Whether you work as an employee for a company or as a freelancer/contractor, there are certain benefits to having a job -- beyond just a paycheck. For contractors, for example, there are tax deductions you can take as business expenses that employees may not be able to claim. On the other hand, employees often have employer-paid benefits that positively affect their tax liability.
For employees, certain business expenses can be deducted as miscellaneous expenses on Schedule A. They can be deducted only to the extent that they total more than 2 percent of your adjusted gross income (AGI). This 2 percent rule is mentioned as it applies to the benefits in this list. If you're wondering whether to work as a contractor/freelancer or full-blown employee, take a look at the list. It will help as you're considering the tax ramifications of your decision.
As an employee, your employer pays certain federal and state taxes on your behalf with every paycheck. Since you don't see these payments, you may not be aware of them. They are a great benefit to your bottom line, however, because if your employer wasn't paying them, you would be. Employment taxes include:
- Social Security and Medicare;
- Federal income tax withholding;
- Federal unemployment tax; and
- State taxes.
Freelancers, contractors andother self-employed workers know the effect these taxes can have on their bottom line because they must pay the taxes themselves in the form of the self-employment (SE) tax. SE taxes include Social Security and Medicare payments, which contribute to your coverage in the Social Security system.
The benefits of Social Security -- and the reason you must pay in, even as a self-employed person -- include retirement, disability, survivor and hospital insurance (Medicare). The SE tax rate for 2014 is 15.3 percent, which includes 12.4 percent for Social Security and 2.9 percent for Medicare. Self-employed people can deduct the employer-equivalent portion when calculating their AGI [source: IRS Self-Employed].
Full-time employees, and even a few fortunate part-timers, often have employer-paid or partially paid health, life and disability insurance. If that is the case with your employer, be sure you're participating in those programs as fully as possible. However, keep in mind that employer-sponsored plans may offer less insurance than you and your family need based on your financial circumstances.
For freelancers, contractors and those without employer-sponsored health plans, the Affordable Care Act requires you and everyone in your family to have qualifying health insurance, called minimum essential coverage. If you don't want or need insurance coverage, you can apply for an exemption and see if the government agrees with you.
However, if you don't have minimum essential coverage or receive your exemption, you will pay a penalty when you file your tax return. For 2014, the penalty, known as the Individual Responsibility Payment, is generally the greater of 1 percent of your household income or $95 per adult and $47.50 per child, with a per-family cap of $285.
You may also want to consider private life and disability insurance, especially if you are the major breadwinner in your family. These two types of insurance can help protect your family in the event something happens to decrease or eliminate your ability to earn an income.
8: Flex Spending Account
Another benefit -- this one applies to employees only, not to the self-employed -- is a medical flexible spending account (FSA). This is an account you pay into throughout the year with pretax dollars. The money can then be used for many medical expenses that aren't covered by your health insurance, such as deductibles and co-pays, eyeglasses, dental visits and prescription medications.
The Affordable Care Act lowered the annual contribution limit to this type of account to $2,500. As it gets toward year-end, check with your account administrator or review your account to be sure you have used all of the money in it. The U.S. Treasury has changed the rules so that it's possible to carry over $500 to the next year, but your employer must sign up for this benefit.
Again, check with your plan administrator. If yours is a use-it-or-lose-it account and you have money left at the end of the year, it will vanish in a bureaucratic labyrinth, never to be seen again [source: Bankrate].