Reader in Philadelphia, PA: This might be a random situation, but this stripper wants to save some money! In particular, I need to save for retirement. I’ve been doing this gig for a bit and I’m starting to make some serious dough, like $50,000 a year and I’m working about 25 hours a week. My friends in more traditional jobs have 401k’s and stuff like that, but I have no idea where to start in trying to put away more money and do it in a way that helps with taxes and all. I know I can’t do this forever but I feel like I could go another couple years and I think the money I’d make doing something else in the service industry will definitely be less than what I’m making right now. I’ve been taking my tips to the local bank and the teller knows me by now since I’m bringing in a couple hundred in singles, but I feel like there’s a better place to put the money than my bank where I earn nothing on my savings. Thanks!
First Thoughts
Dear Reader, thanks for writing in! I love tackling atypical financial situations and this certainly qualifies as atypical. If it’s cool I’m going to cover a whole host of financial situations that might impact you, and along the way I’ll talk about retirement savings too.
Get Treated as an Employee Under the Law
This is something that will be easily overlooked by the average person but not by the strip club that employs them. Because of Social Security and Medicare taxes, you will get a major tax bill at the end of the year if your employer tries to pull a fast one on you and classify you as an independent contractor. Why is this so important? You said you had about $50,000 of earnings. The combined employer share of Social Security and Medicare taxes that the club should be paying for you is 7.65% of $50,000, or $3,825. That’s almost 4k that your employer could be taking from you by trying to claim to the government that you aren’t really one of their employees. Make sure they are paying your employment taxes throughout the year or you will get hit by a really nasty tax bill.
My bet is that strip clubs do this regularly because I’m guessing the average tenure of a stripper isn’t that long. So they can take advantage of people not knowing the tax code and hitting them with this baloney independent contractor designation so they can save money and make more profits. This is the same thing that Uber is trying to do with their drivers to make more money, and while I understand why they’re trying to do it because who doesn’t like saving money, it shouldn’t fly.
Another thing worth mentioning is health insurance. If you work for a small outfit with fewer than 50 total employees then your employer doesn’t have to provide health insurance. There might be a bunch of part time dancers, cooks, and bartenders that aren’t qualified as employees and that means they won’t count towards the 50. If the club does have more employees than 50, they are classified as a large employer and must help you out with health insurance or face a pretty big penalty, but they only have to do this for full time employees. Again, that means if they are getting away with saying you are a part time independent contractor then you won’t be getting health insurance. To be a full time employee you need to work an average of 30 hours a week, and you mentioned you are at 25.
I would suggest picking up another shift to make sure you are considered a full time employee. You might even qualify for other random benefits like vision, dental, disability, or whatever they offer to the management staff. I think it really depends on what state you’re working in but it’s always going to be better to be classified as a full time employee than not. So check it out with whoever does payroll to make sure they are paying the employer share of SS and Medicare taxes and see how you can get the “full time” label.
Watch Out for the Stripper Tax Temptation
You have a unique situation where you are probably making a majority of your income in tips and cash payments. I have no idea how regularly the establishment checks out your earnings for the night to make sure that it is complying with workplace regulations and what not, but there is a big temptation to under report earnings in any service industry job where a big chunk of your compensation comes from wads of dollar bills.
When you save money from jobs like this, if you don’t report all the income you could get in trouble because you have created a paper trail by depositing money and not showing the source of that money in your income tax statements. That’s not legal so just make sure you definitely write down all the money you make and account for it. If you are used to spending the cash comp where it’s harder to catch under reporting of earnings I just want to make sure you aren’t doing this while saving your money because it could get you in big trouble as its so much more obvious.
If a Stripper Wants to Save For Retirement, See if Your Employer Offers or Might Offer a Retirement Plan
I am not familiar with the benefit plans typically offered by strip clubs, but if they have any kind of retirement plan at all you want to be a part of it. If it’s a larger operation in a big city they will have management, long term bouncers, maybe a director of security, casting director or coaches, ie people that will demand some kind of retirement plan because it’s their long term job. If you classify as an employee you could be eligible to participate in the plan too. Here are the kinds of options they might offer:
SEP IRA/SIMPLE IRA/SIMPLE 401k: These are different kinds of plans that allow small employers to contribute to a retirement account for you without having tons of paperwork. Money going in these accounts might interfere with contributions to a Roth IRA or Traditional IRA so check with a financial rep or institution before contributing to both. You should be able to save at least $5500 of your own money in these accounts in addition to what your employer chips in.
401k: I think it’s highly unlikely a small business like a strip club would offer a full blown 401k to you but it’s possible. If they offer one there are tons of rules associated with it, but the good news is you’ll be able to save more. That means you can contribute up to $18,000 as of 2015 to your 401k and then another $5,500 to a Roth or Traditional IRA on top of that.
What if Work Doesn’t Offer a Retirement Plan
The bad news is if you can’t get a retirement plan offered to you by the club, you won’t be getting free money on top of what you’re making to help you afford to retire one day. The good news is you can take charge of your own life and retirement and take advantage of the retirement accounts available to everyone that makes a wage.
The two different account names are the Traditional IRA and the Roth IRA. You can contribute to either one as long as your income is below six figures. If you are making six figures, contact an accountant to help you figure out which one is better for you.
You mentioned that you make about $50,000 a year. Assuming you’re single, that puts you in the 25% marginal bracket. Many states will let you avoid tax on traditional IRA contributions, so say you had a 5% state income tax, then the total savings would be 30% and you should probably contribute to a Traditional IRA.
The general rule is if you think your income will be lower in the future then do a Traditional IRA. Since you you stated that will probably be the case as the service industry doesn’t pay as well outside of a few occupations, then the Traditional IRA would be the best for you. It will allow you to save more money outside of the retirement account as well by putting the tax savings away in a separate account. The Roth IRA is primarily for early career corporate types that know for sure their taxes aren’t going anywhere but up in the future.
You can contribute $5,500 a year to these accounts combined. So I’d say throw the $5,500 in a traditional IRA and get yourself an extra thousand bucks from the income tax deduction to save elsewhere. Another thing worth mentioning is that you could get the saver’s credit, worth up to $1,000, if you make retirement contributions and you make under about $30,000 a year. You make too much to claim it this year, but if your income dropped in the future it is like a employer match coming from the government. So even if you had a year where you didn’t make much in income it’s still a good idea to save for retirement.
Make Sure To Save Outside of Retirement Accounts
If you are working in the volatile entertainment industry, it is really important to get a solid emergency fund saved up. You could lose your job tomorrow or suffer an injury that prevents you from standing up on stage for long periods of time and then you are in trouble financially if you don’t have some rainy day savings.
I’d recommend saving at least five months expenses, enough to recover from any common life event that would knock you out of the workplace for a time. From the description you might already have this in the bank. If so then awesome work! Another route you should explore is opening up your own individual brokerage account. You can do this at Vanguard and Schwab among other places. These accounts allow you to invest in the stock market on top of what you put in your retirement accounts. If you want a vanilla option go with a balanced mutual fund at Vanguard with low expenses. The returns over the long run will make the savings account look silly.
Final Thoughts to Supercharge Your Financial Life
The financial issues you have are similar to many people actually. You are working in a job where the money you make when you’re younger is greater than the money you’ll make when you’re older. Furthermore, your retirement age from stripping is gonna be sometime in your 30s if not much sooner. That means you probably have 20 plus years to look forward to as a bartender, waiter, or other service industry job unless you go to college.
When I say “go to college,” I don’t mean sign up for ITT Tech or Phoenix Online. These online schools are mostly ripoffs, especially compared to your local community college. Sign up for a program at your local public higher ed institution and you can be a nurse tech, fireman, police officer, and more, any of which will pay better and give better benefits than the service industry. Community college should not cost more than a few thousand per year max, so it has a fantastic return on your investment. In addition to the solid job you could get, you might have some entrepreneurial things you could get involved with like a pinup calendar if you went the fireman route (sorta kidding but maybe not, that stuff probably pays well).
Make sure your degree is in something really straightforward and marketable. Court reporting pays more than Criminology, Actuarial Science pays more than Accounting, and Public Policy pays more than History, according to FiveThiryEight. I’m just citing that study to show that specialized programs within fields pay better than the generic ones. If you follow this advice to go to community college you could end up making more money than the upper middle class kids that went to top universities to major in low earnings fields like sociology or psychology. That same study by FiveThirtyEight shows the average earnings for psych majors is $31,000 a year while court reporters bring in about $50,000 a year starting.
If you decide you aren’t the college type and you love what you’re doing , try and maximize your earning power by taking care of your body, eating right, working out, and using spray tan instead of the real tanning beds to minimize your risk of cancer. Also, avoid smoking since some people use it to stay skinny and its one of the worst financial habits you could possibly have long term.
You’re way ahead of the game by even thinking about retirement. Most strippers don’t think about it at all and will probably end up old and wrinkly in government supported retirement homes living on whatever money is still coming from Social Security down the line. So get out there and strut your stuff but make sure some of those $1’s end up in IRAs and brokerage accounts with your name on it.