Switching from W2 to 1099 contractor. Seeking advice.

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marklar13
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Switching from W2 to 1099 contractor. Seeking advice.

Post by marklar13 » Mon Jun 29, 2020 9:46 am

I recently accepted a position as an independent contractor (software engineer). This will be full time -- I am leaving my current W2 employer. I've never done 1099 work, and am trying to do my due diligence on financial planning for the swtich. I think that I have a decent grasp on the tax rules, and have a short meeting scheduled with a CPA to get another set of eyes on this.

That being said, I wanted to float some of my questions to the experienced boglehead community as well. Some things I've been thinking about:

Sole Proprietor vs. LLC/other
From most of my reading, it seems like I can just file taxes as a sole proprietor and get the 20% deduction on my 1099 income. It doesn't seem like it is necessary to create an LLC unless I want the liability protection. As a software engineer, this doesn't really seem necessary. Maybe I am overlooking something, though? Is it recommended to create an LLC or other entity? (I am in CT). This is the primary question that I have for my meeting with the CPA.

Insurance
My spouse is full time, and we have benefits through her employer. I have term life insurance already. I will probably look into disability insurance as well. I am still undecided on this as my spouse has a career that pays well and is relatively stable. Anything else related to insurance/benefits that I am missing? Any recommendations for disability insurance shopping?

Retirement Savings (Trad vs Roth)
For retirement savings, we typically both max traditional 401k, perform backdoor Roth, and have a tiny bit left over for taxable. I have done some reading on the negative impact of trad 401k on QBI deductions (e.g. https://www.kitces.com/blog/199a-qbi-de ... ions-roth/). We typically end up in the 24% tax bracket. Last year we were about 180k taxable income after all deductions. This will go up a bit, but not drastically. I know that there is no right or wrong answer, but I am thinking that I will open a solo 401k at either e-trade or TD Ameritrade and go with the Roth option. I normally favor traditional, but the impact on the QBI deduction has me leaning towards Roth. Is this reasonable? More info needed?

Anything else?
Any other important planning aspects that I am missing in W2 vs 1099 work?

Thanks for all the help.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Mon Jun 29, 2020 10:58 am

Sounds like you have a pretty good handle on the issues. My wife has had a sole proprietor business for almost 30 years.

On the 401(k) and QBI deduction, just run your tax numbers when you get near the end of the year to decide whether a pre-tax contribution is that beneficial. Set up your 401(k) so that it has both Traditional and Roth options. Vanguard does this. Last time I checked Fidelity doesn't.

Try to qualify for a home office deduction.

Unless you have a good reason to go with an LLC, I'd stay a sole proprietor. There are various threads on this board about this issue. (I believe you need to be an SP to take the self-employed health insurance deduction, but it doesn't sound like that will be relevant in your case.)

I'd pass on the disability insurance unless you have a good specific reason for it.

Paying both halves of payroll taxes (SS and Medicare) is painful, but unavoidable.

Make sure you're maxing your potential Schedule C expenses (including because this will help with payroll taxes).

I'm assuming your spouse won't participate in your business. There are various tax strategies for a "two spouse business".

Good luck.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Mon Jun 29, 2020 11:57 am

P.S., Don't forget about state and local business licenses and tax. Not sure how many 1099 people comply with these requirements but you should look into it.

hayman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by hayman » Mon Jun 29, 2020 12:25 pm

Whether you stay sole proprietor or go with the LLC (I recommend LLC, it's not troublesome and adds a layer of protection), I think you absolutely should get some form of professional insurance.

You might only need Errors and Omissions (E&O), aka. professional liability, which will cover lawsuits even in the case where you did not make a mistake, but should also be aware of potential copyright issues and data breaches, etc. There are lots of pitfalls out there, and you will probably feel better knowing that even if someone brought a frivolous suit you are covered!

oldfatguy
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by oldfatguy » Mon Jun 29, 2020 12:56 pm

Perhaps you've already done so, but if not, make sure the new position actually meets the criteria for independent contractor work:
https://www.irs.gov/newsroom/understand ... esignation

muddgirl
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by muddgirl » Mon Jun 29, 2020 1:09 pm

I am not a lawyer but my understanding is that an LLC would provide me little protection as an owner/employee providing professional-type services without any payroll, inventory, or debts. It did not seem worth any expense to me.

Some companies, wary of IRS rules or wage lawsuits, won't do business with owner/employee sole proprietors and will only do business with a corporation. So that would be a factor to consider.

Perkunas
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by Perkunas » Mon Jun 29, 2020 3:37 pm

How much money do you expect to gross and net from this work?

If you're going to make a lot of money, then you'll want to look into an LLC because it opens the door to becoming an S-corp. I don't know the CT fees or taxes associated with an S-corp, so that would be one particular question to ask a CPA. S-corps incur additional expenses, but can potentially offer tax savings if you make enough income.

You would also need to ask the company that is paying you whether they can/would be willing to pay an LLC with an EIN rather than paying you directly under your SSN.

caffeperfavore
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by caffeperfavore » Mon Jun 29, 2020 4:05 pm

oldfatguy wrote:
Mon Jun 29, 2020 12:56 pm
Perhaps you've already done so, but if not, make sure the new position actually meets the criteria for independent contractor work:
https://www.irs.gov/newsroom/understand ... esignation
This is totally on the employer. They are the ones that are on the hook to have to defend using contractors over employers.

OP, the S-Corp angle is definitely something you should look into and will allow you to stash a lot more into a 401k (over $50k) if the stars align to do so. I'm sure your CPA will bring it up, but if not, ask. The S-Corp will mean more accountant fees and a bit more annoyance with taxes, payroll, and paperwork, but your CPA can do that (for a fee of course). But, it's not that big of a deal and if your income is fairly high would be worth the trade off.

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Elric
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by Elric » Mon Jun 29, 2020 4:16 pm

cowdogman wrote:
Mon Jun 29, 2020 10:58 am
I believe you need to be an SP to take the self-employed health insurance deduction
This is incorrect. You can be a single person LLC treated as a pass-through on your federal taxes and take the deduction.
"No man is free who works for a living." | Illya Kuryakin

oldfatguy
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by oldfatguy » Mon Jun 29, 2020 4:20 pm

caffeperfavore wrote:
Mon Jun 29, 2020 4:05 pm
oldfatguy wrote:
Mon Jun 29, 2020 12:56 pm
Perhaps you've already done so, but if not, make sure the new position actually meets the criteria for independent contractor work:
https://www.irs.gov/newsroom/understand ... esignation
This is totally on the employer. They are the ones that are on the hook to have to defend using contractors over employers.
So there are no tax consequences if, for example, someone deducts business expenses from their income and is later determined to have been working as an employee?

evonboeck
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by evonboeck » Mon Jun 29, 2020 4:25 pm

I’m an IT Consultant on a 1099 and I initially set up my business as an LLC. I regretted this decision for many reasons and I switched to SP. The companies that I worked for expected me to carry 2 million in Personal Liability Insurance, which sort of negates the LLC. I had more paperwork and annual filing fees of $300 in my state. TN collects excise tax of 6.5% of income. The only way to get around this was to complete a disregarded entity form, which basically stated that the LLC would not cover me. Converting to SP made all of these problems go away. The only downside is if I was sued and lost for more than 2 million. As stated earlier, the business taxes will still be there regardless which business type you chooses. The main benefit that I achieved from going solo was being able to put approx 56K in a solo 401K minimizing my income and taxes. I do have Personal Lability and Errors and Omissions Insurance. The companies you work for will expect it regardless of the business type you elect.

Look at some of SpiritRider’s posts on this. Everyone assumes they need to be an LLC, but it’s just not the case. BTW - Converting the business from LLC to SP was a major pain.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Mon Jun 29, 2020 4:43 pm

Elric wrote:
Mon Jun 29, 2020 4:16 pm
cowdogman wrote:
Mon Jun 29, 2020 10:58 am
I believe you need to be an SP to take the self-employed health insurance deduction
This is incorrect. You can be a single person LLC treated as a pass-through on your federal taxes and take the deduction.
I stand corrected. Thanks.

simas
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by simas » Mon Jun 29, 2020 5:08 pm

marklar13 wrote:
Mon Jun 29, 2020 9:46 am

Sole Proprietor vs. LLC/other
From most of my reading, it seems like I can just file taxes as a sole proprietor and get the 20% deduction on my 1099 income. It doesn't seem like it is necessary to create an LLC unless I want the liability protection. As a software engineer, this doesn't really seem necessary. Maybe I am overlooking something, though? Is it recommended to create an LLC or other entity? (I am in CT). This is the primary question that I have for my meeting with the CPA.
in the bolded part, even that is not necessary - single member, no employees , LLC offer you nothing in the liability protection. You are the only person behind this excuse for 'corporate veil' and that veil would get 'pierced' extremely easily. Do NOT go LLC for single person if your concern is liability protection, as it would offer you none. Sometimes it may help you with marketing (for those clients more likely to do business with 'best IT solutions ever inc' vs ' joe marklar'), whether that applies to you, up to you to answer.

As for insurance, if they require it (which they may ), get it and bake it into the rates. if not, for what you are doing, likely unnecessary as well, few K for 'sound sleep'

Similarly, you can do full 401k (solo 401k) and put in significantly higher contributions into it without any corp of LLC types, not needed for that.

everything else you already covered.

and yes, going all legal and HR and prove to me this and that including this scope of work is not done by employee - leave those out of your contract negotiations and client management, not likely to do well here. there are here on the board that are fanatical about it however I am not sure how close to real life they are and what they are doing as IT contractor. Leave this out. Focus on how you want to get marketed (projects have start and end , what you do behind the end to avoid non billable time), how you manage client expectations, how you get paid - things that truly matter to independent consultant ..

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Bogle7
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Just say no

Post by Bogle7 » Mon Jun 29, 2020 5:13 pm

cowdogman wrote:
Mon Jun 29, 2020 10:58 am
Try to qualify for a home office deduction.
No.
Not worth the hassle.
It is a pittance.

I base this upon 24 years as a 1099 worker.
marklar13 wrote:
Mon Jun 29, 2020 9:46 am
I will probably look into disability insurance as well.
The cost will horrify you.

simas
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Re: Just say no

Post by simas » Mon Jun 29, 2020 5:19 pm

Bogle7 wrote:
Mon Jun 29, 2020 5:13 pm
cowdogman wrote:
Mon Jun 29, 2020 10:58 am
Try to qualify for a home office deduction.
No.
Not worth the hassle.
It is a pittance.

I base this upon 24 years as a 1099 worker.
marklar13 wrote:
Mon Jun 29, 2020 9:46 am
I will probably look into disability insurance as well.
The cost will horrify you.
what is there to 'try'? if you are truly using specific space your place of business => then you are. if not, not.

also, home office deduction could be very easily calculated by your tax program (#sq ft in your 'office' vs total #sq feet as input values and simplified method if you want). In my case, it was 1.5k off net business income last year. again, it if it needed (vast majority of my work is remote) then it is needed, deduction or not. nothing to qualify, or struggle for, or anything else. if audited, sure , pretty easy too.

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rob
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by rob » Mon Jun 29, 2020 5:20 pm

Don't forget your paying both sides of SS and stuff like family leave (not sure about CT). Rest I think is covered above.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 11:08 am

Bogle7 wrote:
Mon Jun 29, 2020 5:13 pm
cowdogman wrote:
Mon Jun 29, 2020 10:58 am
Try to qualify for a home office deduction.
No.
Not worth the hassle.
It is a pittance.

I base this upon 24 years as a 1099 worker.
As with any tax strategy run the numbers and see if it's worth it. Keep in mind the home office deduction not only reduces your income tax, it also reduces your payroll tax.

I would not however claim it unless you clearly fit within the requirements.
Last edited by cowdogman on Tue Jun 30, 2020 11:22 am, edited 1 time in total.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 11:19 am

simas wrote:
Mon Jun 29, 2020 5:19 pm
cowdogman wrote:
Mon Jun 29, 2020 10:58 am
Try to qualify for a home office deduction.
what is there to 'try'? if you are truly using specific space your place of business => then you are. if not, not.
From the IRS website:
Requirements to Claim the Home Office Deduction

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:

Regular and exclusive use.
Principal place of your business.

Regular and Exclusive Use.

You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

Principal Place of Your Business.

You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
Try to comply with these requirements. The "exclusive use" requirement is often difficult. Depends on the size of your house/apartment and your living arrangements.

JonnyB
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by JonnyB » Tue Jun 30, 2020 11:25 am

Perkunas wrote:
Mon Jun 29, 2020 3:37 pm
If you're going to make a lot of money, then you'll want to look into an LLC because it opens the door to becoming an S-corp.
LLC has absolutely nothing to do with S-corp. You can be taxed as an S-corp without being an LLC.
You would also need to ask the company that is paying you whether they can/would be willing to pay an LLC with an EIN rather than paying you directly under your SSN.
You don't need to have an LLC to obtain and use an EIN. You can do that with a sole proprietorship.

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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by JonnyB » Tue Jun 30, 2020 11:28 am

caffeperfavore wrote:
Mon Jun 29, 2020 4:05 pm
OP, the S-Corp angle is definitely something you should look into and will allow you to stash a lot more into a 401k (over $50k) if the stars align to do so.
You don't need an S-corp to do a 401(k). You can do that with a sole proprietorship.

JonnyB
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Re: Just say no

Post by JonnyB » Tue Jun 30, 2020 11:35 am

Bogle7 wrote:
Mon Jun 29, 2020 5:13 pm
cowdogman wrote:
Mon Jun 29, 2020 10:58 am
Try to qualify for a home office deduction.
No.
Not worth the hassle.
It is a pittance.

I base this upon 24 years as a 1099 worker.
There is no hassle to the home office deduction if you use the new simplified method. The direct deduction is small but it opens the door to making all of your commuting to and from your client's office a deductible travel expense. At 58 cents a mile, this can amount to thousands of dollars of deductions.

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Tamarind
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by Tamarind » Tue Jun 30, 2020 11:39 am

I'd go with the DI, myself, if your family is dependent on your income. Though I agree the price tag is eye-watering. Don't get more than you need.

OP, familiarize yourself now with Schedule C, Schedule SE, and the requirements for quarterly filing. Make sure you remit enough tax each quarter!

Make sure you increase your rate as an IC to account for the extra tax.

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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by JonnyB » Tue Jun 30, 2020 11:41 am

cowdogman wrote:
Tue Jun 30, 2020 11:19 am
Try to comply with these requirements. The "exclusive use" requirement is often difficult. Depends on the size of your house/apartment and your living arrangements.
It's not that difficult. The rules do not require a separate room or partition for you office. Your office can consist of, for example, a desk in the corner and a filing cabinet. The square footage is small and provides a small office deduction, but your travel expenses to and from your office become deductible.

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FelixTheCat
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by FelixTheCat » Tue Jun 30, 2020 11:55 am

I'm a independent contractor working 1099 from a former employer.

I work as a sole proprietor. You must file estimated taxes quarterly.

I used Turbo Taxes Self-Employed software to track miles, income and expenses. There's other software out there but TT Self employed is free for Turbo Tax users. Expenses are usually health insurance, cell phone and internet since I don't maintain a home office.

I buy my own health insurance which is expensive.

I have a Individual 401K for my employer contributions and a Roth 401K for my employee contributions. As a 1099 worker, you are the Employer and the Employee. So you get to fund two 401Ks for double the amount. Best benefit as a 1099 worker. I used Vanguard's individual 401K https://investor.vanguard.com/small-bus ... -solo-401k
Felix is a wonderful, wonderful cat.

caffeperfavore
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by caffeperfavore » Tue Jun 30, 2020 12:29 pm

JonnyB wrote:
Tue Jun 30, 2020 11:28 am
caffeperfavore wrote:
Mon Jun 29, 2020 4:05 pm
OP, the S-Corp angle is definitely something you should look into and will allow you to stash a lot more into a 401k (over $50k) if the stars align to do so.
You don't need an S-corp to do a 401(k). You can do that with a sole proprietorship.
Yes, but can you do the full amount that you can do with an S-Corp, over $57,000 versus the standard amount of $19,500?

JonnyB
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by JonnyB » Tue Jun 30, 2020 12:42 pm

caffeperfavore wrote:
Tue Jun 30, 2020 12:29 pm
JonnyB wrote:
Tue Jun 30, 2020 11:28 am
caffeperfavore wrote:
Mon Jun 29, 2020 4:05 pm
OP, the S-Corp angle is definitely something you should look into and will allow you to stash a lot more into a 401k (over $50k) if the stars align to do so.
You don't need an S-corp to do a 401(k). You can do that with a sole proprietorship.
Yes, but can you do the full amount that you can do with an S-Corp, over $57,000 versus the standard amount of $19,500?
Yes, the limits are the same for a sole proprietor. The details might be slightly different. For example, you might be able to put more into a sole proprietor 401(k) since all of your business income is eligible for contributions. For an S-corp, only your W-2 wage income is eligible for contributions.

Perkunas
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by Perkunas » Tue Jun 30, 2020 12:47 pm

JonnyB wrote:
Tue Jun 30, 2020 11:25 am
Perkunas wrote:
Mon Jun 29, 2020 3:37 pm
If you're going to make a lot of money, then you'll want to look into an LLC because it opens the door to becoming an S-corp.
LLC has absolutely nothing to do with S-corp. You can be taxed as an S-corp without being an LLC.
I didn't write an entire description of the process and my thoughts, but the point is that "an LLC opens the door to becoming an S-corp." Yes, the OP could also incorporate. But an LLC allows for flexibility to remain a Sch C sole prop or to do an S-election somewhere down the road, even if it isn't the best option today. I also didn't say that the OP should for sure become an LLC or anything else for that matter. Just pointing out one option to consider.
JonnyB wrote:
Tue Jun 30, 2020 11:25 am
Perkunas wrote:
Mon Jun 29, 2020 3:37 pm
You would also need to ask the company that is paying you whether they can/would be willing to pay an LLC with an EIN rather than paying you directly under your SSN.
You don't need to have an LLC to obtain and use an EIN. You can do that with a sole proprietorship.
I didn't say he needs an LLC to obtain an EIN. I said he needs to check with the payor to determine if they will pay the EIN and/or LLC as opposed to the SSN. Not everyone has the ability to make that choice based on their own best interests; sometimes the payor has rules about who they'll contract with and who they'll pay. OP would want to verify what is or is not possible before making any decisions.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 1:05 pm

JonnyB wrote:
Tue Jun 30, 2020 12:42 pm
Yes, the limits are the same for a sole proprietor. The details might be slightly different. For example, you might be able to put more into a sole proprietor 401(k) since all of your business income is eligible for contributions. For an S-corp, only your W-2 wage income is eligible for contributions.
Agreed, with one clarification--all your NET income is eligible--that is, your Schedule C net profit.

simas
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by simas » Tue Jun 30, 2020 1:23 pm

cowdogman wrote:
Tue Jun 30, 2020 1:05 pm
JonnyB wrote:
Tue Jun 30, 2020 12:42 pm
Yes, the limits are the same for a sole proprietor. The details might be slightly different. For example, you might be able to put more into a sole proprietor 401(k) since all of your business income is eligible for contributions. For an S-corp, only your W-2 wage income is eligible for contributions.
Agreed, with one clarification--all your NET income is eligible--that is, your Schedule C net profit.
what cowdogman said - with Schedule C it is net business profit that matters. and yes, you can put just as much into S401k including fun things like mega backdoor Roth if your plan is set up that way. not a rocket science at all to do.

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marklar13
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by marklar13 » Tue Jun 30, 2020 3:43 pm

Thanks for all the feedback.

Sounds like Sole Proprietor is the direction I am headed. I'm not really looking to market myself beyond the contract that I have already been offered (for now at least... and I am hoping this contract opens the door for others within the same circle).

I will obtain some sort of liability / E+O insurance as suggested. It looks like there is a boilerplate line in the contract stating that I should be able to present proof of insurance if requested, but nothing about required amounts or anything specific.

As far as taxes, I think I have a good grasp on this. I've already run through the rough calculations (with employer unemployment tax, etc included) when doing compensation comparisons. As far as home office deduction... I will probably plug it into my tax software for fun, but I expect for our situation we won't even be itemizing. I tried this deduction in the past when I was full time telecommute worker, and it didn't move the needle at all. I don't foresee much in the way of business expenses to deduct (no travel expenses, no extra software requirements, relatively small home office, etc).

For retirement accounts, regarding these posts...
JonnyB wrote:
Tue Jun 30, 2020 12:42 pm
caffeperfavore wrote:
Tue Jun 30, 2020 12:29 pm
JonnyB wrote:
Tue Jun 30, 2020 11:28 am
caffeperfavore wrote:
Mon Jun 29, 2020 4:05 pm
OP, the S-Corp angle is definitely something you should look into and will allow you to stash a lot more into a 401k (over $50k) if the stars align to do so.
You don't need an S-corp to do a 401(k). You can do that with a sole proprietorship.
Yes, but can you do the full amount that you can do with an S-Corp, over $57,000 versus the standard amount of $19,500?
Yes, the limits are the same for a sole proprietor. The details might be slightly different. For example, you might be able to put more into a sole proprietor 401(k) since all of your business income is eligible for contributions. For an S-corp, only your W-2 wage income is eligible for contributions.
My understanding is that while these deductions are still beneficial -- the benefit is reduced on both the pre-tax "employer" and "employee" contributions into solo 401k because they both reduce the QBI deduction. This is why I was planning on just doing a Roth contribution for the "employee" contribution and calling it a day there.

I considered mega-backdoor roth, but from reading other posts on this forum, it sounds like you need to involve another vendor in addition to your brokerage in order to legitimately facilitate this. I may re-visit this next year, but for our current income level I don't think we'd fill all of that extra space anyway.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 4:53 pm

marklar13 wrote:
Tue Jun 30, 2020 3:43 pm
As far as home office deduction... I will probably plug it into my tax software for fun, but I expect for our situation we won't even be itemizing.
For a sole proprietor the home office deduction is taken on Schedule C. Whether or not you itemize is irrelevant.

But yes, you should run the numbers and decide whether it is worth the effort. You mentioned that you will likely be in the 24% bracket and so every dollar you can claim as an expense will reduce your taxes by about $.40--24% in income tax and 15.6% in payroll taxes--and that doesn't include state income taxes (if any in your state). So, a $1,000 home office deduction will save you about $400.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 5:20 pm

marklar13 wrote:
Tue Jun 30, 2020 3:43 pm
My understanding is that while these deductions are still beneficial -- the benefit is reduced on both the pre-tax "employer" and "employee" contributions into solo 401k because they both reduce the QBI deduction. This is why I was planning on just doing a Roth contribution for the "employee" contribution and calling it a day there.
Yes, a pre-tax 401(k) contribution will lower your QBI deduction, but you should still run the numbers.

I have a detailed income tax Excel spreadsheet that I use for our taxes that has a dropdown box with 2 options--(1) make max pre-tax contribution and (2) don't make any pre-tax contribution. When I choose one, various amounts on the spreadsheet change, not just the QBI amount.

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marklar13
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by marklar13 » Tue Jun 30, 2020 6:35 pm

Thanks cowdogman, makes sense. I'll wait until the end of the year and check the impact -- although it's still an inexact science because I won't know my retirement tax rate. I have a similar spreadsheet for our current taxes and was planning on updating with the 1099 rules anyway.

And yes, mention of itemizing was a mental lapse in my part.

Thanks for following up on the thread, your responses have been helpful.

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cowdogman
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Re: Switching from W2 to 1099 contractor. Seeking advice.

Post by cowdogman » Tue Jun 30, 2020 7:13 pm

marklar13 wrote:
Tue Jun 30, 2020 6:35 pm
I'll wait until the end of the year and check the impact -- although it's still an inexact science because I won't know my retirement tax rate. I have a similar spreadsheet for our current taxes and was planning on updating with the 1099 rules anyway.
One more general input for you:

401(k)s are, of course, great for retirement savings and for reducing taxes thru pre-tax contributions, but another huge benefit of pre-tax 401(k) contributions for a Schedule C filer is that they allow the filer to manage his/her AGI, which is used as a trigger/threshold for numerous tax provisions, like (non-exhaustive list):

-whether Net Investment Income Tax is payable
-whether a parent is entitled to take various college tuition benefits
-what tax is payable on qualified dividends and capital gains--0%, 15% or 20%
-whether the filer qualifies for the 2020 stimulus credit (for those of us who didn't get a check)
-whether the filer stays on top of the Obamacare cliff
-which marginal bracket the filer is in--really helpful if dropping from 32% to 24%

Given that a Schedule C filer can potentially make $57,000 in pre-tax contributions to an individual 401(k), that's a huge tool in managing AGI. And so while pre-tax 401(k) contributions do lower your QBI deduction, there are lots of other tax benefits they may produce.

A detailed spreadsheet is a must to determining the best strategy. It's doable in TurboTax, but very time consuming. it's nice to see it all on one worksheet.

Good luck.

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