Independent Contractors: Is Your Money Working as Hard as You Are?

Posted: Jun 01, 2017 12:01 AM
Independent Contractors: Is Your Money Working as Hard as You Are?

Dear Carrie, I'm 26 years old and for the past three years I've been an independent hairstylist renting space in a salon. Fortunately, I've been able to grow my clientele and have saved some money, but what else should I be doing? I like being independent! -- A Reader 

Dear Reader, There's a lot to be said for independence. You're in charge of your own business growth and your time. That can be very freeing. On the flipside, you're in charge of your own financial security -- from everyday things like emergencies to future concerns like retirement. That can be very scary.

As an employee, you often have the comfort and convenience of employer-sponsored health insurance and retirement plans. When you're an independent contractor, it's up to you to make sure you have those things covered. That all starts with saving, so it sounds like you're on the right track. But having money in the bank is only the first step. Now you have to decide where to put that money to maximize your ability to remain independent.

Set up an emergency fund. What would you do if you have an accident or illness or if you suffer a business downturn? If you set aside cash to cover a minimum of three to six months of essential living expenses in a designated account that's easy to access, you'll know you can survive. It's fine to have a chunk in savings, but it's even better to know that you have a certain amount specifically earmarked for an emergency.

If you don't have health insurance, that's number one. Yes, you may think you're young and healthy and insurance is expensive, but consider that a single hospital stay could wipe out your savings. At the very least, get a high-deductible policy that would cover a catastrophic health event. Comparison shop, check out what's available on your state's exchange, but whatever it takes, make sure you have it.

Next, look into liability insurance. Regardless of how conscientious you are, things can go wrong. Best to be safe and purchase a comprehensive policy that covers general (legal), professional (your work), and product liability.

And finally, research disability insurance. An emergency fund will cover you if you can't work for a short time, but what happens if you're unable to work for an extended period? Social Security offers some coverage, but it's limited and the rules to qualify are quite strict. A private disability policy is an alternative worth looking into. It's not inexpensive, but if you intend to keep working independently, I'd recommend at least exploring your options.

While we're talking about health insurance, I'd like to suggest opening a health savings account. An HSA is available if you have a high-deductible health insurance policy. Current minimum deductibles are $1,300 for self-only coverage, $2,600 for a family.

An HSA makes sense because you can make tax-deductible contributions up to an annual maximum ($3,400 for a single, $6,750 for a family in 2017) -- and then use that money to pay for qualified medical expenses, tax-free. If you don't use the total in any year, the money stays in the account and grows tax-deferred. You can withdraw funds for any reason penalty-free after age 65, but you'll pay ordinary income taxes on that type of withdrawal, just like with an IRA.

When it comes to what to do with your savings, retirement should be at the top of your list. As an independent contractor, you have a few choices for retirement accounts; at the very least, open an IRA and contribute the annual maximum. Start now in your 20s to put away just 10 percent of your annual earnings toward retirement, gradually increase that percentage 1-2 percent a year as you earn more money to target 15 percent and you'll be in pretty good shape. That percentage goes up dramatically the longer you wait.

You're probably already on top of this, but for the record, as an independent contractor you're responsible for all self-employment taxes for Social Security and Medicare. The 2017 self-employment tax rate is 15.30 percent. You pay this by filing quarterly estimated taxes. Fail to file and you'll pay a penalty. (Hint: Put the dates on your calendar!) To keep your tax bite lower, itemize your business expenses and keep good records.

As an independent worker, you're your own boss but you also need to be your own CFO. That means carefully managing personal and business expenses both for the present and the long term. If you do that, you'll know you're on track for a financially secure future. That's the ultimate freedom.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at You can e-mail Carrie at information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Investing involves risk including loss of principal. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at