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ByCurtis Watts

10 COVID-19 Stimulus Benefits for the Self-Employed

Since the outbreak of the coronavirus pandemic in March 2020, life and business certainly have changed. If you’re self-employed full-time or earn business income on the side of a day job, you may be wondering what economic relief applies to you.  

Let's review what relief Congress passed to help self-employed Americans cope with financial challenges. I’ll review ten key stimulus benefits that apply to solopreneurs and small businesses.

If you're experiencing economic hardship due to the coronavirus, using some of these new regulations may be the ticket to managing your personal and business finances better.

10 ways the self-employed can get financial relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.

1. Getting lower interest rates

On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.

An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.

In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.

While savers never celebrate low interest rates, they're beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.

If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.

2. Having more time to file taxes

Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn't have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.

If you missed the tax filing deadline, be sure to request an extension.

Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:

  • The first quarter was due on July 15, 2020, which changed from April 15, 2020
  • The second quarter was due on July 15, 2020, which changed from April 15, 2020
  • The third quarter was due on September 15, 2020
  • The fourth quarter is due on January 15, 2021

Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.

If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.

However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.

Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.

3. Getting more time to contribute to retirement accounts

You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.

However, this deadline doesn't apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.

4. Getting more time to contribute to an HSA

Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.

To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.

5. Delaying tax on retirement withdrawals

While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:

  • Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
  • Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years. 

Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.

6. Skipping early withdrawal penalties

Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.

The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.

Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.

7. Getting larger retirement plan loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

You can delay the repayment period for a retirement plan loan for up to one year.

For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.

You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.

Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.

8. Suspending student loan payments.

Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.

On August 8, the suspension of student loan payments was extended through December 31, 2020.

The suspension covers the following types of loans:

  • Direct Loans that are unsubsidized or subsidized
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Federal Family Education Loans (FFEL)
  • Federal Perkins Loans

Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.

During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.

Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.

However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.

9. Having Paycheck Protection Program (PPP) loans forgiven

The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.

Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.

For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.

When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.

In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds. 

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

If some or all of a PPP loan isn't forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don't have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.

10. Getting SBA loans

In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.

  • Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
  • SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender. 
  • SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.

Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.

This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.

How to manage money in uncertain times

When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.

If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.

If you don’t need to dip into your emergency fund, continue shoring it up when possible.

If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.

RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro

My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.

Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.

Source: quickanddirtytips.com

ByCurtis Watts

How I Invest

One of the most common questions I receive from readers like you—especially since Grow (Acorns + CNBC) published my story last week—asks me how I invest.

All this theoretical investing information is fine, Jesse. But can you please just tell me what you do with your money.

That’s what I’ll do today. Here’s a complete breakdown of how I invest, how the numbers line up, and why I make the choices I make.

Disclaimer

Of course, please take my advice with a grain of salt. Why?

My strategy is based upon my financial situation. It is not intended to be prescriptive of your financial situation.

I’ve hesitated writing this before because it feels one step removed from “How I Vote” and “How I Pray.” It’s personal. I don’t want to lead you down a path that’s wrong for you. And I don’t want to “show off” my own choices.

I’m an engineer and a writer, not a Wall Street professional. And even if I was a Wall Street pro, I hope my prior articles on stock picking and luck vs. skill in the stock market have convinced you that they aren’t as skilled as you might think.

All I can promise you today is transparency. I’ll be clear with you. I’ll answer any follow-up questions you have. And then you can decide for yourself what to do with that information.

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Are we clear? Let’s get to the good stuff.

How I Invest, and In What Accounts…?

In this section, I’ll detail how much I save for investing. Then the next two sections will describe why I use the investing accounts I use (e.g. 401(k), Roth IRA) and which investment choices I make (e.g. stocks, bonds).

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How much I save, and in what accounts:

  • 401(k)—The U.S. government has placed a limit of $19,500 on employee-deferred contributions in 2020 (for my age group). I aim to hit the full $19,500 limit.
  • 401(k) matching—My employer will match 100% of my 401(k) contributions until they’ve contributed 6% of my total salary. For the sake of round numbers, that equates to about $6,000.
  • Roth IRA—The U.S. government has placed a limit of $6,000 on Roth IRA contributions (for my earnings range) in 2020. I am aiming to hit the full $6,000 limit.
  • Health Savings Account—The U.S. government gives tremendous tax benefits for saving in Health Savings Accounts. And if you don’t use that money for medical reasons, you can use it like an investment account later in life. I aim to hit the full $3,500 limit in 2020.
  • Taxable brokerage account—After I achieved my emergency fund goal (about 6 months’ of living expenses saved in a high-yield savings account), I started putting some extra money towards my taxable brokerage account. My goal is to set aside about $500 per month in that brokerage account.

That’s $41,000 of investing per year. But a lot of that money is actually “free.” I’ll explain that below.

Why Those Accounts?

The 401(k) Account

First, let’s talk about why and how I invest using a 401(k) account. There are three huge reasons.

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First, I pay less tax—and so can you. Based on federal tax brackets and state tax brackets, my marginal tax rate is about 30%. For each additional dollar I earn, about 30 cents go directly to various government bodies. But by contributing to my 401(k), I get to save those dollars before taxes are removed. So I save about 30% of $19,500 = $5,850 off my tax bill.

Editor’s Note: The original version of this article incorrectly stated that 401(k) contributions are taken out prior to OASDI (a.k.a. social security) taxes. That claim was incorrect. 401(k) contributions occur only after OASDI taxes are assessed.

Many thanks to regular reader Nick for catching that error.

Second, the 401(k) contributions are removed before I ever see them. I’m never tempted to spend that money because I never see it in my bank account. This simple psychological trick makes saving easy to adhere to.

Third, I get 401(k) matching. This is free money from my employer. As I mentioned above, this equates to about $6,000 of free money for me.

Roth Individual Retirement Account (IRA)

Why do I also use a Roth IRA?

Unlike a 401(k), a Roth IRA is funded using post-tax dollars. I’ve already paid my 30% plus OASDI taxes, and then I put money into my Roth. But the Roth money grows tax-free.

Let’s fast-forward 30 years to when I want to access those Roth IRA savings and profits. I won’t pay any income tax (~30%) on any dividends. I won’t pay capital gains tax (~15%) if I sell the investments at a profit.

Tax GIFs | Tenor

I’m hoping my 30-year investment might grow by 8x (that’s based on historical market returns). That would grow this year’s $6000 contribution up to $48000—or about $42000 in profit. And what’s ~15% of $42000? About $6,300 in future tax savings.

Health Savings Account (H.S.A.)

The H.S.A. account has tax-breaks on the front (36.7%, for me) and on the back (15%, for me). I’m netting about $1300 up-front via an H.S.A, and $4,200 in the future (similar logic to the Roth IRA).

Taxable Brokerage Account

And finally, there’s the brokerage account, or taxable account. This is a “normal” investing account (mine is with Fidelity). There are no tax incentives, no matching funds from my employer. I pay normal taxes up front, and I’ll pay taxes on all the profits way out in the future. But I’d rather have money grow and be taxed than not grow at all.

Summary of How I Invest—Money Invested = Money Saved

In summary, I use 401(k) plus employer matching, Roth IRA, and H.S.A. accounts to save:

  • About $7,100 in tax dollars today
  • About $6,000 of free money today
  • And about $10,500 in future tax dollars, using reasonable investment growth assumptions

Don’t forget, I still get to access the investing principal of $41,000 and whatever returns those investments produce! That’s on top of the roughly $25,000 of savings mentioned above.

I choose to invest a lot today because I know it saves me money both today and tomorrow. That’s a high-level thought-process behind how I invest.

How I Invest: Which Investment Choices Do I Make?

We’ve now discussed 401(k) accounts, Roth IRAs, H.S.A. accounts, and taxable brokerage accounts. These accounts differ in their tax rules and withdrawal rules.

But within any of these accounts, one usually has different choices of investment assets. Typical assets include:

  • Stocks, like shares of Apple or General Electric.
  • Bonds, which are where someone else borrows your money and you earn interest on their debt. Common bonds give you access to Federal debt, state or municipality debt, or corporate debt.
  • Real estate, typically via real estate investment trusts (REITs)
  • Commodities, like gold, beef, oil or orange juice
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Here are the asset choices that I have access to in my various accounts:

  • 401(k)—my employer works with Fidelity to provide me with about 20 different mutual funds and index funds to invest in.
  • Roth IRA—this account is something that I set up. I can invest in just about anything I want to. Individual stocks, index funds, pork belly futures etc.
  • H.S.A.—this is through my employer, too. As such, I have limited options. But thankfully I have low-cost index fund options.
  • Taxable brokerage account—I set this account up. As such, I can invest in just about any asset I want to.

My Choice—Diversity2

How I invest and my personal choices involve two layers of diversification. A diverse investing portfolio aims to decrease risk while maintaining long-term investing profits.

The first level of diversification is that I utilize index funds. Regular readers will be intimately familiar with my feelings for index funds (here 28 unique articles where I’ve mentioned them).

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By nature, an index fund reduces the investor’s exposure to “too many eggs in one basket.” For example, my S&P 500 index fund invests in all S&P 500 companies, whether they have been performing well or not. One stellar or terrible company won’t have a drastic impact on my portfolio.

But, investing only in an S&P 500 index fund still carries risk. Namely, it’s the risk that that S&P 500 is full of “large” companies’ stocks—and history has proven that “large” companies tend to rise and fall together. They’re correlated to one another. That’s not diverse!

Lazy Portfolio

To battle this anti-diversity, how I invest is to choose a few different index funds. Specifically, my investments are split between:

  • Large U.S. stock index fund—about 40% of my portfolio
  • Mid and small U.S. stock index fund—about 20% of my portfolio
  • Bond index fund—about 20%
  • International stocks fund—about 20%

This is my “lazy portfolio.” I spread my money around four different asset class index funds, and let the economy take care of the rest.

Each year will likely see some asset classes doing great. Others doing poorly. Overall, the goal is to create a steady net increase.

Updating My Favorite Performance Chart For 2019
An asset class “quilt” chart from 2010-2019, showing how various asset classes perform each year.

Twice a year, I “re-balance” my portfolio. I adjust my assets’ percentages back to 40/20/20/20. This negates the potential for one “egg” in my basket growing too large. Re-balancing also acts as a natural mechanism to “sell high” and “buy low,” since I sell some of my “hottest” asset classes in order to purchase some of the “coldest” asset classes.

Any Other Investments?

In June 2019, I wrote a quick piece with some thoughts on cryptocurrency. As I stated then, I hold about $1000 worth of cryptocurrency, as a holdover from some—ahem—experimentation in 2016. I don’t include this in my long-term investing plans.

I am paying off a mortgage on my house. But I don’t consider my house to be an investment. I didn’t buy it to make money and won’t sell it in order to retire.

On the side, I own about $2000 worth of collectible cards. I am not planning my retirement around this. I do not include it in my portfolio. In my opinion, it’s like owning a classic car, old coins, or stamps. It’s fun. I like it. And if I can sell them in the future for profit, that’s just gravy on top.

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Enter full nerd mode!

Summary of How I Invest

Let’s summarize some of the numbers from above.

Each year, I aim to save and invest about $41,000. But of that $41K, about $15K is completely free—that’s due to tax benefits and employer matching. And using reasonable investment growth, I think these investments can save me $15,000 per year in future tax dollars.

Plus, I eventually get access to the $41K itself and any investment profits that accrue.

I take that money and invest in index funds, via the following allocations:

  • 40% into a large-cap U.S. stock index fund
  • 20% into a medium- and small-cap U.S. stock index fund
  • 20% into an international stock index fund
  • And 20% into a bond index fund

The goal is to achieve long-term growth while spreading my eggs across a few different baskets.

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And that’s it! That’s how I invest. If you have any questions, please leave a comment below or drop me an email.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog