Main content
Course: Financial Literacy > Unit 11
Lesson 3: Non-typical pay structuresTax implications of non-typical pay structures
Self-employment can offer a lot of perks, like setting your own schedule and being your own boss, but it also comes with some drawbacks, such as the need to manage your own taxes. While you gain independence and potential for higher earnings, you'll also have to keep track of your income, expenses, and pay taxes on your own. Created by Sal Khan.
Video transcript
- [Sal] So let's think
about some of the pros and cons of self-employment. So I'm gonna make a column
of pros and then in cons, maybe a nice scary red over here. All right, cons. Alright, so 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, et cetera, you are to some degree the
master of your own destiny. Now, being a 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 are responsible for
making the business work. So all on you, all on you, which 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 gonna have to pay for
your own health insurance, there's not gonna 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 gonna give you W2 statements. When you file your taxes,
you're gonna get other types of statements, and you're
gonna fill everything out and 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, paperwork on you. So 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. And once again, you are responsible for all of the taxes,
the paperwork, et cetera. You have to be very organized here. Now, you might be saying, hey Sal, 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. Anything that 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 more business expenses. Business expenses, deductible, deductible, which
once again, it doesn't mean, if say 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.