Paychecks. I get one now, but what should I think about as a business owner?
Thinking about moving from a traditional (and sometimes stable) paycheck to self-employment is huge. What should be considered to ensure we don’t find ourselves crosswise of federal agencies? What amounts are deducted from a paycheck that will impact final take home pay and how do you structure your processes and payroll?
FICA – Social Security and Medicare. Each of these is a percentage set by legislation in Congress and collected by the IRS. Social Security is 6.2% on income up to approximately $176,000, and 1.45% on all income for Medicare.
Federal withholdings – An employee will complete and submit a W-4 form to the employer during the onboarding phase. The information in the completed form impacts how much or little is deducted from the paycheck. Those withholdings will ultimately be analyzed for final tax liability when the individual (or a married filing jointly couple) files their tax return. Individuals and couples can either receive a tax refund or owe money when calculated with all the other data points in the tax return. The question posed for households is whether you want more resources in your paychecks throughout the year, or a lump sum amount one time a year? If I had the chance to have more money available throughout the year, and address any money owed at that time.
Health insurance premiums – Portion the employee is responsible for themselves and/or other dependents included in the coverage. Deductions will vary depending on selected health care insurance. In addition to the premiums, if an individual selected a high deductible health plan, any regular contributions to a Health Savings Account (HSA) connected to that plan will also be deducted from the paycheck.
Retirement contributions – Percentage of annual income set aside in a retirement account. Sometimes participation in the employer’s 401(k) retirement program is automatic and the employee must ‘opt out’ through the company portal. Employees set either the percentage or specific amount up to the maximum amount set by the IRS. For 2025, under age 50 the contribution limit is $23,500; over age 50 the contribution limit is $31,000 - $7,500 catch up.
As a new or future business owner, what of the listed paycheck deductions should you be aware of for yourself and your employees? All. Maybe not all at once, but you will encounter them. How to address?
FICA – For a self-employed person, you will be responsible for both sides of the FICA taxes – as the employer AND employee. Contact a trusted tax professional for guidance, but there are certain tax forms to estimate tax liability for the applicable tax year. While there might be an urge to avoid paying taxes, know for certain, that is a more expensive pathway to take. As you add employees, set up your payroll process to automatically calculate and deduct from your employee’s paychecks.
Federal withholdings – Again, work with a tax professional for what forms and schedule you should know and understand to ensure you are accounting for all the appropriate tax liability for that tax year. Similar to the above bullet point, your payroll onboarding process will be critical to receive the appropriate paperwork from your employees to properly calculate their paychecks. Employees should retain the ability to adjust and submit new W-4 forms throughout their time at your organization.
Health insurance premiums – What health coverage will you pursue? Will you participate in the Affordable Care Act Marketplace, seek private insurance provided the premiums can be reasonably covered, or if married, can you be covered under your spouse’s plan through their employer? Or forgo coverage until a later date.
Retirement contributions – A self-employed individual can open an Individual Retirement Account (IRA) or Simplified Employee Pension Individual Retirement Account (SEP IRA). The SEP IRA contributions are made by the employer on behalf of the employee (even if they are the same individual). Employees must meet the eligibility criteria to receive the contributions. The growth of the contributions are will work like a traditional IRA and be tax-deferred until the time of withdrawal.
We are here to assist you as you consider your options. Consider our Your Money Mix Entrepreneurship cohort with education and coaching in 2025 and 2026. But feel free to reach out with any questions or comments - letstalk@studiomfinancial.net. Would love to hear from you! Until we meet, keep working on the change.