Side gig, 1099 strategy

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
moneywise3
Posts: 365
Joined: Mon Nov 22, 2010 6:54 pm

Side gig, 1099 strategy

Post by moneywise3 » Mon May 01, 2017 8:39 am

I am considering starting a side gig for a few hours a week. This is in addition to my regular job that pays through W-2. This side gig will pay through 1099. Looking for ways to minimize taxes and keep it simple. Looking for advise on what option would be the best. Some options that come to mind are:
1. Start a LLC in spouse's name, deduct expenses, pay myself almost all of the profit. Downside is a lot of additional paperwork of maintaining a business.
2. Ask them to pay my spouse, who is currently not working. This lets her earn SS credits, although total tax is still the same (filing jointly).
3. Keep it really simple, they just pay me and issue me a 1099 end of the year. I file a sch C and SE. Downside is I pay 15% Self employment taxes in addition to income taxes on that income. IRS allows half of SE taxes as a deduction though.

Note: Somebody mentioned a $600 limit on 1099 reporting. Not clear how that would work.

Thanks.

User avatar
CyclingDuo
Posts: 1590
Joined: Fri Jan 06, 2017 9:07 am

Re: Side gig, 1099 strategy

Post by CyclingDuo » Mon May 01, 2017 8:46 am

moneywise3 wrote:I am considering starting a side gig for a few hours a week. This is in addition to my regular job that pays through W-2. This side gig will pay through 1099. Looking for ways to minimize taxes and keep it simple. Looking for advise on what option would be the best. Some options that come to mind are:
1. Start a LLC in spouse's name, deduct expenses, pay myself almost all of the profit. Downside is a lot of additional paperwork of maintaining a business.
2. Ask them to pay my spouse, who is currently not working. This lets her earn SS credits, although total tax is still the same (filing jointly).
3. Keep it really simple, they just pay me and issue me a 1099 end of the year. I file a sch C and SE. Downside is I pay 15% Self employment taxes in addition to income taxes on that income. IRS allows half of SE taxes as a deduction though.

Note: Somebody mentioned a $600 limit on 1099 reporting. Not clear how that would work.

Thanks.
We still have some side gig 1099 income from time to time each year, and would vote for option 3 - KISS.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

User avatar
Kosmo
Posts: 1285
Joined: Wed Sep 05, 2012 11:54 am
Location: Philadelphia

Re: Side gig, 1099 strategy

Post by Kosmo » Mon May 01, 2017 9:02 am

With the caveat that I have 0 experience I this area... unless your spouse is directly involved in earning this money, 1 and 2 sound not legal.

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Mon May 01, 2017 10:11 am

As Kosmo said, 2. constitutes tax fraud. As is failing to report self-employment income even if you receive no Form 1099-MISC.

1. An LLC achieves nothing with regard to taxes. You will just add the unnecessary state creation/annual fees. Having the business in your wife's name LLC or not also achieves nothing with regard to taxes. You will just add the complexity/cost of the payroll to pay you. I don't know that it is tax fraud, but certainly sketchy and counter-productive.

3. Is your only practical option.

missingdonut
Posts: 85
Joined: Thu Jun 23, 2016 9:37 am
Location: Donutville, WI

Re: Side gig, 1099 strategy

Post by missingdonut » Mon May 01, 2017 11:21 am

3 is simplest. 2 would be problematic if your spouse does no work. I don't see what option 1 does for you.

Keep in mind that if you hit the social security maximum, then the amounts over that figure ($127k and change) are only subject to Medicare tax.

metrunt
Posts: 259
Joined: Thu Jul 16, 2015 9:36 am

Re: Side gig, 1099 strategy

Post by metrunt » Mon May 01, 2017 11:49 am

It sounds like you're trying to maximize the money you take home here, including future SS earnings.

Two things come to mind:
-How long have you two been married? How old are each of you? What are each of your projected SS credits?

-What retirement accounts do you and your wife have access to?

If you want to maximize the amount of SS you and your wife collect jointly, it gets complicated. If she's already in the low end of the scale (say expected to make it to the first bend point, but not much further or less), then her spousal benefit will likely be as good as her own benefit. The math gets real tricky real fast, so that's just a ball park estimate.

If you want to limit income taxes, then, depending on your income and available retirement accounts, you can set up a SIMPLE IRA in your wife's name for your new LLC. Your wife will work, perhaps doing admin or billing, work and you can pay her, contributing to the IRA. She'll get SS credits, and tax deferred retirement income.

Anything left over will trickle down to your income.

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Mon May 01, 2017 12:56 pm

Why would a small business owner with no eligible employees ever want to open a Simple IRA with the following disadvantages:
  1. SIMPLE IRA plans typically charge an annual administrative fee.
  2. Employee deferral is limited to $12.5K ($15.5K >= age 50)
  3. Employer contributions limited to either a 2% employer non-elective contribution or a 3% employer match*.
  4. SIMPLE IRA assets are pre-tax assets that make any Roth conversion including as part of a backdoor Roth subject to pro-rata taxation.
Here on the other hand a one-participant 401k has the following advantages:
  1. One-participant 401k plans at all major providers are administrative fee-free.
  2. Employee deferral is limited to $18K ($24K >= age 50)
  3. Employer contributions limited to a 25% employer non-elective contribution*.
  4. One-participant 401k plan assets have no impact on any Roth Conversions.
I can think of absolutely no good reason for a small business owner with no eligible employees to ever use a SIMPLE IRA over a one-participant 401k.

*For the self-employed employer contribution, the self-employed contribution rate of net self-employment income = plan contribution rate / (1.00 + plan contribution rate). E.g. 0.25 / (1.00 + 0.25) = 0.20 or 20% of net self-employment income.

missingdonut
Posts: 85
Joined: Thu Jun 23, 2016 9:37 am
Location: Donutville, WI

Re: Side gig, 1099 strategy

Post by missingdonut » Tue May 02, 2017 10:27 am

Spirit Rider wrote:I can think of absolutely no good reason for a small business owner with no eligible employees to ever use a SIMPLE IRA over a one-participant 401k.
I can think of a few.

1) The small business doesn't expect to put more than ~$13k/~$16k if age 50+ and has no backdoor Roth needs
2) The small business owner prefers to work with an advisor (and most small, independent advisors do not work with 401k plans)
3) The small business expects to grow soon and to hire employees
4) The administration of the 401k is not something that the business owner wishes to spend his or her time learning or doing

Just because it doesn't fit in with your investing needs, doesn't prevent it from fitting in with their investing needs

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Tue May 02, 2017 11:05 am

missingdonut wrote:
Spirit Rider wrote:I can think of absolutely no good reason for a small business owner with no eligible employees to ever use a SIMPLE IRA over a one-participant 401k.
I can think of a few.
1) The small business doesn't expect to put more than ~$13k/~$16k if age 50+ and has no backdoor Roth needs
This makes no sense. Nothing prevents you from putting less that the maximum in a one-participant 401k. It certainly doesn't hurt even if you never do a backdoor Roth. I see you didn't mention that a SIMPLE IRA is going to cost you.
2) The small business owner prefers to work with an advisor (and most small, independent advisors do not work with 401k plans)
Every SIMPLE IRA plan I have seen using advisors has been an exceedingly expensive plan that the advisor was making a killing on. There is no reason you can't find a fee only planner/advisor that will advise you on all your investments including a one-participant 401k.
3) The small business expects to grow soon and to hire employees
I think someone can reasonably infer that themselves from my statement. Hopefully, they are smart enough and go directly to a low cost provider like Vanguard, Fidelity, etc.. and stay as far away as possible from your advisors.
4) The administration of the 401k is not something that the business owner wishes to spend his or her time learning or doing
Exactly what are these onerous administration requirements? The only reporting required of a one-participant 401k is a Form 5500-EZ if and when their balance exceeds $250K.
Just because it doesn't fit in with your investing needs, doesn't prevent it from fitting in with their investing needs
This have nothing to do with investing needs. It has to do with what is best for Bogleheads.

You have not presented any compelling reason for someone who is not going to have employees to use a SIMPLE IRA. Oh, and let us not forget the fact that any withdrawal or rollover of a SIMPLE IRA to anywhere other than another SIMPLE IRA before two years after the 1st contribution results in a 25% penalty.

I stand by my statement.

User avatar
JupiterJones
Posts: 2673
Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: Side gig, 1099 strategy

Post by JupiterJones » Tue May 02, 2017 2:39 pm

Spirit Rider wrote:3. Is your only practical option.
Yup.

Focus on knowing about and tracking every possible legally-deductible business expense. The nice thing about the Schedule C is that you can deduct things there even if you're taking a standard deduction on your 1040 (i.e., not also filing a Schedule A).

So track your mileage, office supplies, out-of-town meals, advertising costs, web hosting fees, etc. Depreciate equipment where possible. Deduct insurance premiums on any business-related riders/policies.

See if you can set aside part of your home for business use (doesn't have to be an "office"... even a closet can be deducted if it's regularly used to store inventory, for example)
Stay on target...

missingdonut
Posts: 85
Joined: Thu Jun 23, 2016 9:37 am
Location: Donutville, WI

Re: Side gig, 1099 strategy

Post by missingdonut » Tue May 02, 2017 3:07 pm

Spirit Rider wrote:This makes no sense. Nothing prevents you from putting less that the maximum in a one-participant 401k. It certainly doesn't hurt even if you never do a backdoor Roth. I see you didn't mention that a SIMPLE IRA is going to cost you.
If you don't need the expanded contribution limits of a 401k, and can't/won't utilize the opportunity to backdoor Roth, then what does it hurt if you go with the SIMPLE IRA? My solo 401k with Vanguard costs me the same as if I had a SIMPLE IRA with Vanguard, so that wouldn't be it.
Every SIMPLE IRA plan I have seen using advisors has been an exceedingly expensive plan that the advisor was making a killing on. There is no reason you can't find a fee only planner/advisor that will advise you on all your investments including a one-participant 401k.

I think someone can reasonably infer that themselves from my statement. Hopefully, they are smart enough and go directly to a low cost provider like Vanguard, Fidelity, etc.. and stay as far away as possible from your advisors.
I have no idea what I am supposed to infer or not, especially when you make statements like "absolutely no good reason for a small business owner with no eligible employees to ever use a SIMPLE IRA over a one-participant 401k." You seemed pretty firm that your opinion applied in every single case.

I'm a CPA in industry with a side practice, and I used to work full-time in small business public accounting. Speaking from experience, when you're dealing with someone like an independent electrician who wants to start a retirement plan for him/herself, you can't really steer them into a fee-only advisor where the owner makes the investment decisions because that's completely unrealistic. That person usually doesn't want to learn how to DIY, and the most realistic thing you can advise is to stay away from the Edward Joneses and the Primericas of the world.
Exactly what are these onerous administration requirements? The only reporting required of a one-participant 401k is a Form 5500-EZ if and when their balance exceeds $250K.
To some people, a 5500-EZ when the balance exceeds $250k or when they shut down the plan is not something they would be comfortable with, or would not be something that they want to spend time learning how to do. Hell, I know some CPAs who wouldn't be comfortable preparing a 5500-EZ.
This have nothing to do with investing needs. It has to do with what is best for Bogleheads.
Not everyone is a Boglehead. Not everyone can DIY. The solo 401k is right for my situation and right for yours, but let's not claim that it's right for everybody.

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Tue May 02, 2017 3:29 pm

missingdonut wrote:If you don't need the expanded contribution limits of a 401k, and can't/won't utilize the opportunity to backdoor Roth, then what does it hurt if you go with the SIMPLE IRA? My solo 401k with Vanguard costs me the same as if I had a SIMPLE IRA with Vanguard, so that wouldn't be it.
Why don't you check a little further. Vanguard charges nothing for their Individual 401k, but they charge $25/fund/year in their SIMPLE IRA, unless you are a Voyager, Voyage Select, Flagship or Flagship Select client. Most people just starting out are not going to have $50,000 invested with them.

foodstamp
Posts: 54
Joined: Sat Nov 23, 2013 6:15 pm

Re: Side gig, 1099 strategy

Post by foodstamp » Tue May 02, 2017 3:36 pm

I am not an accountant but I have an LLC taxed as an S-Corp.

The S-Corp will help save you on taxes since you can pay yourself less than you make.

Plus you get access to the Solo401k account which you can open up at Fidelity or Vanguard and contribute up to $18k/ year plus 25% of the salary you pay yourself.

Start w/ a side gig and who knows maybe you can grow it into a full gig.

User avatar
serbeer
Posts: 1112
Joined: Fri Dec 28, 2007 2:09 pm

Re: Side gig, 1099 strategy

Post by serbeer » Tue May 02, 2017 3:39 pm

Do #3, open Solo-401K and contribute just under 20% (need to calculate exact %) to it as Profi Sharing if you max out 401K at your first job. That minimizes taxes to the extent legal and is simple.

Not so simple is using S-Corp and paying yourself a salary, avoiding payrol taxes on the rest. Not worth it IMO for small gig.

missingdonut
Posts: 85
Joined: Thu Jun 23, 2016 9:37 am
Location: Donutville, WI

Re: Side gig, 1099 strategy

Post by missingdonut » Tue May 02, 2017 4:06 pm

Spirit Rider wrote:Why don't you check a little further. Vanguard charges nothing for their Individual 401k, but they charge $25/fund/year in their SIMPLE IRA, unless you are a Voyager, Voyage Select, Flagship or Flagship Select client. Most people just starting out are not going to have $50,000 invested with them.
Vanguard charges $20/fund/year for a solo 401(k) under the same circumstances -- if they don't already have (for example) a rollover IRA at Vanguard from a previous job.

But, then again, this is just part of my overall point that whether a SIMPLE IRA or a solo 401k is the best choice is highly situational.

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Tue May 02, 2017 4:10 pm

We are going to have to agree to disagree. I stand by my position that I would not recommend a SIMPLE IRA for a small business owner unless they could not or soon would not be able to have a one-participant 401k.

Copernicus
Posts: 320
Joined: Thu May 16, 2013 4:38 pm

Re: Side gig, 1099 strategy

Post by Copernicus » Sun Dec 31, 2017 1:43 pm

Spirit Rider wrote:
Mon May 01, 2017 12:56 pm

[*]Employer contributions limited to a 25% employer non-elective contribution*.

*For the self-employed employer contribution, the self-employed contribution rate of net self-employment income = plan contribution rate / (1.00 + plan contribution rate). E.g. 0.25 / (1.00 + 0.25) = 0.20 or 20% of net self-employment income.
Spirit Rider,
Having had only a W-2 earnings career, I only know employer contribution to 401-k. I did not understand: what is 'plan contribution'? Does it mean that the sole proprietor opens a self-401-k and makes own contribution. Then, adds another amount to the same 401-k calculated as you show as 'self-employed employer contribution'?

tibbitts
Posts: 7800
Joined: Tue Feb 27, 2007 6:50 pm

Re: Side gig, 1099 strategy

Post by tibbitts » Sun Dec 31, 2017 2:05 pm

So let's put this into perspective. The OP in a year where everything goes right is going to net a few $k. I have a great deal of experience with having a similar business. It's nuts to do an S-corp for that, or open a solo 401k. Just take the money and pay taxes on it whether you get a 1099 or not. If you really want an SEP... whatever, but your options for a few hundred dollar SEP will be limited and possibly not cost effective.

Don't get the spouse involved unless there is something the spouse can legitimately do - and actually will do. File this under "do as I say not as I do/did."

Yes, when the business dwarfs Amazon, by all means hire an army of attorneys and accountants and have employ every available tax management technique.

Spirit Rider
Posts: 8339
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side gig, 1099 strategy

Post by Spirit Rider » Sun Dec 31, 2017 7:51 pm

Copernicus wrote:
Sun Dec 31, 2017 1:43 pm
Spirit Rider wrote:
Mon May 01, 2017 12:56 pm
[*]Employer contributions limited to a 25% employer non-elective contribution*.
*For the self-employed employer contribution, the self-employed contribution rate of net self-employment income = plan contribution rate / (1.00 + plan contribution rate). E.g. 0.25 / (1.00 + 0.25) = 0.20 or 20% of net self-employment income.
Spirit Rider,
Having had only a W-2 earnings career, I only know employer contribution to 401-k. I did not understand: what is 'plan contribution'? Does it mean that the sole proprietor opens a self-401-k and makes own contribution. Then, adds another amount to the same 401-k calculated as you show as 'self-employed employer contribution'?
A W-2 employee usually makes employee elective deferrals. These are deducted from their net pay. Their employer optionally can match those deferrals and/or make non-elective employer contributions. Non-elective employer contributions are set to a percentage of compensation. This percentage is usually set to single digits. The safe harbor percentage is 3%. This percentage is the plan contribution rate.

The maximum employer contribution rate can not exceed 25% of compensation. Almost all normal businesses could not afford such a large contribution and stay in business. However, an owner only (with optionally spouse(s) employee(s)) may want such a high contribution, because it is going to their own retirement and deferring taxes on that amount.

A sole proprietors compensation is net self-employment earnings = net business profits - 1/2 SE tax. Since they are an employee they can make an employee deferral of up to 100% of compensation. This is $18K in 2017 and $18.5K in 2018, less any deferrals to any other qualified plans. Then since they are also the employer, they can make an employer contribution of up to 25% of compensation. This is the employer contribution rate (25%), but for the self-employed it is 20% of net self-employment earnings.

Copernicus
Posts: 320
Joined: Thu May 16, 2013 4:38 pm

Re: Side gig, 1099 strategy

Post by Copernicus » Mon Jan 01, 2018 12:40 pm

Spirit Rider,
Thank you for explaining this so clearly!
c

Post Reply