Announcement

Collapse
No announcement yet.

Advantage of contributing from W2 income vs 1099 income?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Advantage of contributing from W2 income vs 1099 income?

    Two-part question, would love some insight!

     

    I work part time as a W2 and part-time as a 1099.

    If it is much easier to make tax and business deductions from 1099 income, does it make any difference if I contribute zero towards 401k from 1099 income and make the contributions from the W2 income? Or is it all the same in the end?

     

    Part 2 confounder:

    The W2 job is offering me a small window of time to choose to participate in an elective deferral plan (up to 53k). The election will be permanent forever (i.e. 20% will be deducted from my check forever). If I don't elect to do this, my max contribution is the 18k.

    The 1099 job has a 401k that allows me to contribute up to 53k total (they somehow classify anything above 18k as employer contribution, but still comes from me...??) The total allowed between this plan and the W2 plan is 53k total each year.

    Question is: does anyone see any compelling reason to contribute 20% forever without ability to change amount, or should I just use job 2's ability to change up and down the 401k contribution as needed? Of course jobs can change but I can't figure it out.

  • #2
    I am having some trouble with this scenario.

    • It is unusual for you to make a "lifetime" election for a deferred comp plan, especially as a p.t. employee. Are you sure about this?

    • Are the W2 and the 1099 with the same company? To allow a max of $53k between the 2 indicates it is so. (By the way, it many be troubling if the same company hires you in 2 different capacities, if this is so, but that is another story.)

    • It is also unusual for 1099 contractors to be allowed to participate in a deferred comp plan.

    • You stated that "if it is much easier to make tax and business deductions from 1099 income..." - you meant W2 income, correct? Other than deferred comp, what other "tax and business deductions" are you referring to?


    The 1099 income allows you to deduct some business expenses relative to your work that will be unavailable to you as a W2 employee.

    If the employers aren't related, there is a possibility of contributing $53k to each plan, depending upon the amount of compensation at each. Perhaps you could clarify and flesh out the details of your situation a bit more?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      Hi Johanna, thanks for your response!

      Yes, the EDP policy clearly states it is a lifetime election, and I won't be able to change the percentage regardless of going back between PT or FT, or leaving and returning to the company.  However, it will allow me to specify two future dates to change the election to a percentage I specify now (i.e. 2025 to 15% and 2035 10%)

      W2 is one company, and 1099 (this is actually K1 but I thought it's treated similarly to 1099 income and simplified the question) is another company. However, both companies use the same brokerage/institution to administer the plans. When I called the brokerage, they told me the 53k max is total between the two. It was a lower level employee that told me though so not clear if it's accurate. Is it theoretically possible to contribute 53k into separate plans each year?

      Yes I was referring to business deductions from the 1099/K1 income. Would it be better for expensing purposes to reduce the W2 income using pretax contributions and leave my 1099/K1 untouched?

      Comment


      • #4
        If the two companies are not related, then yes you can contribute $53k into each, but salary deferral would be $18k for both combined.  Actually, it sounds like you have a 401a plan (with required lifetime contribution), and typically the employer contributes into those.  But if you do, then that would be your 'salary deferral' and possibly some 'profit sharing' if greater than $18k.  Whether you pick one or both plans together would also depend on relative amounts (W2 vs. 1099) and also investment choices.  You might be able to max out plan #2 (1099) with profit sharing only, so that's another consideration.  Lots of variables here and without a close examination of both plans and your specific situation it is impossible to provide any detailed advice.
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

        Comment


        • #5




           

          W2 is one company, and 1099 (this is actually K1 but I thought it’s treated similarly to 1099 income and simplified the question) is another company. However, both companies use the same brokerage/institution to administer the plans. When I called the brokerage, they told me the 53k max is total between the two. It was a lower level employee that told me though so not clear if it’s accurate. Is it theoretically possible to contribute 53k into separate plans each year?

          Yes I was referring to business deductions from the 1099/K1 income. Would it be better for expensing purposes to reduce the W2 income using pretax contributions and leave my 1099/K1 untouched?
          Click to expand...


          K1 and 1099 income are treated differently. While you are an owner in the company issuing the K1, you have to contend with the tax reg's for whatever kind of company is issuing the K1 (S-Corp or partnership) within the constraints of other owners in the company.

          If business 1 owns 80%+ of business 2 or if 5 or fewer part era/shareholders own at least 80% of 2 businesses, then the businesses are part of a "controlled group". This means they are treated as 1 enterprise for tax purposes, including the limit on retirement contributions. If the businesses are not part of a controlled group, then, yes, it is possible to max out ($53k) 2 separate retirement plans.

          As for your question about expensing purposes for business deductions, I just do not know enough about your situation to comment.

          This is a pretty complex area and you really should get advice from a professional with relevant experience who can address and help plan in your personal situation.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6




            If the two companies are not related, then yes you can contribute $53k into each, but salary deferral would be $18k for both combined.  Actually, it sounds like you have a 401a plan (with required lifetime contribution), and typically the employer contributes into those.  But if you do, then that would be your ‘salary deferral’ and possibly some ‘profit sharing’ if greater than $18k.  Whether you pick one or both plans together would also depend on relative amounts (W2 vs. 1099) and also investment choices.  You might be able to max out plan #2 (1099) with profit sharing only, so that’s another consideration.  Lots of variables here and without a close examination of both plans and your specific situation it is impossible to provide any detailed advice.
            Click to expand...


            Company 1 (W2) states I can do deferral of up to $53k (20% of IRS limit of $265k).

            Company 2 (K1) has a "profit sharing plan" where I can put up to 53k in each year, but it is categorized as 18k from me and 36k from employer, even though it all comes out of my paycheck.

            Comment


            • #7
              I also now of a company that offers EDP and the percentage election is for life. Now that percentage is for your gross salary with a max of 20%. So if you are only partime and makes 100k, your EDP would go only 20K.

              I would consider to put as much %in EDP as you can always adjust 401 k according to your needs. (Also in case that 1099 job is not what you were expecting)

              I would also double check that the EDP caps at 53. I would guess it would cap at 35k (53k - 18 of 401k)

              Now if any of your two jobs 1099/K1 or w2 gives you a match, then I would do the 401 with them.

              Comment

              Working...
              X