Life & Career Archives | Page 51 of 88

Oct

2023

How Are Bonuses Taxed? Understanding the Bonus Tax Rate

By Timothy Moore | Financial Independence, Life & Career, money | Comments Off

Earning a bonus at work can be a reason to celebrate, but keep in mind that the money gets taxed, just like regular income. While you may be told the gross amount that’s coming your way, the amount you actually deposit can be significantly less once the withholding comes out.

So how does your employer calculate how much to withhold from your bonus? Learn the details here, including:

• Why are bonuses taxed?

• How are bonuses taxed?

• Are taxes on bonuses higher than standard income taxes?

• What can you do to lower the taxes on a bonus?

Why Are Bonuses Taxed?

The answer to “Why are bonuses taxed?” is simple, albeit a bit circular: The IRS considers bonuses to be taxable income.

The IRS doesn’t categorize bonuses as regular wages, however; instead, it labels bonuses as “supplemental wages,” meaning there are specific guidelines for employers when withholding taxes.

That said, there are two different ways that a bonus can be taxed, which may or may not impact which tax bracket you’re in.

How Are Bonuses Taxed?

All bonuses — whether performance-based, sign-on, or holiday — are subject to income taxes, just like regular income. But how are bonuses taxed, numerically speaking?

Because bonuses are folded into Box 1 (“Wages, tips, other compensation”) on your W-2 tax form, you’ll likely wind up paying the same amount of taxes on the bonus as the rest of your income.

However, your employer may have withheld money from your bonus check differently from how it withholds taxes from regular earnings. That means when you receive the bonus payment, there could be a larger or smaller percentage of tax withheld than you’re used to.

Employers have two methods for withholding taxes on bonus payments:

1. The percentage method

2. The aggregate method

The Percentage Method

Many employers use the percentage method to withhold taxes from bonus payments. Why? Because it’s much easier for the employer.

For this method, the IRS allows companies to withhold a flat 22% rate of bonus payouts. It’s straightforward math for employers, nice and easy! They don’t have to check the recipient’s details, such as the salary and tax bracket.

A couple of points to consider:

• If you earn $89,075 or more as an individual, a 22% rate might be lower than your usual tax withholdings.

• If you earn $41,775 or less as an individual, however, it might be higher than your usual tax withholdings.

• The flat 22% applies to all bonuses equal to $1 million or less.

• If your bonus is larger than $1 million, your employer is required to use this method — and taxes on a bonuses above $1 million are computed at a flat 37% rate.

And remember: Just because your employer withholds 22% of your bonus, that doesn’t necessarily mean that’s what you actually owe. When you file your tax return, you may find that you overpaid (and are due a refund) or underpaid (and owe additional money). This will typically depend on your tax bracket and how much you’ve already paid through other withholdings and/or estimated quarterly payments.

The Aggregate Method

If your employer tacks your bonus payment onto your regular paycheck, the company can instead use the aggregate method to withhold a portion of the bonus.

In this bonus taxation scenario, your employer would treat this combination payment as a regular (but larger) paycheck and withhold funds based on the withholding specifications on your W-4. That is, it would withhold the percentage of your paycheck for tax purposes that reflects your exemptions and filing status.

Can You Lower the Taxable Amount on a Bonus?

If your regular wages are your primary (or only) source of income, it’s easy to estimate which tax bracket you’ll be in when you go to file — and you can set up tax withholdings based on that estimate.

But if you receive a large, unexpected bonus that increases your income enough, you might graduate to a higher tax bracket for that excessive income. This means you would owe more in taxes and may have underpaid throughout the year.

For that reason, you may want to lower your taxes on your bonus. While you can’t ask the IRS to tax your bonus less, you can look for ways to lower your taxable income for the year so that you stay within a lower tax bracket.

Recommended: What Are the Tax Benefits of Marriage

Tips for Lowering the Amount You Are Taxed on a Bonus

So you’ve just received a hefty bonus check but are concerned about paying taxes on it, especially if it’s large enough to bump you up to a higher tax rate. What can you do? Here are some ways to handle the tax burden:

• Anticipating the bonus: If your total compensation includes an anticipated bonus, you can submit a W-4 with your employer at any point to increase withholdings throughout the year to account for the bonus you’ll eventually earn. It won’t lower your taxable income, but by withholding slightly more money from each paycheck, you may be able to avoid owing a large amount when you go to file your taxes. Making sure your W-4 is up to date is an important part of preparing for tax season.

• Investing your bonus in a tax-advantaged account: An easy way to avoid paying taxes on your bonus is to invest it in a tax-advantaged account, like a 401(k) or traditional IRA. Money invested in these is pre-tax, and it’s usually a good idea to save money for retirement anyway.

Depending on your health insurance plan, you may also be able to contribute to a health savings account (HSA) for medical costs. An HSA is also a tax-advantaged account.

• Donating your bonus: You could use your bonus to make an end-of-year donation to a charity. That can be a tax deduction that would lower your taxable income. Of course, that means you don’t get to keep the money, but if you’re passionate about a nonprofit, it may be worth it to hand over your bonus.

Keep in mind, however, you can only deduct charitable contributions if you’re itemizing deductions. This strategy won’t work if you plan to take the standard deduction.

• Working with an accountant: Paying for an accountant can get expensive, but they may have additional strategies to help you reduce your taxable income. On top of that, they can help you analyze your bonus to make sure you actually have to pay taxes on it. All monetary bonuses are indeed taxable, but the IRS doesn’t tax certain fringe benefits from employers, such as tickets for entertainment events.

• Deferring your bonus: This might sound odd, but you could ask your employer to defer your bonus until next year. This would allow you to update tax withholdings in the new year so you’re prepared for the additional income. In addition, it would enable you to focus on tax deductions and tax-advantaged investments during the next tax year to reduce your taxable income.

Also, if you expect to make less in the following year, it could be beneficial to receive your bonus then — there’s less risk of getting bumped up to a higher tax bracket.

The Takeaway

Earning a bonus can be great: It’s money that you weren’t guaranteed or perhaps even expecting, and now you can use it to fund emergency savings, pay down debt, invest for retirement, or even treat yourself to something nice. But just remember: Bonuses are subject to income taxes, so Uncle Sam will take a chunk out of the check.

Planning to jump-start your emergency savings by depositing a bonus payment? Consider opening an online bank account to help your money grow faster. With a SoFi Checking and Savings account, you’ll earn a competitive annual percentage yield (APY), pay no account fees, and get to spend and save in one convenient place. That’s what we call better banking!

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How much is the typical yearly bonus?

The typical yearly bonus depends entirely on your employer, industry, job level, job performance, and salary. Often, employers pay bonuses as a portion of your job salary.

If you want to see what other employees in your industry typically make for bonuses, you can look at employee-reported salary data on job sites such as Glassdoor and Salary.com.

How can bonuses impact your finances?

If you aren’t expecting a bonus and receive one, this could be a major boost to your finances. You could stash the unanticipated bonus in your emergency fund, contribute to a retirement account or HSA, or even spend it on yourself or your family, purchasing something you couldn’t otherwise afford.

However, remember that bonuses are taxable income. Your employer likely took out 22% already to cover the taxes. However, if the bonus is large enough to put your income over a certain threshold, you might move up in tax brackets and owe more than expected when you go to file.

Are there bonuses that are not taxable?

The IRS considers bonuses to be taxable income. Any cash bonus will be subject to income taxes. However, the IRS has exceptions for what it calls “de minimis fringe benefits,” which include things like:

• Occasional food, such as doughnuts in the morning or a meal for a lunch and learn

• Tickets to a sporting event or concert

• Group-term life insurance for your spouse or dependent (as long as the face value is $2,000 or less)

Photo credit: iStock/AJ_Watt

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Oct

2023

The Great Resignation, Explained

By Rebecca Lake | Life & Career, money | Comments Off

The Great Resignation is a term used to describe an increase in the quit rate among U.S. employees that began in 2021. Millions of people began leaving their jobs citing various reasons, including low pay, poor working conditions, and negative lifestyle impacts associated with the COVID-19 pandemic.

While the Great Resignation created challenges for many employers, it also presented an opportunity for companies to fine-tune their hiring and retention policies.

Here, take a closer look, including:

• What is the Great Resignation?

• What are the reasons for the Great Resignation?

• How can companies prevent employees from resigning?

What Is the Great Resignation?

The Great Resignation refers to the fact that millions of people opted to quit their jobs during the height of the COVID-19 pandemic. Anthony Klotz, associate professor of management at Texas A&M University, is credited with coining the term.

Data suggests that the Great Resignation began in early 2021, reaching a peak of 4.5 million quits in November of that year, according to the Bureau of Labor Statistics (BLS). Altogether, the BLS estimates that nearly 48 million people quit their jobs in 2021.

The wave of quitting hasn’t entirely subsided, however. The Great Resignation trend persisted well into 2022, as more employees elected to leave their employers. For example, the quit rate was 4.1 million for September 2022, according to a recent Job Openings and Labor Turnover report.

Who’s Quitting Their Jobs?

The Great Resignation affected numerous industries but not always equally. According to an analysis by Zippia, for example, the industries affected most by the Great Resignation in 2021 include accommodation and food service, leisure and hospitality, and retail. Here are some other statistics on the Great Resignation and who’s quitting their jobs:

• Employees aged 18 to 29 quit more than any other demographic, with a 37% quit rate in 2021.

• Women were 11% more likely to quit their jobs than men, while Hispanics and Asians quit more often than Black or White Americans.

• Those with less education, e.g., a high school diploma, were more likely to quit than employees with some college or a college degree.

• Employees with lower incomes had a quit rate that was double that of those earning higher pay.

The range of people quitting is diverse, as are their reasons for doing so, as you’re about to learn.

Recommended: 5 Ways to Achieve Financial Security

Reasons for the Great Resignation

Now that you know what the Great Resignation is, you are likely wondering why so many people walked away from their work. There’s no single cause for the Great Resignation. Instead, employees began leaving their jobs in response to a combination of factors. Here are some of the top reasons employees chose to quit, according to Pew Research.

• Low pay. Thirty-seven percent of employees said low wages were a major reason behind their decision to quit.

• No room for advancement. Thirty-three percent of people who quit their jobs in 2021 said they did so due to a lack of opportunities to get ahead.

• Felt disrespected. Interestingly, 35% of those who quit during the first wave of the Great Resignation said they felt disrespected by their employer.

• Child care. The COVID-19 pandemic made child care a struggle for many parents as schools closed for months on end. According to Pew, 24% of quitters cited child care as a major reason for doing so.

• Lack of flexibility. Being able to work flexible job hours or put in for time off as needed is important for many employees. Pew found that 24% of those who quit in 2021 cited lack of flexibility as a major motivator.

Other reasons for quitting included lack of benefits, working too many hours, wanting to relocate, or working too few hours. A small number of employees said they chose to quit over employer requirements to get a COVID-19 vaccine.

Here’s how the top 10 reasons for resigning look in chart form:

Reason for quitting	% who said it was a major reason
Low pay	37%
Feel disrespected	35%
Lack of advancement opportunities	33%
Lack of child care	24%
Lack of flexible schedule	24%
Lack of benefits	23%
Wanted to relocate	22%
Too many hours of work	20%
Roof few hours of work	16%
COVID-19 vaccine requirement	8%

Ways Companies Can Prevent Employees From Leaving

Building a resilient workforce is important, but employee retention can be tricky, especially if workers don’t feel motivated to stick around. The Great Resignation has turned up the pressure on companies to provide employees with a more favorable working environment. Some of the ways companies may be able to prevent workers from leaving include:

• Offering flexible work schedules, including the chance to work remotely

• Focusing on building connections with employees and creating a welcoming company culture

• Getting input from employees on what’s working and what could be improved

• Showing appreciation for employees and respecting them at all times

• Offering opportunities for growth and advancement

• Enhancing benefits packages to include things like wellness perks or student loan repayment. The Great Resignation may have a significant effect on employee benefits in this way.

Offering higher salaries may be a starting point, but it could take more than just a bigger paycheck to convince employees to stay put. Thinking creatively and putting oneself in the mindset of the employee can be helpful ways for employers to figure out what’s needed most.

The Takeaway

The Great Resignation involved almost 48 million workers leaving their jobs in the wake of the COVID-19 crisis. This has taken a toll on many employers as they scramble to hire new workers to replace those who have quit. If you’re thinking of quitting, it’s important to get your financial ducks in a row first so you can maintain your standard of living during a job transition.

3 Money Tips

If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

If you’re creating a budget, try the 50/30/20 budget rule. Allocate 50% of your after-tax income to the “needs” of life, like living expenses and debt. Spend 30% on wants, and then save the remaining 20% towards saving for your long-term goals.

If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What’s the Great Resignation?

The Great Resignation refers to the millions of Americans who have quit their jobs since early 2021. Almost 48 million people left their employment in 2021. Some of the most common causes for the Great Resignation include low wages, employee burnout, inflexible work schedules, and poor work-life balance.

Should you quit for a better paying job?

Not being able to make your budget work is one of the clearest signs that you’re not making enough money. If you believe a better paying job could help you reach your financial goals or, at the very least, make budgeting less stressful, then it could be worth moving on to a new employer. However, consider what you might be giving up in the way of benefits or other job perks to snag a higher salary.

Is it better to quit or be fired?

Quitting a job may look better on a resume than being fired. Additionally, if you’re putting in proper notice in advance, it may be easier to plan your budget as you countdown to your final paychecks. Your employer may also appreciate your giving notice that you plan to make a job transition so they have time to hire someone to replace you.

Photo credit: iStock/Prostock-Studio

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBK1122002

Oct

2023

Can You Rent a Car With a Debit Card?

By Timothy Moore | credit card, Family Finances, Life & Career | Comments Off

Renting a car with a debit card is possible at certain car rental agencies. For some people, this may be a preferable way to conduct this transaction, but you may have to take additional steps before you get behind the wheel.

If you don’t have a credit card, it’s a good idea to research which rental agencies allow you to use a debit card — and understand the extra steps you’ll have to take before they hand over the keys.

Learn more about what to expect here, including:

• Can you use a debit card to rent a car?

• Which companies let you rent a car without a credit card?

• What are the pros and cons of renting a car with a debit card?

• What are alternatives to renting a car with a debit card?

Is It Possible to Rent a Car With a Debit Card?

So, can you use a debit card to rent a car? Yes! You’ve just got to find rental car agencies with a debit card policy. Though their policies differ and this list is not comprehensive, these are among the agencies that allow drivers to rent a car without a credit card:

• Alamo

• Avis

• Budget

• Dollar

• Enterprise

• Hertz

• Thrifty.

Note that not every franchise follows corporate policy and that airport rental agencies may have additional requirements for renting a car with a debit card. It’s a good idea to call the specific location from which you hope to rent a car using a debit card. You can then make sure you understand what requirements must be met before you get behind the wheel.

If you’re renting a car with a debit card, a rental agency might require a security deposit and run a credit check on you. You may also have to provide multiple forms of identification and proof of return travel, be at least 25 years old, and/or have a debit card with a common logo, like Mastercard, Visa, or Discover.

Recommended: Cheapest Ways to Rent a Car

Why Do Many Car Rental Companies Require a Credit Card?

While you may be able to use a credit card like a debit card in some situations and vice-versa, renting a car is a special case. Can you rent a car with a debit card? Yes, in many situations. But do rental car companies want you to? Probably not.

Credit cards offer multiple types of assurances to a rental car agency. For starters, a credit card signals to them that you are trustworthy and responsible — two traits that a company might value before lending you a $30,000+ piece of heavy machinery.

Credit cards also enable rental car companies to collect money for any repairs, tickets, tolls, and other fees. Because of the open line of credit on the card, the rental agency knows it can charge you for incidentals as necessary — without requiring a large security deposit from you upfront.

Recommended: Can You Use a Debit Card Online?

Pros of Renting a Car With a Debit Card

Renting a car with a credit card certainly seems easier, but are there advantages to using a debit card? Most definitely. Here are some of the pros of using a debit card to rent a car:

• No credit card necessary: The biggest advantage is also the most obvious. If you can’t qualify for a credit card or simply don’t want one, using a debit card allows you to rent a car without needing a line of credit.

• No credit card interest: If you pay your credit card off in full each month, you probably aren’t worried about credit card interest. But if you suddenly have a charge for a car rental surpassing $1,000, you might be tempted to just make your minimum payment on your credit card — and rack up interest. By paying with a debit card upfront, you don’t risk accruing credit card interest.

• No impact on credit utilization: High credit utilization can drive down your credit score. By using a debit card, you won’t tap into any of your available credit. However, if the agency runs a credit check for debit card users, the hard inquiry could impact your credit score temporarily.

Cons of Renting a Car With a Debit Card

Yes is the answer to “Can I rent a car with a debit card?” But paying for a rental car with a debit card can have drawbacks. Here are some of the top downsides of renting a car with a debit card:

• No perks: By swiping your debit card, you may be missing out on credit card travel insurance offered to cardmembers. If you have a rewards credit card that earns cash back or points for every purchase, you may also be leaving money on the table by using a debit card.

• Security deposit: When using a debit card, you’ll often have to pay the full cost of the rental upfront. On top of that, an agency may hold additional funds as a security deposit. This could reduce the cash you have in your checking account to spend while on your travels.

• Credit check: Without a credit card, the rental car agency may perform a credit check before allowing you to get behind the wheel. This can result in a hard inquiry on your credit report.

• More hoops to jump through: In addition, rental agencies may require multiple forms of ID, might have age requirements, and may even need to see proof of scheduled return travel to allow you to pay with a debit card.

Is It Better to Rent a Car With a Debit or Credit Card?

Do you need a credit card to rent a car? Not necessarily. If you cannot qualify for a credit card or do not want one, renting with a debit card is the right choice for you.

That said, using a credit card can offer some perks. Doing so is likely the better approach for many drivers since it won’t require a security deposit, may have built-in car insurance, and won’t necessitate a credit check by the agency.

Is It Safer to Rent a Car With a Debit or Credit Card?

If you’re wondering about using a credit card vs. debit card, renting a car with a credit card is generally safer than renting a car with a debit card.

While paying with both debit cards and credit cards is often an option, credit cards offer a heightened level of zero-fraud liability thanks to stricter federal regulations. Your credit card may also offer rental car insurance as part of its perks, meaning extra protection on the road.

Alternatives to Car Rentals With Debit Cards

You’ve just learned the answer to “Can I use a debit card to rent a car?” is often yes. But what if you don’t have a debit card or don’t want to use your debit card to rent a car? Consider some alternatives:

• Using a credit card: The main alternative is paying for a car rental with a credit card. In fact, this is usually the better option for the driver and the rental agency.

• Riding with another driver: If someone else in your party has a credit or debit card and is willing to pay for the rental, let them get behind the wheel. Many companies allow you to pay an additional fee to add a second driver if you’d also like a turn in the driver’s seat.

• Paying with a prepaid card or cash: While rental car agencies will likely require a credit or debit card to secure the rental, some agencies may allow you to pay with a prepaid gift card, money order, or even cash at the end of the rental agreement — once the car has successfully been returned.

Recommended: Common Misconceptions About Money

Ways to Protect Yourself While Renting a Car

Renting a car can be stressful, but it also enables you freedom to travel, allows you to put miles on a car that isn’t yours during road trips, and may come in handy when your vehicle is being worked on. Here’s how you can protect yourself when renting a car:

• Research the car before driving it: Once you know the year, make, model, and trim of your rental, you can research it online to understand any nuances to how it works, especially if you aren’t accustomed to newer safety technologies. The owner’s manual should be in the glove compartment and is worth reviewing if you’re uncomfortable driving an unfamiliar vehicle.

• Carry insurance: Before renting a car, it’s a good idea to check with your car insurance agent and your credit card company to see what coverage you have. If you don’t have coverage for the rental through any other means, make sure you opt in for the insurance offered by the rental agency.

• Follow the rules of the road: You should always abide by traffic laws, but they’re especially important when you’re learning a new vehicle. If you’re traveling in a foreign country, it’s a good idea to study their laws and traffic signs at home before your trip.

The Takeaway

Renting a car with a debit card is possible, but you’ll miss out on some of the perks of paying with a credit card — like potential cashback rewards and car insurance. Plus, rental agencies may require you to fulfill more requirements to get behind the wheel, like paying a security deposit or agreeing to a credit check.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Unlock the benefits of the SoFi debit card with your own SoFi Checking and Savings Account.

FAQ

Which rental car companies allow you to use a debit card?

Alamo, Avis, Budget, Dollar, Enterprise, Hertz, and Thrifty are just some of the rental car companies that allow you to pay with a debit card. However, these and other rental car companies may have additional criteria for renting the car using a debit card, like paying a security deposit or providing multiple forms of identification.

Are there any restrictions when renting with a debit card?

Each rental car company may have its own restrictions when you rent a car with your debit card. For example, they may require you to be 25 or older, pay a security deposit, and/or agree to a credit check. It’s a good idea to call the specific agency before arriving to understand what you’ll need in order to rent a car with a debit card.

What is the process of renting a car with a debit card?

Rental agencies have varying processes for renting a car with a debit card. It’s a good idea to check online and even to call the specific agency to understand the process ahead of time. In general, companies may require full payment plus a security deposit upfront, they may run a credit check, and they might want to see multiple forms of identification. If you’re renting at an airport, they may also require you to provide proof of a return plane ticket.

Photo credit: iStock/Khaosai Wongnatthakan

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK1222007

Oct

2023

Tips to Avoid Schemes Disguised as Multi-Level Marketing Companies

By Timothy Moore | Family Finances, Life & Career, money | Comments Off

Multi-level marketing businesses— also called direct sales, direct marketing, or network marketing — are legitimate enterprises that involve selling products or services to a network of peers (i.e., friends and family) and recruiting more salespeople.

The problem? According to the Federal Trade Commission (FTC), many illegal pyramid schemes disguise themselves as legal multi-level marketing (MLM) companies. Even legal MLMs can be bad news; most people make little or no money with MLMs, and some even lose money.

Read on to learn:

• What’s an MLM?

• What are the differences between MLMs and pyramid schemes?

• How can you avoid multi-level marketing companies?

What Is a Multi-Level Marketing (MLM) Company?

A multi-level marketing business, or MLM for short, is a legitimate business that sells products and services through independent distributors. These companies rely on such distributors to sell to networks of peers, typically friends and families. The distributors, often called “participants” and “contractors,” must also recruit new distributors for the program.

The companies are found in a variety of categories. They might be selling supplements, personal-care products, kitchen utensils, or any other number of items.

Recommended: Common Credit Card Scams

How Do Multi-Level Marketing Companies Work?

What is an MLM company, and how does it operate? In a multi-level marketing business, distributors must first buy the products wholesale from the company. They then make commissions off the products that they sell at retail prices.

Distributors also earn a commission from their recruits’ sales, which incentivizes distributors to recruit more people into the business. Those at the top of the company, with multiple levels of distributors beneath them, thus earn the most money without even needing to purchase more products to sell.

Multi-Level Marketing vs. Pyramid Schemes: What’s the Difference?

Though sometimes questionable, multi-level marketing programs are legal. Pyramid schemes, however, are illegal types of money scams. Unfortunately, many pyramid schemes disguise themselves as legitimate MLMs. Here are key differences:

• Pyramid schemes are more focused on recruiting than actually selling the products. While MLMs do ask you to recruit more distributors, the focus is on sales.

• Pyramid schemes may also require distributors to buy more products at regular intervals, even if they have not sold all the products they already have. Sometimes, in a pyramid scheme, you have to buy more products just to get paid or earn a bonus. This is a major red flag.

In the end, most people who are swindled into pyramid schemes run out of money, are stuck with products that they can’t sell, and quit — meaning they lose everything they invested in the business.

Real-Life Examples of Multi-Level Marketing Companies

Some products marketed and sold through network marketing companies are from legitimate MLM businesses — and you can feel comfortable purchasing them. In other cases, recognizable products can emerge from pyramid schemes.

Here are some real-life examples of legal, established MLMs. You may be surprised to learn that what is an MLM can be a familiar and trusted brand:

• Amway

• Avon

• Herbalife

• Vorwerk

• Mary Kay

• Infinitus

• Perfect

• Quanjian

• Natura

• Tupperware

• Nu Skin

• Primerica.

Why Is Multi-Level Marketing Legal?

Multi-level marketing businesses must adhere to strict FTC guidelines to be considered legal. The FTC regularly goes after suspicious MLM companies that may actually be pyramid schemes.

Though sometimes seemingly predatory, MLM is just a form of direct sales. When adhering to FTC guidelines, these businesses aren’t breaking any laws.

Recommended: What’s a Pump-and-Dump Scheme?

What Is the 70% Rule?

Though not technically a law, the 70% rule is a common term in MLM discussions. It arose in a 1979 case against Amway.

In analyzing the business structure of Amway, the FTC determined that, because Amway required distributors to sell at least 70% of the products they bought in a given month to earn a bonus, Amway was attempting to operate as a legitimate MLM. Their business model involved profited from sales, not shady recruiting tactics.

Now, the 70% rule is a loose term that means an MLM is focused on sales, rather than requiring distributors to buy more products or recruit more people to earn bonuses. The trouble with this rule is that it is difficult to enforce: MLMs typically trust their distributors to tell the truth about how much product they’ve sold but cannot always verify the numbers.

Are the Products That MLMs Sell Legitimate?

The products and services that MLMs and even pyramid schemes sell can be completely legitimate. Just think of that trusty Tupperware in your kitchen cabinet or your favorite lipstick from Mary Kay.

But even if a product is good, the distributor requirements of a legitimate MLM or shady pyramid scheme can still cause the seller to lose money.

Recommended: A Guide to Credit Card Protection

Can You Create Financial Freedom by Joining an MLM?

Multi-level marketing companies require a lot of entrepreneurial hustle from distributors to make money. As contracted sellers, distributors don’t earn a salary but instead make commissions.

While someone with a true sales spirit may make some money in an MLM, most do not make enough money to achieve any kind of financial freedom without another source of income. In fact, the FTC says some people even lose money from legitimate MLMs.

Pyramid schemes are worse, having left some people in economic ruin.

Tips for Recognizing Predatory MLMs and Pyramid Schemes

While MLMs are legitimate, they may not be worth the effort and could also cause you to lose money. Illegal pyramid schemes, however, are usually designed to hurt the low-level distributor.

So how can you spot a predatory MLM or pyramid scheme? Here are a few warning signs:

• Hyperbolic claims of excess income: If a brand promoter is promising outlandish amounts of income — even saying you can quit your day job and retire early — that’s typically a red flag.

• “Act fast” pressure: You should be able to think about any financial decision and be given the time to talk it over with friends and family. Brand promoters of pyramid schemes and predatory MLMs may use high-pressure tactics, like telling you that you must act now or you’ll lose out on the opportunity.

• An emphasis on recruiting: In a true MLM where you at least have the potential to earn money, the emphasis should be on sales. If during initial conversations with a promoter, the emphasis is on recruiting other members, this is likely an indicator of a pyramid scheme.

Recommended: How to Verify a Check

Tips for Avoiding Predatory MLMs and Pyramid Schemes

The first step to avoiding a shady MLM or full-on pyramid scheme and protecting your finances is recognizing them when you see them.

Here’s what you can distinguish what are MLMs from pyramid schemes and avoid the latter:

• Researching the company: Take the time to conduct research online. The FTC recommends googling the name of the company with terms like “scam” or “complaint” and then analyzing the results. The FTC even suggests reaching out to your state attorney general to inquire about complaints for a specific company. Uncovering evidence of lawsuits during your research is often a tell-tale sign.

• Analyzing the products: Legitimate MLMs can sell good products. Pyramid schemes might even have products that you recognize. But if any company has poor-quality products that they expect you to sell, there’s a good chance it’s a pyramid scheme. Watch for products that are priced too high, claim to have “miracle” ingredients, or “guarantee” results.

• Asking good questions: If the promoter is unwilling to answer very basic questions, like how refunds work or what happens if you can’t sell the product, they are likely hiding something.

• Not making decisions in a vacuum: It’s a good idea to discuss all major financial and business decisions with a trusted friend or family member. If you have paperwork for an MLM that you’re unsure about, you can even have a personal accountant or lawyer review it before you sign.

Recommended: Jobs That Pay for Your College Degree

The Takeaway

Multi-level marketing companies are legitimate and legal direct-sales businesses, but they rarely enable a distributor to make good money; some distributors may even lose money. Pyramid schemes are typically disguised as MLMs and can lead to financial ruin. Such schemes are illegal. In general, it’s a good idea to avoid any kind of MLM company if you are unsure of their trustworthiness.

Looking for other ways to grow your finances? Open an online banking account with SoFi to take advantage of our super competitive APY and the fact that we don’t charge account fees, which can help your money grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is it legal to join an MLM?

Yes, it is legal to join an MLM. However, very few people earn enough money from multi-level marketing companies to make them worth the effort. In fact, some people lose money in MLMs.

What makes an MLM illegal?

MLMs are legal, but pyramid schemes are not. Pyramid schemes often disguise themselves as legitimate MLMs. However, with pyramid schemes, the emphasis is on recruiting new members and forcing distributors to buy more products, rather than focusing on empowering distributors to successfully sell to customers.

Are MLMs the same as pyramid schemes?

No, MLMs are not the same as pyramid schemes, but pyramid schemes often disguise themselves as MLMs. Multi-level marketing companies are legitimate businesses that require distributors to buy products and earn commissions by selling them to a network of peers. Pyramid schemes are more focused on recruiting new distributors and forcing them to buy products than empowering distributors to sell the products.

Photo credit: iStock/Makhbubakhon Ismatova

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SOBK0822005

Oct

2023

What Is a Freelancer? Guide to Freelancing

By Timothy Moore | Building Your Career, Life & Career, money | Comments Off

A freelancer is a self-employed worker who provides services for a client or multiple clients as an individual contractor. Freelancers typically have flexible hours, work remotely, and can be involved in as many or as few projects as they would like. Think about people you may know who provide social-media consulting for a few businesses, drive an Uber, or take catering gigs. All of them are freelancers.

Because freelancers are not employees, however, they do not receive typical work benefits like health insurance and paid time off. They are also subject to self-employment tax and are responsible for paying taxes entirely on their own.

Are you committed to being a freelancer or just curious about how it works? In this piece, you’ll get the answers you need to move ahead, including:

• What is a freelancer?

• How does freelancing work?

• What are common types of freelancers?

• What are the pros and cons of freelancing?

What Is Freelancing?

So what does freelancing mean? Freelancing is when a self-employed individual offers professional services to a company in exchange for payment. Unlike a traditional employee, the freelancer can set their own rates and hours. They can work for one or multiple companies.

In exchange for this flexibility, freelancers must be prepared to fund their own benefits like health insurance. They also typically pay their own taxes which are potentially higher.

Some people freelance as their sole source of income. If they work on a large or long-term project, you may hear the term “independent contractor” used (you’ll learn more about different terminology below).

However, it is possible to freelance on top of a regular salaried or hourly position. Such freelance work is commonly referred to as a side hustle or side gig and can help people bring in more cash.

Recommended: 15 Low-Cost Side Hustles

How Does Freelancing Work?

Now that you know the answer to “What is freelancing,” here’s more detail on how this kind of employment works. Freelancers make money by selling a service to another individual or company (i.e., a client). Typically, freelancers and their clients will enter into a contract with one another that specifies the nature of the work, the duration of the professional relationship, and the payment for services rendered.

After completing the work, a freelancer will usually submit an invoice to the client, who will then pay the freelancer by a predetermined method (direct deposit, paper check, peer-to-peer transfer, etc.). During tax season, a freelancer will receive an IRS 1099 composite form from each client instead of a W-2. This form will detail the total compensation the freelancer earned from the client.

Because freelancers are self-employed, they are solely responsible for paying federal, state, and local taxes on all earned income. In addition to paying what an employee would traditionally have withheld from their paycheck, a freelancer must also pay what an employer usually contributes toward taxes (typically Social Security and Medicare taxes). And because there is no steady paycheck from which funds are being withheld for taxes, freelancers are responsible for paying quarterly estimated taxes to avoid a penalty from the IRS.

If you decide to become a freelancer, it is a good idea to work with a certified accountant to ensure you are handling your taxes correctly. Not only can an accountant help you with quarterly taxes, but they can also point out important freelancer tax deductions you can be taking.

Recommended: Passive Income Options

Common Fields for Freelancing

Traditionally, freelancers have been thought of as roles like writers, photographers, consultants, and coaches. But today’s gig economy has broadened the definition of freelance work. Rideshare drivers, dog walkers, and online tutors — these just scratch the surface of jobs one can do as a freelancer.

In terms of what a freelancer is specifically, take a look at some common fields and roles:

• Editorial

◦ Copywriters

◦ Journalists

◦ Bloggers

◦ Proofreaders

◦ Editors

• Creative

◦ Graphic designers

◦ Photographers

◦ Podcasters

◦ Vloggers

◦ Animators

◦ Videographers

◦ Social media influencers

◦ Musicians

• IT and Development

◦ Web developers

◦ Mobile developers

◦ Software developers

• Admin

◦ Virtual assistants

◦ Transcribers

◦ Administrative assistants

• Financial and Legal

◦ Accountants

◦ Bookkeepers

◦ Tax preparers

◦ Lawyers

• Sales and Marketing

◦ Social media marketers

◦ Public relations specialists

◦ Digital advertisers

◦ SEO marketers

• Consultants

◦ Business consultants

◦ Medical consultants

◦ Legal consultants

• Gig Economy

◦ Delivery drivers

◦ Rideshare drivers

◦ Dog walkers

◦ Babysitters

◦ House cleaners

◦ Fitness instructors

The important thing to remember: Most of these jobs can be done as an actual employee, and many other jobs not listed here can now be done by freelancers. Many businesses rely on a healthy mix of freelancers and independent contractors to achieve success.

Recommended: How to Make Money Through Social Media

Types of Freelancers

You may hear different terms used and wonder what does freelancing mean exactly? Are independent contractors and freelancers the same thing? Here, the answer to that question as well as clarity on some other phrases you may encounter that describe this kind of work:

1. Independent contractor: Most freelancers are independent contractors. They provide their services to multiple clients and companies, as specified by the contracts they agree to. An independent contractor may do a short, one-off project with a client, but it tends to be used (as noted above) when one is contracted to provide a service on an ongoing basis or does a larger scale project.

2. Part-time freelancer: People who hold down a full-time job but make extra money on the side — like a weekend wedding photographer or a doctor who does some medical consulting with clients — are considered part-time freelancers.

3. Small business owners: Some freelancers may earn enough work that they need to hire actual employees to keep up with it. For example, a freelance writer may attract enough clients to eventually form an agency.

4. Temporary workers: Individuals who find temporary work, often through a temp agency, are considered freelancers. Sometimes, businesses need to fill a full-time role but only for a set number of months or years, like to cover for a full-time employee’s parental leave. The contracted worker who temporarily fills that role is also considered a freelancer but may enjoy some company benefits during their tenure, depending on contract specifics.

Recommended: 5 Ways to Achieve Financial Security

Tips on Becoming a Freelancer

Thinking about becoming a freelancer? The following tips may help you find success:

• Finding clients: Before quitting a full-time job with steady income and benefits, it’s a good idea to have some clients as a freelancer. Many freelancers start out part-time and transition to full-time freelancers once they have enough steady work.

• Understanding the financial implications: Knowing how you will pay taxes as a freelancer is an important requirement before transitioning into this career. It’s also wise to have a plan for health insurance, disability insurance, and other benefits that you may be losing by transitioning out of full-time work.

• Staying organized: Having an organizational system to keep track of clients, projects, communication, and deadlines can be crucial. Successful freelancers often make their own work schedule with standard hours and stick to it, even if no one else is holding them accountable.

• Networking: Word-of-mouth referrals are a great way to earn business as a freelancer; networking on sites like LinkedIn and in person with potential clients and others in your field is a great strategy. Depending on your line of work, having a website and portfolio advertising your services can make it easier to win new business.
Feeling unsure about the transition to independent contractor? Consider researching and following some financial planning tips for freelancers.

Pros of Freelancing

Freelancers enjoy plenty of perks, including:

• Setting your own rates: As a freelancer, you can determine how much you’ll charge a client per project or hour. Just remember that if you set the price too high, companies may go with another contractor.

• Setting your own hours: You can also work as much or as little as you’d like — and at the time of day you’d prefer. You don’t have to ask for permission to go to the grocery store, take a mental health day, or go to yoga class in the morning.

• Diversifying your client list to keep work interesting: You can choose which clients you work with and have more freedom to define your job responsibilities.

• Flexible time off: Freelancers may not get paid for their time off, but as long as you fulfill contractual obligations to clients, you can take vacation (or just lazy days) whenever you like.

• Freedom from regular meetings and office politics: While freelancers may hop on a call or meet up with a client for lunch on occasion, there is typically more freedom to do the actual work instead of sitting through unnecessary meetings. This may not apply to some freelancers, like consultants.

• Remote work: Most freelancers are able to work on the go or from a home office.

Cons of Freelancing

But there are also downsides to freelancing, like:

• Lack of company-paid benefits: Freelancers are responsible for getting their own health insurance and can’t count on a company’s 401(k) match. (That’s where the solo 401(k) comes in!) Freelancers also won’t get paid while they’re on vacation.

• Higher and more complicated taxes: If you’re self-employed, you’ll need to cover some taxes beyond those you would pay as a traditional employee. Freelancers must also pay their taxes quarterly to avoid fines from the IRS.

• Less job security: Because freelancers are not employees, it is easier for a company to sever ties. Freelance work is sometimes on a per-project basis, so as a freelancer, you may need to spend a significant portion of your time just trying to market your services to find more work.

• Lack of steady income: As a freelancer, you might not be able to depend on the same amount of money every week; it can vary by the type and amount of projects you take on. This can make it more challenging to build a monthly budget.

• Loneliness: Working from a home office as a freelancer can be isolating. If you feed off other people’s energy and really enjoy networking and socializing with coworkers, you may find that freelancing isn’t right for you.

• The constant need for “hustling”: Workers who do an average job might be able to skate by as a traditional employee and still earn a paycheck. To turn a profit as a freelancer, you must constantly impress clients with high-quality work and no missed deadlines. Otherwise, they might look elsewhere.

Here’s a look at the pros and cons of freelancing in chart form:

Pros of Freelancing	Cons of Freelancing
• Set your own rates • Set your own hours • Choose your clients • Have flexibility with time off • Avoid meetings and office politics • Can work remotely	• Don’t get benefits • Must cover more taxes • Lack job security • Don’t receive steady paycheck • May be lonely • Must constantly be pitching new work

Pros of Freelancing

Cons of Freelancing

• Set your own rates

• Set your own hours

• Choose your clients

• Have flexibility with time off

• Avoid meetings and office politics

• Can work remotely

• Don’t get benefits

• Must cover more taxes

• Lack job security

• Don’t receive steady paycheck

• May be lonely

• Must constantly be pitching new work

Banking With SoFi

Freelancers rely on many tools to turn a profit, including a bank account that puts their hard-earned money to work. If you sign up for an online bank account with SoFi, you’ll enjoy a suite of tools that makes organizing your earnings, spending, and saving super convenient. Plus you’ll earn a hyper competitive interest rate and pay no monthly fees, so your money can grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is freelancing better suited for full-time or part-time?

Many freelancers are able to turn their work for a client or clients into a full-time career. If you are just starting out, it might be a good idea to freelance part-time and then transition to full-time if you feel confident that you can sustain a freelance career.

What skills are necessary for freelancing?

Beyond the actual job skills required by whatever field you’re freelancing in, being a successful freelancer requires several key skills, including:

• Excellent communication

• Strong organization

• A commitment to deadlines

• The ability to network

• A solid understanding of finances.

Is freelancing difficult?

Freelancing can be difficult: You won’t enjoy employer-sponsored benefits, you’ll have to pay self-employment taxes, and you’ll need to “hustle” to win clients — and then deliver impressive work that convinces clients to keep you around. That said, freelancing offers freedom and flexibility and can be lucrative if your business is successful.

Photo credit: iStock/AleksandarNakic

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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