insure your operation.

    Having a business will necessitate a fresh look at insurance and probably require some additional types of coverage. From liability and property insurance to worker’s compensation, running a business comes with its own unique set of insurance needs.

    6) Retirement is on you. 

    As a small business owner, there are a variety of different options to save for retirement. From SEP-IRAs to 401(k)s, you can build for the future and potentially save on taxes. However, if there’s a matching contribution, it will be coming out of your pocket. 

    No matter what route you choose, it pays to have a plan. The U.S. Small Business Administration has many helpful articles as well as a business planning template on its website if you choose to set out on your own. 


    Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA.  IM2_NET0910_Views_and_Opinions_Blogs

    Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.  FPS2_FPC0800_CFP_Symbols_Allowed

    USAA means United Services Automobile Association and its affiliates.

    Photo by Thought Catalog on Unsplash

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