A self-employed person works for himself/herself
instead of as an employee of another person or organization, drawing
income from a trade or business. This is less stable than working
as an employee but tends to earn a higher hourly income or rate.
In some cases, a self-employed person may find that s/he cannot keep
up with clients' needs alone, and may hire others, thereby forming
a small business.
In its simplest form, the individual and his business are one
and the same entity. This makes the owner personally liable for
all the debts of the business. To avoid this, he may choose to
incorporate his business, protecting his personal assets from
creditors or others taking legal action against the business.
Self-Employment and Retirement Savings
Self-employed workers cannot contribute to a 401K plan, unless
they self-incorporate and set up a 401K plan for the company,
but this requires some significant paperwork. Most self employed
set up a Self Employment Plan (SEP) IRA, which allows them
to contribute up to 20% of their income, up to $40,000 in contributions,
to the SEP per year. This is significantly higher than 401K
If a self-employed person's client goes bankrupt, the bankrupt
company's actual employees usually have first rights to whatever
cash the company had. Next is the IRS, and then all the external
creditors, including the self employed worker.
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