Self Help For the Self Employed

So much for Mr. Key Executive and his forerunner, Mr. Young Executive. As employees of Corporation Americana, their occupations offer them a unique and negotiable source of estate building. Yet not everyone climbs a corporate ladder, nor has the opportunity or inclination to do so.

For those reasons we want to introduce another character into the drama, a professional woman who is nobody's employee. Her name is Ms. Doctor, the young physician who nets $80,000 a year from her new practice. She has no compensation package and no negotiated benefits, no company to give her any of these niceties. Where are the estate-building opportunities in her occupation? Who is going to help her?

This, in a nutshell, is the situation of some ten million citizens of this country-all the doctors, lawyers, dentists, accountants, architects, engineers, writers, artists, and actors, other independent professionals, and along with them the independent businesspersons: the sole owners or partners of businesses, large or small, the entrepreneurs. These are the self-employed. They range from the actress who commands $100,000 for a single performance and the individual business owner who grosses a million per year, to the corner grocery store operator who nets only $35,000, or the writer who makes $60,000 in a good year, half of that in a bad one, and the Web page designer who has seen his business boom in the last few years, and expects it to keep on growing.

There are no ready-made pension plans, deferred compensation arrangements, or profit-sharing funds for them. They can put up to $3,000 a year into an IRA or $6,000 where there's a nonworking spouse and they file a joint return. (If neither of them participates in a qualified retirement plan they may make deductible IRA contributions. However, if they are active participants in a retirement plan, the $3,000 IRA deduction limit per person is phased out for single taxpayers with income over $45,000 in 2004; $50,000 in 2005 and thereafter. The phase-out income threshold for married taxpayers is $65,000 in 2004; $70,000 in 2005; $75,000 in 2006; $80,000 in 2007 and thereafter.) Unlike the rest of their fellow citizens, their occupations do not automatically provide them with substantial built-in tax shelters. They are compensated as well as or sometimes better than the corporate employee. But since all of this compensation is in the form of income, it is subject to tax.

The heart of their dilemma is in the very word that describes their economic situation: self-employed. Our tax laws were set up originally to benefit the employee, the person who works for someone else. Large though their numbers are, the self-employed used to be an economic anachronism in our economy.

Today there are a variety of opportunities for the self-employed to establish tax-favored savings plans for retirement. The fence that once separated the tax-sheltered employee from the nonsheltered self-employed person is no longer an issue. Over the years it has been opened more and more, until the Tax Equity and Fiscal Responsibility Act of 1982 gave the self-employed the opportunity to provide themselves with most of the same employee benefits that their corporate counterparts enjoy. Since then many changes in the tax law and many more retirement planning opportunities have been added.

"Self-help" is still the concept, however. More than large corporation employees, the self-employed have to take the initiative and put together their own compensation packages, and have to know about and utilize the various opportunities available to them for building funds for retirement and for building an estate.

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