Just added another 70k per annum.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Just added another 70k per annum.

Post by boatofcar »

I'm a teacher making about 45k a year. A few months ago I started a "side job" that pays 70k a year. At this job I am paid like a contractor--no benefits, just the agreed-upon yearly wage paid in twice a month increments..

I realize that the normal course of action in this situation is to max out my 403(b). However, the county in which I work offers a choice of annuities or investing in mutual funds via Ameriprise. In addition, they also limit what funds I was able to choose within Ameriprise. After conferring with an Ameriprise rep several years ago, I started investing a small ($200/mo) portion of my salary into the CSXAX fund, which was the closest thing to an index fund that was available to me.

Before I started this additional job, I saw the poor performance of this fund compared to the S&P, and figured the growth I'd experience (on average) would outweigh the tax implications if I withdrew the money and invested it myself post tax, so I used the CARES act to withdraw the 13k or so I had in there without paying the penalty. I put the 13k into the Vanguard VFIAX/VWINX mentioned below.

So as of right now I have no school-based retirement plan, other than my pension. I honestly have no idea how the pension scheme works in my county, all I know is that money is deducted from my check into it every month.

Some other factors:
I have no car payment. I owe about 140k on my home. My mortgage interest rate is 3.14%. I have 10k in a Marcus savings account that serves as my emergency fund that should get us through six months of expenses, $6k in last year's post-tax ROTH IRA, and 20k in a post-tax Vanguard brokerage account split between VFIAX and VWINX. I guess this is kind of an emergency fund too, though I would deplete the Marcus account before touching this money.

I have student loans, but am enrolled in Federal Employment Repayment Program, and have about 3 years worth of payments left before the rest is forgiven.

So basically, I am wondering what you think I should be doing with the rest of this money to minimize tax penalties. My current plan is just to save 30% of my 70k job in Marcus to pay off the tax, and split the rest between my savings account and my Vanguard fund with VFIAX and VWINX, while being sure to max out my IRA.

My thinking behind this is that if I have to pay taxes on the money when I withdraw it after 60 anyway, why not just pay the taxes now and have more control over how I invest it? Or what if my wife and I want to move to Thailand and build a house there (she's from Thailand) and I need the money for that? I'm not saying these are sound financial ideas, but this was my thinking earlier in the year when I withdrew the 13k from my 403(b) and continues now, now that I'm getting a check for $3.5k every two weeks.

If this is stupid, and I should just go back to the CSXAX fund to avoid paying taxes, and just take the 10% penalty if I need to dip into things before 60, please let me know. I'm open to anything.

Thank you!
Last edited by boatofcar on Thu Jul 23, 2020 10:51 am, edited 2 times in total.
Jack FFR1846
Posts: 13049
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Just added another 70k per annum.

Post by Jack FFR1846 »

High fees = what? (a number)

How long to you plan to stay in the job?

I've had high ER 401k's that I still contributed the max, knowing that I did not plan to be in the job forever. On resignation, I transferred it all to my Fidelity IRA. My goal was to not lose the tax deferred space.
Bogle: Smart Beta is stupid
User avatar
elcadarj
Posts: 204
Joined: Tue Aug 30, 2016 8:21 am

Re: Just added another 70k per annum.

Post by elcadarj »

Does your plan allow for in-service withdrawals to IRA? Read your summary plan description (SPD).

https://www.lordabbett.com/en/perspecti ... loyed.html

"In-service Withdrawals from 403(b) Plans
These plans are unique in their way, because the in-service distribution rules applicable to 403(b) plans depend on the applicable funding vehicle. The 403(b) investment options generally come in two types: a section 403(b)(1) account, which invests solely in annuities, and a section 403(b)(7) custodial account, which allows for investment in mutual funds. With either plan type, amounts attributable to 403(b) elective deferrals (pretax or Roth) are not available for in-service distributions before age 59½, unless the employee has a severance from employment, dies, has a hardship, or becomes disabled. Notably, distributions from 403(b) employer contributions are permitted upon a stated age (as defined in the plan document), event, or after a fixed number of years, with IRS guidance stating a minimum of at least two-year waiting period. In summary, 403(b) distribution restrictions are dependent upon a number of variables, including the funding vehicle (annuity or custodial account), contribution type (salary deferral, employer contribution, etc.), and satisfying a “triggering” event. So, always review the plan document for specific rules applying to in-service distributions.

However, for employer contribution amounts held in a 403(b)(1) annuity contract, the plan may (but is not required to) provide for in-service distribution upon the occurrence of a specified event (e.g., fixed number of years, attainment of specified age). Further:

A participant may be eligible for an in-service distribution upon turning age 59½, provided that the plan document permits such distributions.

A “contract exchange” allows for the transfer of all or some portion of a participant’s account to another 403(b) vendor included in the employer’s plan.

The plan document must list all eligible 403(b) providers. Check the SPD for plan specifics."
niceguy7376
Posts: 2827
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Just added another 70k per annum.

Post by niceguy7376 »

boatofcar wrote: Thu Jul 23, 2020 9:41 am I'm a teacher making about 45k a year. A few months ago I started a "side job" that pays 70k a year. At this job I am paid like a contractor--no benefits, just my salary.
Salary means SS, Fed, State and local taxes are deducted.
So are you paid a salary or just a contractor (# of hours worked times hourly rate with no tax deductions)?
HomeStretch
Posts: 5377
Joined: Thu Dec 27, 2018 3:06 pm

Re: Just added another 70k per annum.

Post by HomeStretch »

A few more details will be helpful to receive the best feedback. You can edit your original post using the pencil icon to keep your info all in one place.
boatofcar wrote: Thu Jul 23, 2020 9:41 am A few months ago I started a "side job" that pays 70k a year. At this job I am paid like a contractor--no benefits, just my salary.
Will you receive a W-2 or Form 1099?

What do you expect your federal marginal tax rate to be for 2020? State?

Will you receive a pension from your W-2 job?
I realize that the normal course of action in this situation is to max out my 403(b). However, the county in which I work offers a pathetic amount of choices--basically annuities and low-performing, high-expense funds--there is no S&P 500 or index fund to be found. So I used the CARES act to withdraw the 13k or so I had in there without paying the penalty.
How high are the fees/ERs?

What did you do with the $13k withdrawal?
I owe about 140k on my home.
What is your mortgage rate?
I have 10k in a Marcus savings account.
Is this your Emergency Fund? How many months of living expenses will this cover?
$6k in last year's IRA
Is this a Traditional IRA (pretax contributions) or a Roth IRA?
.. and 20k in a Vanguard account split between VFIAX and VWINX.
What type of account is this - a Taxable brokerage account?
So basically, I am wondering what you think I should be doing with the rest of this money to minimize tax penalties. My current plan is just to save 30% of my 70k job in Marcus to pay off the tax, and split the rest between my savings account and my Vanguard fund with VFIAX and VWINX, while being sure to max out my IRA.
What type of tax penalties do you mean? Or do you mean normal income taxes?

First insure your Emergency Fund is adequate.

If you are an independent contractor receiving a Form 1099, you could set up a Solo 401k at a low cost brokerage like e*Trade, Fidelity, Vanguard, etc. Depending on the provider and your self-employment income, you could make employer deferrals (Traditional or Roth) up to the 2020 IRS limit of $19.5k plus employer contributions based on your profit.
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Re: Just added another 70k per annum.

Post by boatofcar »

I've updated my OP with additional information. Homestretch, thank you for the tip!
Jack FFR1846 wrote: Thu Jul 23, 2020 9:45 am High fees = what? (a number)

How long to you plan to stay in the job?
At least three more years, when I've completed my 10 years of the Federal Employment Repayment Plan and I don't have any more student loans.

elcadarj wrote: Thu Jul 23, 2020 9:50 am Does your plan allow for in-service withdrawals to IRA? Read your summary plan description (SPD).

https://www.lordabbett.com/en/perspecti ... loyed.html

"In-service Withdrawals from 403(b) Plans
<snip>
The plan document must list all eligible 403(b) providers. Check the SPD for plan specifics."
I don't know, this is the first I've heard about this.
HomeStretch wrote: Thu Jul 23, 2020 10:19 am
What type of tax penalties do you mean? Or do you mean normal income taxes?

If you are an independent contractor receiving a Form 1099, you could set up a Solo 401k at a low cost brokerage like e*Trade, Fidelity, Vanguard, etc. Depending on the provider and your self-employment income, you could make employer deferrals (Traditional or Roth) up to the 2020 IRS limit of $19.5k plus employer contributions based on your profit.
Yes, normal income taxes. I am sure I will receive a 1099. My contract employer cannot even put me into direct deposit as a contractor, so I don't know if I can depend on them for much help in setting up a Solo 401(k) if they are needed for that.
Katietsu
Posts: 4298
Joined: Sun Sep 22, 2013 1:48 am

Re: Just added another 70k per annum.

Post by Katietsu »

I do not think you are making the best choices. Though as long as you are saving. you will be fine.

First of all, we’re you eligible for a CARES Act withdrawal? You or a spouse must meet one of the Covid related requirements. Second, I believe you can repay your withdrawal to a retirement account of your choice. In other words, I think you can open an IRA, invest how you want and avoid the income tax hit. Please check on this though, as I only sort of paid attention to these provisions.

Second, for your side gig, you are a business owner. You should start thinking of yourself that way. Educate yourself on self employment taxes, quarterly estimated payments, the reporting requirements of a Sch C, etc. You do not have an employer, you are the employer. And for the purpose of this post, learn about the solo 401k. You can put your $19500 a year here plus more if you want. You can choose between traditional and Roth for the $19,500 “salary deferral” part while the employer % of profit part must go to traditional. Search this forum and you will find great suggestions about who to use and mistakes to avoid. Good luck. Your side gig now has a side task.
HomeStretch
Posts: 5377
Joined: Thu Dec 27, 2018 3:06 pm

Re: Just added another 70k per annum.

Post by HomeStretch »

boatofcar wrote: Thu Jul 23, 2020 10:50 am ... I am sure I will receive a 1099. My contract employer cannot even put me into direct deposit as a contractor, so I don't know if I can depend on them for much help in setting up a Solo 401(k) if they are needed for that.
As you are self-employed, you would be responsible for setting up an individual 401k (aka as a Solo 401k). Your client is not involved at all.

This BH wiki page explains such a plan further:
https://www.bogleheads.org/wiki/Solo_401(k)_plan
You can also read up about them at Fidelity, Vanguard, e*Trade, etc. websites. e*Trade will give you more flexibility as it allows both Roth and Traditional contributions, accepts rollovers in and allows in-plan Roth rollovers. Fidelity or Vanguard’s plans Might work for you but they do not offer all of those features.

As you are making more money at your 1099 job than your W2 job, a Solo 401k plus a Roth IRA could be a better option for retirement savings instead of the high-fee 403b.
lakpr
Posts: 6668
Joined: Fri Mar 18, 2011 9:59 am

Re: Just added another 70k per annum.

Post by lakpr »

+1 to the suggestions about to establish an Individual 401k. That should be done like YESTERDAY, and you should contribute $19,500 max (less what you have already contributed to the 403b as teacher, of course). Edit: I would also suggest you open that Individual 401k plan at E*Trade. They are really the best-in-class. Do not go to Vanguard, as Vanguard does not allow rollover of external pre-tax assets into their plans, and as the last paragraph in this comment (below) implies, you do need a plan that allows it.

Going forward, max out your employEE and employER contributions to the Individual 401k plan instead of the 403b plan, Ameriprise and their high fees. You just now built an escape hatch for yourself from high fees. Utilize it!!

Third, your mortgage rate of 3.14%. With a principal amount of $140k, your mortgage interest is $5.2k approximately, no where near the amount of $14,800 minimum required for you to start itemizing deductions (I am assuming zero to charity, or at least less than $10k to charity per year). With those assumptions, I think you are taking standard deduction on your taxes now. In other words, that 3.14% is not providing you any tax benefit, or in other words, 3.14% is an AFTER-TAX interest rate. For a fair comparison, just to break even, you should be earning 3.14/(1 - 0.22) = 4% CD.

Think of mortgage as a negative bond, and that every dollar extra you pay into your mortgage as earning a 3.14% CD after-tax / 4% before-tax for the next few years. Say you are 17 years into a 30 year mortgage, and monthly payment of $1000. Paying $1000 extra towards mortgage is the same as earning 4% guaranteed rate for 13 years. The next $1000 you pay towards the mortgage is the same as earning 4% guaranteed rate for only (13 years - 2 months); the third $1000 you pay is the same as earning 4% guaranteed for only (13 years - 3 months), etc.

I bet you aren't going to find a 4% guaranteed CD anywhere. In other words, accelerate the payoff of your mortgage.

=========================

If your school district has asked you to stay home, has asked you to do virtual instruction for students, if your duties have been substantially re-defined ... *YOU ARE AFFECTED BY COVID-19*. The impact need not be necessarily financial. The CARES act only cares (pardon the unintentional pun) that you are affected, not specifically financially, and the impact does not need to be necessarily rise to a crisis proportion in your household. I believe that would allow you (as long as you have a note from your school district about re-assigning duties or to do only virtual instruction etc.) to withdraw the $100k maximum from Ameriprise 403b and redeploy into an IRA of your choice. Once in a lifetime opportunity, don't let it pass by. I believe those withdrawals must be made by 8/31/2020.
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Re: Just added another 70k per annum.

Post by boatofcar »

lakpr, thank you for the insightful post. I am in the process of opening an E*Trade Solo 401(k) now.

So you would suggest that I max out my Solo 401k contribution at $19,500 and pay extra on my mortgage? My current mortgage payment is about $1,200, so I could tack on an extra thousand without too much trouble. I guess you're taking a gamble that the 4% rate locked in by paying off your mortgage early will beat out the S&P over the same period of time?

What about a ROTH IRA in addition to the Solo 401(k)? Will that work the same way as it did last year, where I just create another one on Vanguard and put $6k in it? Or should I do it through E*Trade in some kind of conjunction with the Solo 401(k)?

I need to do a lot of research into being my own business. I never expected something like this to happen, where I'd be earning twice as much as my "real" job doing something else but still keeping my real job. I'm not complaining though.

If anyone has any favorite resources to share about setting up a sole proprietorship, etc. I am all ears!
terran
Posts: 1883
Joined: Sat Jan 10, 2015 10:50 pm

Re: Just added another 70k per annum.

Post by terran »

Yes, I would max out the solo 401(k). You'll actually be able to put in more than $19.5k since you can also make profit sharing contributions. With net business income of $70K you could contribute more like $32.5k, but that will go down if you're able to claim business expenses that reduce your income.

I would suggest using some tax software to compare what you'd pay if you contributed to Roth solo 401(k) vs traditional. Traditional contributions reduce your Qualified Business Income deduction, so the tax savings of contributing to a traditional solo 401(k) are 20% less than they would be if you contributed to another traditional plan. For example, if you're in the 22% bracket, contributing to a traditional solo 401(k) only saves you 80% x 22% = 17.6%. Weigh this against your expected marginal tax bracket in retirement to make the decision.

I don't know what the answer is, but you should also consider if/how decreased income through traditional solo 401(k) contributions effect your student loan payments since increased payments before you get forgiveness is basically another form of tax.

Keeping your Roth IRA at Vanguard is fine (moving it to etrade would also be fine) -- do whatever you prefer. You should be fine for now, but as your income goes up you might start going over the income limit for direct Roth IRA contributions: https://www.irs.gov/retirement-plans/pl ... e-for-2020. At that point increased traditional solo 401(k) contributions can help keep you under the limit, and if not you can look into the "backdoor Roth."
lakpr
Posts: 6668
Joined: Fri Mar 18, 2011 9:59 am

Re: Just added another 70k per annum.

Post by lakpr »

boatofcar wrote: Thu Jul 23, 2020 12:37 pm lakpr, thank you for the insightful post. I am in the process of opening an E*Trade Solo 401(k) now.

So you would suggest that I max out my Solo 401k contribution at $19,500 and pay extra on my mortgage? My current mortgage payment is about $1,200, so I could tack on an extra thousand without too much trouble. I guess you're taking a gamble that the 4% rate locked in by paying off your mortgage early will beat out the S&P over the same period of time?

What about a ROTH IRA in addition to the Solo 401(k)? Will that work the same way as it did last year, where I just create another one on Vanguard and put $6k in it? Or should I do it through E*Trade in some kind of conjunction with the Solo 401(k)?

I need to do a lot of research into being my own business. I never expected something like this to happen, where I'd be earning twice as much as my "real" job doing something else but still keeping my real job. I'm not complaining though.

If anyone has any favorite resources to share about setting up a sole proprietorship, etc. I am all ears!
1. Yes, I suggest your first order of priority to establish Solo 401k and max out the employEE contribution of ($19,500 less what was already contributed to 403b).
2. Your second order of priority would be to max out your Roth IRA. The Roth IRA can remain at Vanguard, but if you WANT to consolidate at E*Trade that is fine too.
3. Prepaying a mortgage should only be done after (1) and (2). Prepaying is more akin to owning BONDS in your portfolio rather than STOCKS. These are two different asset classes. Although you can use leverage to borrow (where you pay a guaranteed interest rate) and invest in stocks (the return is not guaranteed, risk is high, but expected returns are also high). But if you own a mortgage and also bonds in your retirement plans (look under the hood ... even target retirement date funds have some bonds in them), then the suggestion is to view prepayment of your mortgage as the same as increasing bonds in your portfolio. OR, stated otherwise, go 100% stocks in your 403b/Solo-401k, but also pay your mortgage down, you are not really a 100:0, it's going to be more like 90:10 or 80:20.
Last edited by lakpr on Thu Jul 23, 2020 2:03 pm, edited 1 time in total.
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Re: Just added another 70k per annum.

Post by boatofcar »

Makes total sense. I never thought about my mortgage as an asset class before. Thank you!
User avatar
beernutz
Posts: 479
Joined: Sun May 31, 2015 12:50 pm

Re: Just added another 70k per annum.

Post by beernutz »

OP you must be pretty frugal if you are paying off a $140k mortgage, you are also paying off student loans, but $10k will cover your expenses for 6 months as that is $1,667/month. Do you have family other than your wife?
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Re: Just added another 70k per annum.

Post by boatofcar »

Well, in an emergency situation I would defer my student loans, but point taken, I should probably add more to the emergency fund.
OhBoyUhoh
Posts: 49
Joined: Wed Feb 10, 2016 2:16 pm
Location: SW Ohio

Re: Just added another 70k per annum.

Post by OhBoyUhoh »

Hi,

Care to share what the side gig is? I need to get my wife (also a teacher) doing extra :D

~Will
HomeStretch
Posts: 5377
Joined: Thu Dec 27, 2018 3:06 pm

Re: Just added another 70k per annum.

Post by HomeStretch »

OhBoyUhoh wrote: Thu Jul 23, 2020 3:57 pm Hi,

Care to share what the side gig is? I need to get my wife (also a teacher) doing extra :D

~Will
Any opportunities for private tutoring or SAT/ACT prep? Qualified teachers are $100+/hour in our area (HCOL).
Topic Author
boatofcar
Posts: 12
Joined: Sun Jan 04, 2015 3:58 pm

Re: Just added another 70k per annum.

Post by boatofcar »

OhBoyUhoh wrote: Thu Jul 23, 2020 3:57 pm Hi,

Care to share what the side gig is? I need to get my wife (also a teacher) doing extra :D

~Will
It's a university administration job I stumbled into as a result of me being an adjunct there for the past few years. So it's really a side job of another side job :)

If I needed another side job, I would look into VIPKID, aka teaching English online to Chinese students. The pay isn't bad and if you are currently a teacher and hold valid credentials you will get on pretty quickly I've read.
OhBoyUhoh
Posts: 49
Joined: Wed Feb 10, 2016 2:16 pm
Location: SW Ohio

Re: Just added another 70k per annum.

Post by OhBoyUhoh »

boatofcar wrote: Fri Jul 24, 2020 9:01 am
OhBoyUhoh wrote: Thu Jul 23, 2020 3:57 pm Hi,

Care to share what the side gig is? I need to get my wife (also a teacher) doing extra :D

~Will
It's a university administration job I stumbled into as a result of me being an adjunct there for the past few years. So it's really a side job of another side job :)

If I needed another side job, I would look into VIPKID, aka teaching English online to Chinese students. The pay isn't bad and if you are currently a teacher and hold valid credentials you will get on pretty quickly I've read.
Thanks for sharing. I'll have my wife check this out. thank you too, Homestretch, for your thoughts.
Spirit Rider
Posts: 13908
Joined: Fri Mar 02, 2007 2:39 pm

Re: Just added another 70k per annum.

Post by Spirit Rider »

This sounds like another case of a CPA not being well versed in owner only employer retirement plans.

There actually is such a thing in the tax code as a "SIMPLE 401k". It was conceived at the same time as the SIMPLE IRA with many of the same rules, but larger contribution limits It was intended as a "simple" less costly alternative to the safe harbor 401k. However, the reality is it was no less complex to administer and is really an orphan in the plan universe.

Most importantly to you, I am not aware of any mainstream brokerage providing such a myth. Not to mention, it has no advantage over a one-participant 401k for an owner-only small business. Dismiss any thought of a SIMPLE 401k.

Now let's address the other two CPA suggestions.
  • You can not just pay your spouse a wage solely for the purpose of making one-participant 401k employee deferrals and receiving employer contributions. That is what is known as tax fraud.
  • She must perform legitimate business necessary work tasks for the hours and fair market value (FMV) to generate the compensation necessary to make and receive such contributions.
  • It is not necessary to create an S-Corp to be able to pay a spouse W-2 wages. Sole proprietorships hire W-2 employees all the time.
  • The question whether an S-Corp makes sense in these circumstances is complex and deserving of its own thread. However, it is highly unlikely with $70K in gross income that an S-Corp makes sense.
  • There is a far better option. If your spouse can legitimately work >= 500 hours/year in business necessary work tasks that she primarily performs. She will be able to materially participate in a qualified joint venture (QJV). You will both be self-employed and each file a Schedule C/SE on the allocated business income and expenses of the (QJV).
However reading your other thread, I am not convinced you will be paid on a 1099-NEC. Just because you do not receive benefits does not mean you are not considered an employee and paid on a W-2. The first thing you need to do is verify your employee vs. IC status.

If, you are a 1099 independent contractor. There was also some misconceptions or at least poorly worded statements in your other thread.

You can not; just maximize your employee deferral any time you want. Employee deferrals must come from compensation not already received. This means you can not just make the full $19.5K employee deferral on day one. You can only make employee deferrals from net earnings from self-employment (earned income) = (business profit - 1/2 SE tax) as it is received.
AB609
Posts: 54
Joined: Thu Oct 17, 2019 9:02 am

Re: Just added another 70k per annum.

Post by AB609 »

You need to pin down the exact relationship you have with your side-gig employer. If you are not doing true "independent contractor" type work, the IRS may consider you to be employee and not an independent contractor. Do you have some sort of contract with them that defines deliverables and timelines? Are you sitting in their offices doing work very similar to their regular W-2 employees? Do you submit billing statements or invoices for specific work products?

If you are independent contractor, you need to get setup with separate financial accounts for your business and start paying your estimated taxes. If you already have income for this year, you might have already missed the 1st and 2nd quarter payments.

It can me a little intimidating at first but once you get everything set up (taxes, Solo 401k, etc) it's not too big a deal and a great way to really load up your tax deferred retirement accounts.
depressed
Posts: 236
Joined: Sun Oct 14, 2018 4:07 pm

Re: Just added another 70k per annum.

Post by depressed »

Are you planning to continue teaching? If so, then start by learning the details of the pension you'll be getting from the money that's just taken out of your check each month. Most likely, you are paying into that pension plan in lieu of paying social security. But with your new self-employment, you'll also be paying into social security. If that's the case, then you will probably be collecting both pension and social security in retirement, but will also be subject to the social security windfall elimination provision.

Anyway, I would want to know the pension details now, as for me it would effect what I do with my other investments.
Spirit Rider
Posts: 13908
Joined: Fri Mar 02, 2007 2:39 pm

Re: Just added another 70k per annum.

Post by Spirit Rider »

AB609 wrote: Tue Aug 04, 2020 3:09 pm You need to pin down the exact relationship you have with your side-gig employer. If you are not doing true "independent contractor" type work, the IRS may consider you to be employee and not an independent contractor. Do you have some sort of contract with them that defines deliverables and timelines? Are you sitting in their offices doing work very similar to their regular W-2 employees? Do you submit billing statements or invoices for specific work products?
This is an over-simplification of the employee vs. independent contractor classification. The vast majority of legitimate professional independent contractors are paid an hourly rate for services performed.
If you are independent contractor, you need to get setup with separate financial accounts for your business and start paying your estimated taxes. If you already have income for this year, you might have already missed the 1st and 2nd quarter payments.
While it might be a best practice, there is absolutely no requirement for a sole proprietorship to have separate financial accounts from the sole proprietor's personal financial accounts.

While the 1st and 2nd quarter estimated tax payments have been missed, if the OP is really paid on a 1099, they can meet their tax liability by increasing their W-2 withholding from their primary job. Since this is new additional income, the OP very likely can use the 100% of prior tax year liability safe harbor. This should not require much additional withholding. However, the OP should be careful to save the additional income and SE taxes that will be due on 4/15/2021.
AB609
Posts: 54
Joined: Thu Oct 17, 2019 9:02 am

Re: Just added another 70k per annum.

Post by AB609 »

Spirit Rider wrote: Tue Aug 04, 2020 9:11 pm
AB609 wrote: Tue Aug 04, 2020 3:09 pm You need to pin down the exact relationship you have with your side-gig employer. If you are not doing true "independent contractor" type work, the IRS may consider you to be employee and not an independent contractor. Do you have some sort of contract with them that defines deliverables and timelines? Are you sitting in their offices doing work very similar to their regular W-2 employees? Do you submit billing statements or invoices for specific work products?
This is an over-simplification of the employee vs. independent contractor classification. The vast majority of legitimate professional independent contractors are paid an hourly rate for services performed.
If you are independent contractor, you need to get setup with separate financial accounts for your business and start paying your estimated taxes. If you already have income for this year, you might have already missed the 1st and 2nd quarter payments.
While it might be a best practice, there is absolutely no requirement for a sole proprietorship to have separate financial accounts from the sole proprietor's personal financial accounts.

While the 1st and 2nd quarter estimated tax payments have been missed, if the OP is really paid on a 1099, they can meet their tax liability by increasing their W-2 withholding from their primary job. Since this is new additional income, the OP very likely can use the 100% of prior tax year liability safe harbor. This should not require much additional withholding. However, the OP should be careful to save the additional income and SE taxes that will be due on 4/15/2021.
You can see some of the specific guidance from the IRS. https://www.irs.gov/businesses/small-bu ... or-defined.

I hadn't thought about the safe haven provisions since he is apparently in the first year of his side job. As you said, you just have to be sure to have a big chunk of change read next spring to pay the taxes or start some serious extra withholding on the day job.
Spirit Rider
Posts: 13908
Joined: Fri Mar 02, 2007 2:39 pm

Re: Just added another 70k per annum.

Post by Spirit Rider »

AB609 wrote: Wed Aug 05, 2020 8:20 am You can see some of the specific guidance from the IRS. https://www.irs.gov/businesses/small-bu ... or-defined.
I am well aware of the IRS requirements for Independent Contractor (IC) classification.

I was an IC at least a dozen times and was a project manager for two different Fortune 500 companies hiring hundreds of professional ICs. The latter always using a third party (IC vs. W-2) compliance company. It is the client/employer who is at risk for misclassification.

I know exactly what is required to be classified as an IC, On recommendation of the compliance company, I submitted several Form SS-8 "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding" and almost all were approved. They were all for professional ICs paid on an hourly rate. You just have to know how to structure the terms of the engagement and write them into the contract.

Whenever there is a thread about independent contracting, there are always claims such as yours about IC classification. The reality is that it is far easier for professionals to be classified as ICs than most people realize. Provided that the client and the IC understand, structure and contract the nuances of the relationship.
EnjoyIt
Posts: 5311
Joined: Sun Dec 29, 2013 8:06 pm

Re: Just added another 70k per annum.

Post by EnjoyIt »

OP,
You have a lot of good advice in this thread that I would like to clean up for you because it is all jumbled up with some very good and some very poor explanations.

1) As you have been told, being self employed you qualify for opening a 401k. Here is what it will look like for you.
$70k income of which you will qualifying business expenses which may include travel, home office, computer, phone, etc. As an example let assume you have $5k in business expenses. don't forget you will need to pay employer taxes on that income of 6.2% social security and 1.45% medicare. That is ($65k * 7.65% = $4972.50) For simplicity lets use $5k. You are now left over with $60k. From there you can deduct 25% in the employER portion of your solo 401k = $15k. Plus you can put another $19.5K as an employEE portion of your401k.

2) Depending on what type of health insurance you have, you may qualify for an HSA which is a great opportunity to save another $3,550 if single and $7,100 if in a family plan.

3) Regarding your 403b, you should at the very least contribute into it to get the company match if you have one. If you are in the 22% tax bracket, despite having high expense ratio, it may very well still be worth adding into the 403b. The max is $19.5k and is irrespective of how much you put into your solo401k. This becomes especially valuable if you are planning on switching jobs in a few years so that you can pull away from such high expense ratio funds.

4) Also, You should be able to qualify for a Roth IRA contribution as well being able to put away another $6k.

5) Mortgage: Although the mortgage as a negative bond is a technically accurate, there is much nuance and controversy regarding that statement on this forum about it. Just do a search. The best advice I can give you is that investing as per your desired asset allocation has a higher expected return compared to paying down your mortgage. This is especially true if you are investing in tax deferred accounts. If you are not highly debt averse, I would hold off on paying down low interest rate debt and invest. As you are getting closer and closer to becoming financially independent, you can then look at paying down the low interest rate mortgage. If you must do something with your mortgage, consider a refinance to a lower rate. Maybe even a 15 year loan may be a decent idea.

6) It is in your best interest to understand the details of your pension. Do some research and figure it out.

I can tell you, if you max out your solo401k, 403b, Roth IRA and HSA if applicable, you can be financially independent in 10 years give or take a year or two.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Post Reply