A Freelancer’s Guide to Contributions to Tax-Free Retirement Accounts

FS-2019-8, February 2019 — For independent contractors, retirement planning and tax savings present significant hurdles. Independent contractors are required to establish and finance their retirement accounts rather than partake in employer-sponsored retirement plans like regular employees. The purpose of this article is to explore how freelancers can use tax-free retirement plan contributions to minimize their taxable payments and develop investments for the long term.

A Freelancer's Guide to Contributions to Tax-Free Retirement Accounts

A Comprehensive Overview of Self-Employment Tax

Self-employment taxes are among the most significant problems for independent contractors because freelancers are liable for both the employer’s and the employee’s portion of Social Security and Medicare taxes. In comparison to regular workers, whose fees are withheld from their wages, freelancers risk having a large charge at the conclusion of the year if they are caught off guard by this.

According to the IRS, schedule SE (form 1040), which freelancers can use to compute self-employment tax rate, is under section 1. The self-employment rate is 15.3%; Medicare accounts for 2.9% and 12.4% for social security. However, half the deduction of self-employment tax is open for freelancers to write off on the tax documents, enabling some deductions from total taxation.

Paying the IRS on a quarterly basis estimated taxes

Moreover, to avoid penalties together with interest, freelancers also need to submit their estimated taxes to the IRS every quarter. Due to the lack of withholding taxes on the freelancer’s profits, taxpayers must pay the IRS during the year to meet their tax obligations. The IRS offers a self-employed form 1040-ES to help people calculate their taxes.

Freelancers should ensure they pay their quarterly invoices on time to avoid any unwelcome surprises at tax period. A freelancer must divide her predicted year’s income and costs to know how much she has to pay each quarter to fulfill her tax obligations. Since neglecting payments will result in fines as well as attention, it is essential for a freelancer to take care of such business opportunities.

Optimizing Contributions to Tax-Free Retirement Accounts

One of the most significant ways to invest for retirement and reduce the tax liability of independent contractors is to contribute to tax-free retirement plans. Traditional, Roth, and SEP-IRAs are the most popular options for independent contractors who want to spend in retirement while enjoying tax breaks.

In addition, by contributing to traditional IRAs, freelancers can dramatically cut their yearly taxation by excluding these contributions from their taxable income. Conversely, a Roth IRA allows withdrawal at any time throughout retirement, and there is no initial tax saving. However, freelancers are permitted to put 25 percent of their net self-employment income into their SEP-IRAs, maintaining a cap.

By paying funds into such tax-free pension funds, freelancers may not just make investments for the future but also alleviate their current tax burden. Freelancers should work with a tax consultant to guarantee that their tax benefits are maximized and they have opted for the most optimal pension scheme for them.


Retirement planning and tax savings optimization can be particularly difficult for independent contractors. Knowing about your self-employment tax, paying the IRS each week instead of hiring an accountant, and contributing to as many tax-free retirement plan options as feasible can give you confidence in your future and prepare you for what will ideally be a great retirement.

Paying taxes and seeking retirement as a freelancer can be more complex than salaried income. However, freelancers should be well-organized, maintain detailed records of income and expenses, and talk to professionals in order to utilize all possible tax credits and deductions. Therefore, scoring the strategies and guidance provided in this report will help freelancers achieve their financial goals.

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