Moonlighting Tax Liability/Debt Reduction Plan

[newbie]

As the handle suggests, I am new to trying to manage money and would like some insight in to how to maximize my moonlighting income/minimize my tax liability to pay down my debt. I just got the WCI book and have been trying to do some reading online but the rules for 1099 income are still somewhat confusing to me -- it seems certain parts of my tax liability can be reduced but not others and I don't fully grasp the specifics.

Some background: Grew up well below the poverty line, made it through college and med school with a moderate amount of educational debt and a large amount of consumer debt due to family crises I had to manage. I am currently in residency and moonlighting as much as I can to aggressively pay down my high interest consumer debt before graduating so I can refinance my educational loans and move toward financial independence.

I have made about 15-20k in 1099 income so far this year and anticipate another 5-10 before the year ends. I am currently putting about 30% into savings for anticipated taxes at the end of the year because I figured it was better to have too much saved rather than not enough and get fined. At first, I didn't mind it because everything felt like extra money but now I'm starting to wonder if I could be putting those thousands of dollars in some other type of account for myself instead.

Would contributing to an HSA or increasing my 403b contributions through my W2 job decrease my tax liability significantly? If so, is there an easy way for me to calculate by how much (I want to make sure I still have plenty set aside for my tax bill)? Are there other options you would suggest instead? Should I just hire a CPA this year for help?

If it helps, other tax info for me: married, spouse without income this year, renting home, expecting first child before the end of the year

Thanks in advance for any advice you have to share!

[DMFA]

newbie wrote:

Some background: Grew up well below the poverty line, made it through college and med school with a moderate amount of educational debt and a large amount of consumer debt due to family crises I had to manage. I am currently in residency and moonlighting as much as I can to aggressively pay down my high interest consumer debt before graduating so I can refinance my educational loans and move toward financial independence.

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That's rough that you had to dig yourself that hole, but you seem like you're doing everything you can to overcome that.  Love that grind, man.  The consumer debt is an appropriate first priority.  Are you eligible to play "hot potato" with low- or zero-interest balance transfers?  Might be something to consider in order to stop the bleeding while you pay it back.

newbie wrote:

I have made about 15-20k in 1099 income so far this year and anticipate another 5-10 before the year ends. I am currently putting about 30% into savings for anticipated taxes at the end of the year because I figured it was better to have too much saved rather than not enough and get fined. At first, I didn’t mind it because everything felt like extra money but now I’m starting to wonder if I could be putting those thousands of dollars in some other type of account for myself instead.

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You're subject to self-employment tax, which is both the employee and employer portions of SS and MCR totaling 15.3%, on it.  You're also subject to income tax.  You'll probably file schedule C and schedule SE of form 1040 and its figuring is there.  The way you do this is:

• Start with total income from self-employment (sched C box 7)


• Subtract all "business expenses" (sched C box 28) from self-employment to determine "net profit" (sched C box 31).  It's debatable what entirely this entails.  Some say it's anything that you needed to do in order to do it, like licensing fees, board exams (initial licensing not covered, but is that the training permit or full license?), white coats, miles driven *between* work sites, etc.  Some go as far to include their cell phones, computers, and relevant bills because they use them for reference or charting...that's a bit extreme imo.  Some say you can deduct the whole thing, others just the prorated amount you used it for moonlighting.


• Multiply net profit (sched C box 31) by 0.9235 (you get a 7.65% exemption from SE tax) to figure the amount subject to SE tax (sched SE line 4)


• This is probably going to be less than $127,200, so all of it is subject to SS tax


• Multiply that by 0.153 (you owe 6.2% for SS and 1.45% for MCR, both as employee and employer) to figure SE tax (sched SE line 5)


• You get to deduct half your SE tax (sched SE line 6) as an adjustment or "above-the-line deduction" from your AGI (since you paid it as an employer and shouldn't be income-taxed on it as well)


• So, if you make under $127,200, SE tax is 14.13% (0.9235 * 0.153) of income minus expenses.

You're also subject to income tax on what you earn as a whole, including your W-2.  This is based on your tax brackets to figure your effective rate.  Remember, half your SE tax is deducted from your income tax (you've already paid it).  So if you're self-withholding 30% of your SE income, then you're assuming your effective income tax rate to be 15.87%.  This means your taxable income would be $93,300, so assuming MFS, 3 exemptions ($4,050 ea) and standard deduction ($12,700), your AGI would be $118,150.  That's a bit higher than I'd expect for a resident earning about $30k from moonlighting, so you may not need to self-withhold as much...but better safe than sorry imo.

newbie wrote:

Would contributing to an HSA or increasing my 403b contributions through my W2 job decrease my tax liability significantly? If so, is there an easy way for me to calculate by how much (I want to make sure I still have plenty set aside for my tax bill)? Are there other options you would suggest instead? Should I just hire a CPA this year for help?

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First, for an HSA, you need to make sure you have a qualifying HDHP, If your employer can make HSA contributions for you, then that will reduce your taxable income both for income tax *and* payroll taxes (SS, MCR).  If it's not related to your employer just yours, then they're an "above-the-line" adjustment (i.e. beyond just std deduction) to just your income tax.  Still not awful.  You're probably in the 25% bracket, so every $4 you put into your pretax 403(b) reduces your tax liability by $1.  However, if you're dealing with consumer debt, you'd probably be better served by eliminating the high-interest debt than putting the pretax investment in, tax deduction or no.

Re: hiring a CPA, *probably* not completely necessary but not a bad idea; I'm not going to tell you not to do it because I'm not a financial professional or giving direct, targeted advice as to what to do; I'm just filling knowledge gaps.  Where I think your money would be better spent on money-stuff is on a financial planner to sit down with you and go over every single dollar and what you'll need: consumer/student debts, retirement accounts, insurances, budgeting, etc.

[hightower]

Aren't you supposed to be paying taxes quarterly if you are making 1099 income?  Sounds like since you're just starting out a CPA wouldn't be a bad idea to at least get you on the right track.

[spiritrider]

hightower wrote:

Aren’t you supposed to be paying taxes quarterly if you are making 1099 income?  Sounds like since you’re just starting out a CPA wouldn’t be a bad idea to at least get you on the right track.

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You can pay your 1099 income/SE tax liability by either making quarterly estimated payments or increasing your W-2 withholding. The latter can be skewed towards the end of the year, because withholding is treated as being equally withheld during the year.

There are three safe harbors that allow deferring your full tax liability until your tax filing deadline without extensions:

• Withholding + estimated tax payments > your 2017 tax liability - $1,000


• Withholding + estimated tax payments >= 90% of your 2017 tax liability


• Withholding + estimated tax payments >= 100% (110% if AGI >= $150K) of your 2016 tax liability

[DMFA]

hightower wrote:

Aren’t you supposed to be paying taxes quarterly if you are making 1099 income?  Sounds like since you’re just starting out a CPA wouldn’t be a bad idea to at least get you on the right track.

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spiritrider explained it, but if you want to go to the source: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

...truly, honestly, I find the IRS's website to be fairly decently digestible and informative.

[jfoxcpacfp]

Maybe this post will help:

How Do I Figure Taxes for a Side Business (1099)?

If you're not finished residency/fellowship this summer, change the 40% to 30%, as you've done. FICA will add 15% to your 15% income taxes. And don't forget to save extra for state income taxes if there is a tax code where you reside.