1099 low income hobby job

[WCInovice]

My wife is looking at doing some freelance stuff as more if a hobby than an actual job. We understand this will be taxed at a high rate (top marginal bracket) and she’s doing it for fun, not for income.

I would anticipate around $5-10K yearly income.

Is it worthwhile to try set up any sort of SEP IRA or any other things we need to do to minimize tax burden or maximize efficiency. We already max out my 401K and both of our back door Roth’s.

As I said, this isn’t really for income, but I don’t want to give money away in taxes if a simple tax deferment set up is possible.

Or for that low of a yearly income should we just take what we get from the income and forget about any sort of LLC, retirement, etc?

Thank you.

[Larry Ragman]

Don’t call it a hobby. That has an adverse connotation with the IRS and limits deductions. Speaking of which, her business might generate some good deductions (home office, business travel, mileage) that you should check out.

That said, you certainly do not need an LLC. She could easily do freelance as a sole proprietor.

As for some sort of deferred income plan, yes it makes sense to do one given her income will be taxed at your marginal rate. Stay away from the SEPIRA. It will impact your ability to do your backdoor Roths. A solo 401k would work though. https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/

[CordMcNally]

If she does a SEP then she’ll be opening herself up to dealing with the pro-rata rule for future back door Roth conversions.

[Tim]

“My wife is looking at doing some freelance stuff as more if a hobby than an actual job.”

“Freelance stuff” is really difficult too understand.
Particularly when you imply it’s a hobby.

Note this needs to be a business and she needs to make a profit in the business. Is that $5-10k income or profits. Without eventually showing a profit, it’s a hobby.

[WCInovice]

Thanks to all for the input.

It will definitely turn a profit. She will be basically “picking up shifts” for local businesses doing some as needed work. It just happens to be in an art field she has a hobby interest in. But it’s basically just labor on an hourly basis/pay.

I should have stayed away from the “hobby” connotation.

[Larry Ragman]

Thanks to all for the input.

It will definitely turn a profit. She will be basically “picking up shifts” for local businesses doing some as needed work. It just happens to be in an art field she has a hobby interest in. But it’s basically just labor on an hourly basis/pay.

I should have stayed away from the “hobby” connotation.

Will she be an employee? That is, W-2 income? If so then perhaps you could take advantage of a 401k at the workplace? If not, then solo 401k still a reasonable choice.

[WCInovice]

Will she be an employee? That is, W-2 income? If so then perhaps you could take advantage of a 401k at the workplace? If not, then solo 401k still a reasonable choice.

She will not be an employee or get a W-2.

She's picking up some gigs as a 1099 worker.

[Tim]

https://www.uschamber.com/co/run/hum...me-workers/amp

If she is picking up gigs with different entities, she is probably safe as 1099. If it is one, she might be part time which would still be w-2.

[mamaham]

edited : removed incorrect info -- see what Larry Ragman said

[Larry Ragman]

I’d open a solo 401k and contribute all the income (assuming you don’t need it for other things) up to The max. I think you can put 100% of income up to $19,500(?)… but maybe someone else can confirm that.

I hesitate to confirm, but there is one total $20.5K employee contribution across all 401k plans the employee participates in. The total limit is $61K for each independent employer but for the solo 401k the "employer" can only contribute 20% of SE income for herself. Best Retirement Savings Plans for Self-Employed | White Coat Investor

[jfoxcpacfp]

If she is working shifts for one business or 12, it is still earned income. If they pay her via 1099, it qualifies for a solo-k contribution of up to $20,500. She will, of course, owe FICA taxes on her profits even if the solo-k wipes them out for income tax purposes. Be sure she checks local ordinances to determine if she needs to file with city/county, too.

[MPMD]

as others have said understand that the concept of business vs hobby is a pretty legit thing for the IRS.

my layman's understanding of this is is that the biz vs. hobby test is what prevents you from saying you are a golf coach, buying all new clubs, giving one lesson for $100 to your college roommate, and then deducting the clubs as a business expense.

as you dig into this issue there are some gray areas. i have always thought that dog breeding/training would be hard to pin down on a case by case basis for example.

it sounds like you are just getting paid to do something you like though, that's a job not a hobby.

[spiritrider]

While WCInovice used a poor choice of words in their OP.

Getting paid to do something you like to do, has absolutely no bearing on whether you are engaged in a trade or business. It is all about your level of activity and profit.

While having multiple simultaneous clients certainly makes a stronger case for independent contractor (IC) status. It is by no means necessary.

In fact, the majority of individual ICs primarily work for one client at a time. With some overlap and/or limited moonlighting.