How to plan for 1099 income

[IDinOH]

I am currently an employed doc (all W-2 income), but will start as a medical director at another facility where I will make about $21k a year in 1099 income.

I have only ever been a W2 employee so am not really sure of the pros and cons of this.  If I understand it correctly, I will be responsible for paying payroll taxes out of that money in addition to income taxes. I'm not really sure how I would go about this (does it require quarterly payments?).

What I'm really not sure of are if there are any advantages this income offers me that $20k of W-2 income would not (I don't want to squander an opportunity to save on taxes or save more money in tax advantaged space)

I've read some on solo 401k, but with such a small sum, I'm not sure if it would be worth it given I already max out my work 403b (so no room under the 18k cap) and 25% of the profits wouldn't be much...and doesn't it require I set up another tax ID?

Any wisdom you could share would be greatly appreciated.

[Joseph]

$20k is actually the sweet spot needed to max out another (solo) 401k.

[IDinOH]

I thought the maximum amount one could put into a 403b/401k was 18k? So if I put 18k into my work 403b I could still set up a solo 401k and save another 18k?

[Zaphod]

The maximum you can contribute as an employee is 18k, you can do 35k as the employer and up to your first 18k can go in the other one so its the sweet spot. Just make sure you make the contributions correctly.

[jfoxcpacfp]

Absolutely worthwhile to set up a solo 401k and contribute. You are not be subject to the 25% limitation for elective employee contributions ($18k). That amount is aggregated among all employers. And as WCI has written about previously, having a solo-K allows you to roll the 401k from the job you are leaving into it. This will give you the opportunity (assuming you own no other pre-tax IRAs) to make tax-free back-door Roth IRA contributions.

Since you have maxed out your elective employee contribution, you can make a nonelective employer contribution of 25% of net profits (reduced by Medicare taxes). Your contribution % to your solo-K from SE income is limited to your net income on your schedule C so if you have deductions (tax prep, mileage, etc), they will reduce the amount you can contribute. The contribution will reduce your taxable income but not your Medicare taxable income, so it's a trade-off somewhat. I hope this makes sense.

As for the tax ID, that can be easily done in about 2 minutes online.

[childay]

Hi ID

You will not need to pay monthly payroll taxes unless you set up a S-corp or something like that which you probably don't need to do.  You will need to pay estimated quarterly taxes OR just increase your withholding at your main job to cover the 20k liability (which would be easier).

You will I think be able to put 20% of the 1099 income in a 401k plan.  That is definitely worth setting up for the tax break.  Those would be "employer" contributions, rather than your $18k individual limit.

Read this if you haven't:

https://www.whitecoatinvestor.com/multiple-401k-rules/

 

And

http://thefinancebuff.com/solo-401k-for-part-time-self-employment.html

 

 

[IDinOH]

Thank you all for your input.  jfoxcpacfp if I understand you correctly, I can put 18k in my day job (w-2) 401k and another 18k in my new solo-k because I'm not subject to the 25% limitation?

[jfoxcpacfp]

incom wrote:

Thank you all for your input.  jfoxcpacfp if I understand you correctly, I can put 18k in my day job (w-2) 401k and another 18k in my new solo-k because I’m not subject to the 25% limitation?

Click to expand...

IDinOH (love your screen name, btw) - your elective contributions are dollar-for-dollar and are not subject to the 25% limitation. The employer nonelective contributions are limited to 25% of your net profits. Since you are  maxing out your employee elective contributions at your day job, you are limited to 25% of net profits (reduced by Medicare taxes) from the 1099 income.

[childay]

I believe 25% is for employees, the maximum is 20% for self employed.

See here Comment 49

https://www.whitecoatinvestor.com/beating-the-51k-limit-friday-qa-series/

 

 

[jfoxcpacfp]

The 20% is near what it comes to after deducting 1/2 of FICA tax and recalculating. It is higher when you only use Medicare tax.

[imgdoc]

I just want to be sure: dual stream income, w2 +1099, if I make employee contributions to solo 401k, amount is not limited by how much I make in 1099 income, correct? Say I dont like my w2 403b choices and prefer to invest all employee 18K (24k) in my solo 401k, but I made only 10K in 1099 income. In addition,  I can make about 2K in employer contributions. Is this correct?

[jfoxcpacfp]

You can contribute no more than $18k in "elective" contributions to your SOLO-k and your 403b, in aggregate. The amount you contribute is limited by how much you make in 1099 income. iow, if you get paid $10k on a 1099, you cannot contribute more than that to your SOLO-k. In addition, your contribution is reduced by any expenses deducted from your 1099 income. If you contribute $9k to your SOLO-k, you can contribute another $9k to your 403b (+ another $6k if you are age 50+).

[imgdoc]

Thank you, Joanna. I had this wrong. Since I won't know how much 1099 I will get until the end of the year, what is the best approach to maximize employee contributions for both solo K and 403b? I want to put as much as I can in my Solo k and remaining in my 403b. I guess, i can wait for after end of the year to send check for the solo k, however 403b are salary deductions.

[consultpsych]

I am in this boat.

For both my plan with my employer and my solo-401k, I have to make sure that my total employee contribution is not over 18k.

Then, from my 1099 income, I can donate an additional 20%. But that's 20% of the net profit, after taking out all deductible expenses, and after taking out the deductible half of self-employment taxes (SS and medicare).

My plan on how to actually accomplish this properly:

1. Monthly contribution from paycheck into employer 403b to get the match (a percentage of my fluctuating income which will certainly be below 18k).

2. Semi-regular contribution of about 18% of 1099 income into solo-401k, after substracting expenses (which for me are planned so I can do it this way).

3. At the end of the year, add (18k - the amount in employer 403b) into my solo-401k as employee contribution.

4. At end of the year, use an online calculator to determine how much I can put into solo-401k as employer, substract the amount from step #2, and put that rest in.

Since I have a 403b, which is technically under 'my control', I also have to make sure my total 403b + 401k contributions don't exceed 53k. But if you have two different 401ks, you actually have to separate 53k limits. You still have one total combined 18k limit as employee.

[jfoxcpacfp]

imgdoc wrote:

Thank you, Joanna. I had this wrong. Since I won’t know how much 1099 I will get until the end of the year, what is the best approach to maximize employee contributions for both solo K and 403b? I want to put as much as I can in my Solo k and remaining in my 403b. I guess, i can wait for after end of the year to send check for the solo k, however 403b are salary deductions.

Click to expand...

You're going to have to estimate as you go along during the year. That may mean you overcontribute but as long as you take it out by 4/15, you'll be fine.