Questions about investing when self-employed but not incorporated

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freyj6
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Questions about investing when self-employed but not incorporated

Post by freyj6 » Tue Jun 11, 2019 11:32 am

Hi,

I began working for myself full time about 6 months ago and I'd guess I'll make around 50k this year. I'm not incorporated, do all the work myself and the money is almost all under the table (cash, check, Venmo and occasionally PayPal).

I have several questions regarding investing and taxes in my situation:

1) How should I approach taxes this next year? The previous few years I was doing long term travel, living off my savings and as such didn't file taxes.

2) What's my best bet for investing? I have a Vanguard Roth IRA that I've had for 7 or 8 years and definitely plan to max it out. I live very cheaply, so I'd also like to invest a lot more in either a 401k, HSA or Backdoor Roth. Which one(s) make the most sense given my situation? And are there any special considerations?

Thanks so much!!

iasw
Posts: 207
Joined: Mon Dec 05, 2016 2:02 pm

Re: Questions about investing when self-employed but not incorporated

Post by iasw » Tue Jun 11, 2019 11:37 am

You still have to report all income and pay taxes, filing quarterly.

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Flobes
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Re: Questions about investing when self-employed but not incorporated

Post by Flobes » Tue Jun 11, 2019 11:43 am

freyj6 wrote:
Tue Jun 11, 2019 11:32 am
and the money is almost all under the table (cash, check, Venmo and occasionally PayPal).
"Under the table" is money that is secretly conveyed and that you intend to avoid rightfully paying taxes.

We are prohibited from discussion of illegal activities here, by explicit Forum policies.

Did you intend to ask, "How do I pay taxes when my business is all cash?"

If so, we can advise you.

Topic Author
freyj6
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Re: Questions about investing when self-employed but not incorporated

Post by freyj6 » Tue Jun 11, 2019 12:02 pm

^Yes, sorry if that was unclear.

I guess it'll be clear from my post that I didn't pay taxes for the first quarter this year. This is my first time running a business on my own and early on had no idea how much money I'd make, or the proper way to pay taxes.

My dad, for example, has a small business and has paid taxes yearly for many many years. Are all self-employed people expected to pay quarterly? Or only if you're incorporated?

Thanks again :)

fabdog
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Location: Williamsburg VA

Re: Questions about investing when self-employed but not incorporated

Post by fabdog » Tue Jun 11, 2019 12:20 pm

If you have self employment income that results in profits, you should pay quarterly estimated taxes, assuming your net income for the quarter is enough for you to have a taxable income for the year. If your expenses wipe out most of your income in a quarter, you may not have much if anything to report for that quarter

Don't forget that as a self employed individual, you owe both halves of the FICA taxes, which get paid with your income taxes, so make sure to include the S/E taxes in your estimate each quarter

And it doesn't matter if you are incorporated or not. Just how much net income vs your tax rates.

Edited to answer investing question

You can only contribute to HSA if you have a high deductible medical plan that is eligible for HSA. If you do, it's awesome, triple tax free, money going in comes off your income, grows tax free, and tax free when used for qualifying expenses

Roth IRA is great, especially if your tax rate is low now

A Solo 401(k) would be the device for you as a self employed. Schwab, Fidelity, and others can set these up for you with minimal hassle and low fee investments. You can contribute your earnings and 20% of your company (you) profits, up to a limit of $56K/year (the part you contribute is capped at the $19K for 401 contributions) up to your business's income less 1/2 the S/E tax.

Mike

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FelixTheCat
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Re: Questions about investing when self-employed but not incorporated

Post by FelixTheCat » Tue Jun 11, 2019 12:35 pm

I suggest opening a Individual 401K and Individual Roth 401K at Vanguard https://investor.vanguard.com/small-bus ... -solo-401k

As a Sole Proprietor, you can contribute $$$ as an employee and as an employer. You are both. :happy

The details are on the link. Happy investing.
Felix is a wonderful, wonderful cat.

Topic Author
freyj6
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Joined: Thu Jun 19, 2014 2:09 am

Re: Questions about investing when self-employed but not incorporated

Post by freyj6 » Wed Jun 12, 2019 1:33 pm

Thanks so much for the help.

Let me make sure I'm reading this correctly:

As an owner/employee I can contribute as both, so if I made $100,000 for example, I could contribute 25% as an owner (as per the link) and $19,000 as an employee, for a total of $44,000 to my individual 401(k).

I'd pay taxes on the remaining $56,000 (before deductible, HSA, etc.) and then can contribute an additional $6000 to my Roth IRA.

Is that right? Thanks a bunch!!

fabdog
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Location: Williamsburg VA

Re: Questions about investing when self-employed but not incorporated

Post by fabdog » Wed Jun 12, 2019 2:06 pm

The vanguard link says up to 25%... that's for corporations

As I understand you're self employed, so there is a calculation to run through to get the max you can contribute as the employer part. In the end 20% is the max for self employed. First link is IRS, 2nd has a nice summary and a calculator

https://www.irs.gov/retirement-plans/se ... -deduction

https://www.mysolo401k.net/solo-401k/so ... and-types/

Mike

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