New to 1099 status. Need advice on.....everything

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BullHouse_BearMarket
Posts: 65
Joined: Sun Jul 10, 2016 4:19 pm

New to 1099 status. Need advice on.....everything

Post by BullHouse_BearMarket »

Hello everyone. I'm hoping to get some great advice as I and most others usually do.

I just accepted a side gig that will pay me as a 1099 Independent Contractor. I've never had that status before as I've always been w-2. The income from this role could be minimal to more than my current salary, depending on how much work I choose to take on. I'd like to have a plan in place before the checks start rolling in. My plan is to invest all the income (other than tax amount) into a taxable account for early retirement.

So here are my initial questions:

1. Taxes. Should I set aside 50% of the income knowing I'll have to pay a portion of that to taxes?
a. Are quarterly tax payments required? How do I calculate that?
2. What kinds of expenses can I write off on taxes against the income? I plan to buy a new laptop and will use my personal cell phone for required client interaction. This is a fully remote role.
3. What other questions should I be asking and things to plan for?

Thank you all. This is really all new to me.
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ResearchMed
Posts: 12089
Joined: Fri Dec 26, 2008 11:25 pm

Re: New to 1099 status. Need advice on.....everything

Post by ResearchMed »

BullHouse_BearMarket wrote: Thu Jun 17, 2021 10:57 am Hello everyone. I'm hoping to get some great advice as I and most others usually do.

I just accepted a side gig that will pay me as a 1099 Independent Contractor. I've never had that status before as I've always been w-2. The income from this role could be minimal to more than my current salary, depending on how much work I choose to take on. I'd like to have a plan in place before the checks start rolling in. My plan is to invest all the income (other than tax amount) into a taxable account for early retirement.

So here are my initial questions:

1. Taxes. Should I set aside 50% of the income knowing I'll have to pay a portion of that to taxes?
a. Are quarterly tax payments required? How do I calculate that?
2. What kinds of expenses can I write off on taxes against the income? I plan to buy a new laptop and will use my personal cell phone for required client interaction. This is a fully remote role.
3. What other questions should I be asking and things to plan for?

Thank you all. This is really all new to me.
About those taxes: Yes, they will need to be paid "timely", which would ordinarily mean you need to file/pay quarterly estimated taxes throughout the year or risk penalties and interest.

However, ANY taxes paid through withholding, such as from your regular W-2 employment are always considered timely, no matter when in the tax year they are actually withheld. (Same for withholding from TIRA withholding, etc., for those who have that opportunity.)

So you either need to pay quarterly what you'd owe quarterly OR plan to withhold extra from you regular paycheck, either along the way all year or perhaps a few larger withholding amounts toward the end of the year, But allow enough time for payroll processing so the taxes are withheld before the year ends!

Note that there is a safe harbor: If you've paid 100% (110% for higher income) of "last year's tax amount due", then there would not be a penalty for paying late, e.g., when tax returns are filed.

You also might be able to set up a SEP-IRA for some of that consulting income.

RM
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arcticpineapplecorp.
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Re: New to 1099 status. Need advice on.....everything

Post by arcticpineapplecorp. »

BullHouse_BearMarket wrote: Thu Jun 17, 2021 10:57 am So here are my initial questions:

1. Taxes. Should I set aside 50% of the income knowing I'll have to pay a portion of that to taxes?
a. Are quarterly tax payments required? How do I calculate that?
2. What kinds of expenses can I write off on taxes against the income I plan to buy a new laptop and will use my personal cell phone for required client interaction. This is a fully remote role.
3. What other questions should I be asking and things to plan for?

Thank you all. This is really all new to me.
1. instead of putting the money in a taxable acct, you should fully fund a Solo 401k (or other self employment retirement plan like SEP IRA, etc):
https://investor.vanguard.com/small-bus ... comparison

that way you get a tax deduction for your contribution and lower income/save you on income taxes.

2. you will likely have to pay self employment taxes. You always paid half of this when you were a w-2, but your employer paid the other half. Now you'll have to pay both out of your income received. So you should anticipate 15.3% of your income to be paid towards self employment tax:
https://www.irs.gov/businesses/small-bu ... care-taxes

3. you should determine what money you'll pay for expenses related to the self employment. However, you can only claim that portion of expenses used for business use. So for instance, if you use your vehicle you can only claim miles used for self employment as an expense. If you want to claim a cel phone you have to determine what portion of that you use for self employment vs. personal use. If you use the phone 30% for business and 70% for personal, you can only claim 30% of the phone bill. You can't claim clothing that you might use for personal use (polo shirts) but could claim steel tipped boots or uniforms that you wouldn't use for personal use.

If you want to claim a home office, it has to be used solely for that. It can't be used as a home office and a second bedroom. Then, you'd either use a short form or determine the percentage of the home office space compared to your entire living space. Say the home office is 15% of your home. You could then only claim 15% of the rent/mortgage, utilities, insurance/taxes, etc. as a business expense. Read more here:

https://www.investopedia.com/articles/t ... ctions.asp
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
fyre4ce
Posts: 1526
Joined: Sun Aug 06, 2017 11:29 am

Re: New to 1099 status. Need advice on.....everything

Post by fyre4ce »

Your 1099 income and appropriate business expenses go into Form 1040 Schedule C. Business expenses are an above-the-line deduction and so are very valuable. Deductions you can consider:
  • You can deduct a home office if you have a room, or part of a room, that you use regularly and exclusively for your 1099 job. The deduction is the square foot ratio to the whole house; typical values are 10-20%. If you rent you can deduct this percentage of your rent. If you own, it will be this percentage of mortgage interest (if applicable) and property taxes. You can also deduct this percentage of utilities, and homeowners or renters insurance. Any work you do exclusively on your home office is 100% deductible, but work on the home that doesn't relate at all to the home office (eg. landscaping) is non-deductible.
  • You can also deduct auto expenses for trips that relate to this 1099 income. It helps a lot if you are able to set up an IRS-legal home office, because that means trips to and from your home are deductible. If you don't have a home office, the rules get much more complex and some or all of your trips become non-deductible commuting. You can either deduct at the standard business mileage rate (presently $0.56/mi) or you can deduct actual vehicle expenses, including interest on a car loan if you have one, and depreciation. Choose the option that works out better for you, but realize once you choose for a particular vehicle you can't switch.
  • Other deductions you may have: cell phone and service, computer and internet service, office supplies, any expenses related to your business. If it's a shared item like a phone, you can only deduct the percentage of the expense that you actually use for business. Make sure you choose a percentage you can defend in an audit. Eg. don't deduct 90% of your cell phone expenses if you only make 3 work-related calls per year and use 8 GB/month data for other stuff.
Other random thoughts:
  • You might want to open a business checking account. Technically you're not required to have one, but it makes income and expenses much easier to sort out if you're audited.
  • You can open business credit cards, some of which have great benefits and big sign-up bonuses. Make sure you can meet the spend requirements though (eg. Chase Ink preferred 100,000 point with $15,000 spent in the first 3 months). The annual fee would even be deductible as a business expense.
  • You almost certainly want a Solo 401k rather than a SEP-IRA (comparison here). Downsides of a Solo 401k are minimal: the paperwork is more complex to set it up, and once the plan assets exceed $250,000 you have to file a Form 5500-EZ once per year. But the upsides are big and numerous, and even if they are not valuable to you now, they may become valuable in the future if your circumstances change. You can even set it up for mega-backdoor Roth contributions with some extra cost and hassle.
  • If you're wondering whether to incorporate, the answer is probably not. It will reduce your Section 199A deduction, if you are eligible for it to begin with, and will add an extra layer of hassle and expense to create the corporation and file corporate taxes every year, and process payroll. The potential upside is that you can save some payroll tax, although incorporating can actually cost you payroll taxes, because surplus Social Security taxes paid by the business are not refundable, whereas they are if you are a sole proprietor (gets sorted out on Schedule SE). I discussed the tax consequences for a physician in a recent post here. You can always incorporate later if your business grows and you decide it makes sense.
All for now, good luck.
sjahoo
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Joined: Wed Jun 16, 2021 8:27 pm

Re: New to 1099 status. Need advice on.....everything

Post by sjahoo »

Pay the quarterly estimated taxes at a minimum. Without knowing what state you are in, and your federal bracket, it's tough to say how much you should plan on paying to the IRS and your state, but setting aside 50% seems like a good idea, at least until you get to the "safe harbor" amount mentioned earlier. Don't forget to also pay state estimated taxes.

I'm a solo consultant as well. I took a slightly different approach to the others in that I chose to incorporate, mostly to create legal separation of the business from my personal finances. While I think it's very unlikely anyone would come after my business for any reason, I'd rather have that firewall between my business side and my personal assets.

In my state it didn't cost much to create a corporation (I downloaded some forms and took care of it myself), and it doesn't cost that much on an annual basis for corporate "franchise" taxes and other fees. You can control how much you pay in SSI taxes by setting a (reasonable for the position) salary and then taking the rest of your income above that level as dividends from the business, which are not subject to SSI taxes. The first year, I took almost no salary because I was building cash reserves, so while I had to pay taxes on the income, anything I took out was dividends (no self-employment tax) that had already been previously taxed (at a lower rate as my income was down the first year).

Yes, there's more paperwork and doing payroll adds cost, but I have experience with payroll and software available to me, so I do it all myself. I would not recommend doing it yourself if you don't have experience in payroll and payroll tax / unemployment insurance matters. It's a pain to do all the filings required, even if you only pay yourself once a month for simplicity. Also, as others stated, if you incorporate, you have to file both corporate returns, and personal returns as well. That's extra work and/or cost, even if your taxes are the same because you flow earnings thru to your personal return via an S-Corp.

I deduct my laptop, my cell phone, and office supplies (printer, toner, paper, etc.). I deduct miles to & from my clients, but that's been zero for the last 15 months. I don't deduct for a home office as I decided not to raise any red flags for an audit, even though my corporate address is my house. I figured the pretty small potential deduction wasn't worth the hassle. Maybe that's a mistake, but when I was younger, it was a guaranteed audit if you tried to claim a home office. My brother, on the other hand, deducts his home office. He also runs his own small (Schedule C) business from his home and has a dedicated, exclusive space.

Once I had the S-Corp, I set up a corporate checking account and a corporate credit card with Chase. It makes it really easy to keep my corporate activity and personal activity separate. Very easy. No extra cost from Chase (at least that I recall).

I set up a SEP-IRA because that was the best option for me at the time, and I had flexibility on when I could make the contributions (or not), since my income was more variable when I started. Now it's still what I use because . . . inertia. I might look into the solo 401k.

Again, I wanted the legal separation to protect my personal assets and have my contracts between my clients and my corporation, not me personally. Do I think I have much risk? No. Would I incorporate again as an S-Corp? Yes.
fyre4ce
Posts: 1526
Joined: Sun Aug 06, 2017 11:29 am

Re: New to 1099 status. Need advice on.....everything

Post by fyre4ce »

sjahoo wrote: Thu Jun 17, 2021 7:43 pm Pay the quarterly estimated taxes at a minimum. Without knowing what state you are in, and your federal bracket, it's tough to say how much you should plan on paying to the IRS and your state, but setting aside 50% seems like a good idea, at least until you get to the "safe harbor" amount mentioned earlier. Don't forget to also pay state estimated taxes.

I'm a solo consultant as well. I took a slightly different approach to the others in that I chose to incorporate, mostly to create legal separation of the business from my personal finances. While I think it's very unlikely anyone would come after my business for any reason, I'd rather have that firewall between my business side and my personal assets.

In my state it didn't cost much to create a corporation (I downloaded some forms and took care of it myself), and it doesn't cost that much on an annual basis for corporate "franchise" taxes and other fees. You can control how much you pay in SSI taxes by setting a (reasonable for the position) salary and then taking the rest of your income above that level as dividends from the business, which are not subject to SSI taxes. The first year, I took almost no salary because I was building cash reserves, so while I had to pay taxes on the income, anything I took out was dividends (no self-employment tax) that had already been previously taxed (at a lower rate as my income was down the first year).

Yes, there's more paperwork and doing payroll adds cost, but I have experience with payroll and software available to me, so I do it all myself. I would not recommend doing it yourself if you don't have experience in payroll and payroll tax / unemployment insurance matters. It's a pain to do all the filings required, even if you only pay yourself once a month for simplicity. Also, as others stated, if you incorporate, you have to file both corporate returns, and personal returns as well. That's extra work and/or cost, even if your taxes are the same because you flow earnings thru to your personal return via an S-Corp.

I deduct my laptop, my cell phone, and office supplies (printer, toner, paper, etc.). I deduct miles to & from my clients, but that's been zero for the last 15 months. I don't deduct for a home office as I decided not to raise any red flags for an audit, even though my corporate address is my house. I figured the pretty small potential deduction wasn't worth the hassle. Maybe that's a mistake, but when I was younger, it was a guaranteed audit if you tried to claim a home office. My brother, on the other hand, deducts his home office. He also runs his own small (Schedule C) business from his home and has a dedicated, exclusive space.

Once I had the S-Corp, I set up a corporate checking account and a corporate credit card with Chase. It makes it really easy to keep my corporate activity and personal activity separate. Very easy. No extra cost from Chase (at least that I recall).

I set up a SEP-IRA because that was the best option for me at the time, and I had flexibility on when I could make the contributions (or not), since my income was more variable when I started. Now it's still what I use because . . . inertia. I might look into the solo 401k.

Again, I wanted the legal separation to protect my personal assets and have my contracts between my clients and my corporation, not me personally. Do I think I have much risk? No. Would I incorporate again as an S-Corp? Yes.
It may depend on the state, but I believe it's possible to incorporate an LLC, and choose to file either as an S-corp or a Sole Proprietor. If it's asset protection you're after, I think that will come from the LLC, not the S-corp. Also, there are some types of liability that an LLC or S-corp will not protect you from, like medical malpractice.
Topic Author
BullHouse_BearMarket
Posts: 65
Joined: Sun Jul 10, 2016 4:19 pm

Re: New to 1099 status. Need advice on.....everything

Post by BullHouse_BearMarket »

Thank you all for the great information!

A question about Solo 401k. Can I create one even though I have a 401k through my w-2 job?

Assuming I can, which company is recommended considering I would like the mega backdoor Roth option?

It sounds like I won't be able to write much if any business expenses off. Maybe the laptop I plan on purchasing or part of it. This is a fully remote job that requires no travel. I will be making phone calls to clients but I don't think it will be significant enough to write off more than maybe 10% of my phone bill.

I debated forming an LLC (I'm in PA) but the firm is providing malpractice insurance for me, so I should be covered from a liability standpoint.

This year we will likely be in the 24% tax bracket with this income. We are MFJ with 2 kids under 3.
DaBombCat
Posts: 46
Joined: Fri Jun 01, 2018 10:49 pm

Re: New to 1099 status. Need advice on.....everything

Post by DaBombCat »

You can have a Solo 401k in addition to the one from your W-2 employer. Your combined employee contribution will still be capped at $19,500–ie if you contribute $5k to your W2 employer’s 401k, then you can contribute another $14,500 to your SoloK. However, your self-employed business can contribute up to 20% of profits to your SoloK—in addition to the $19,500 that you as an employee can contribute.
(I use MySolo401k.net, but you might not need all their capabilities if you are just investing in mutual funds and publicly-traded stuff. It’s good if you want to invest in real estate, crypto, loan money to yourself or others, and other non-BH activities)

One expense to consider paying through your business is that you can pay kids and spouse—should be legit work at reasonable rates. As kids become more capable, they could eventually bepaid up to $12,500 each (the individual standard deduction that is tax free). Your wife could be paid for book keeping and stuff up to 19,500–to contribute to a 401k as well. Add up all the family wages, and you could be expensing $20-40k per year tax free. https://markjkohler.com/paying-your-chi ... -business/

Once your self employment income gets to $50k/yr, it might be worth it to explore an LLC with S-election (an LLC that is taxed as an S-Corp). The reason for this is that you can split your income into salary and distributions. The lower salary means less FICA tax. It could be a big tax savings. But you should really get the advice of a tax advisorwho has a lot of experience with how to appropriately set up and operate this—and calculate whether it even makes sense.
suewolf
Posts: 72
Joined: Sun Aug 03, 2014 5:15 pm
Location: Pennsylvania

Re: New to 1099 status. Need advice on.....everything

Post by suewolf »

Lots of great advice above. We've been getting 1099 income for years. some notes:
1. We're in PA. I strongly advise setting up an LLC. It just makes sense beyond the malpractice insurance you're getting. You want to separate out the business from personal. It's easy and cheap to do. We used a lawyer (it was a friend of ours) but you can do it yourself. PA process is pretty straightforward. Even the lawyer cost is about $500. well worth the money (and yes, you can deduct that expense as well).
2. Strongly advise getting a business checking account. Again, run all expenses through it. Just helps keep things separated. At most banks the cost is free - though you won't get any interest.
3. Strongly recommend the SOLO 401k. We've been contributing for years - it's a great tax deduction and builds wealth efficiently. We use Vanguard and it was easy to set up (yes slightly harder than the SIMPLE IRA but much more flexible).
4. We opted not to deduct our home office simply because the amount was so small and would make more of an issue when we sell the house eventually. But you can include lots of other expenses like cell phone and cell phone plans, internet connections, certainly laptops, printers and software. We ended up using an Accountant - which really helped. PA Dept of revenue gets persnickety when it comes time to Schedule C filers. It was very helpful to have the accountant file taxes with them. The first year I tried to do it myself - it's not hard - but Dept of Rev kept rejecting it. Long story but the forms the accountant filed were identical to those I filed. go figure. The accountant will also advise what you can deduct. For example, laptops are classified as equipment and get depreciated over a 3 year life.
5. We pay quarterly estimated taxes. It's very hard to predict income but the accountant can help here as well.
6. If you have subcontractors help you, you'll have to sent them 1099's if they make more than $600 (I think that's still the limit).
7. We use Quicken as our accounting software - I just added business categories to my personal Quicken version. Unless you have payroll, there's no need for Quickbooks. But I strongly recommend something like Quicken to keep track of expenses. It makes filling out your schedule C at the end of the year a breeze. IT also forces you to consider every expense you have and if it makes sense to categorize it as a business expense.
8. We tend to use credit cards to buy everything. We always pay off every month so we essentially get a free month's float plus free points. We opened a separate business credit card (Chase Ink) for our business. Ink card links directly to Quicken business categories and checking account so even easier. Separating out business from personal expenses is important.

Good luck with your new gig adventure. I hope it's profitable for you. Have patience as it may take time to establish yourself and sometimes income is delayed relative to expenditures.
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