Tax implications of non-typical pay structures | Employment | Financial Literacy | Khan Academy

So let's think about some of the pros and cons of self-employment.

I'm going to make a column of pros and then in cons maybe a nice scary red over here. Alright, cons.

I think a lot of folks, when they imagine working for themselves, they imagine, "Well, hey, that sounds pretty good! You can be your own boss!" Your own boss, which means that you get a lot of flexibility. Flexibility! You kind of define the culture, how you're going to work, the hours, etc. You are, to some degree, the master of your own destiny.

Now, being the master of your own destiny can be a double-edged sword because, especially when you're starting off, this could be a little bit riskier. If you work for a big company, they have a lot of different clients across a bunch of different industries. Maybe if things turn south a little bit in the economy, they're still going to keep people going because they're pretty diversified.

Well, if you're working for yourself, you might only have one or two customers initially, or you're contracting for folks, and if one of them has issues, you might be in trouble. You're responsible for making the business work, so all on you! All on you!

I can tell you from personal experience, it can be pretty stressful when you're not sure where your next paycheck is going to come from or where the deals aren't showing up as quickly as you might expect. There's also, above and beyond not getting a regular paycheck, no regular compensation, but that could also include things like benefits. You're going to have to pay for your own health insurance. There’s not going to be any paid time off.

The other thing is you have to figure out all of the taxes yourself. When you work for a company, you’re going to have withholdings. They’re going to give you W-2 statements. When you file your taxes, you're going to get other types of statements, and you're going to fill everything out. Maybe you'll get a refund or maybe you'll have to pay a little bit.

But when you are self-employed, it's all on you! So, all taxes, paperwork—it's all on you! That might be a little bit more work for you to have to handle.

Now since we're thinking about taxes, a lot of folks don't appreciate that above and beyond regular income tax, you also have to pay for things like Medicare and Social Security. Now, if you're working for a company, your company pays payroll tax, and above and beyond that, you pay 6.75% for things like Social Security and Medicare.

While if you're self-employed, the current rate is actually 15.3% that you're going to have to pay of your income versus that 6.75%. That's a pretty substantial difference. Once again, you are responsible for all of the taxes, the paperwork, etc. You have to be very organized here.

Now you might be saying, "Hey, you're kind of bumming me out a little bit! There's a lot of work to be doing if you're self-employed!" And it is true; there is a lot of work.

But I will now give you another benefit. It goes back to being flexible. A lot of anything that you're... if you are self-employed, anything that—well, I would say not anything—but a large category of things that you are using in order to do that self-employed work can oftentimes be tax deductible.

So, business expenses! More business expenses are deductible, which once again, doesn’t mean if you have a $5,000 business expense, it doesn’t mean it’s $5,000 off your actual taxes. It means you’re $5,000 off of your taxable income. So you will pay less taxes on it, depending on your tax rate. It decreases taxable income.

So I'll leave you there. These are all things to think about, and obviously, these can change over time. Some people might say, "Well, it’s risky to work for a company; they might lay you off sometimes." It might not have anything to do with the economy.

While if you're your own boss and you can start building up a clientele and customers, maybe it's safer in the long run—or vice versa. So, all things for you to be thinking about.