Tax reduction for 1099 wages

[Dogtor]

I’m sure this is a common question and I’ve seen a few similar threads, but I want to make sure I’m not missing anything.

I have about 50K in 1099 wages in the first quarter of 2023 and am getting ready to make a quarterly payment per my CPA. I’m expecting 1099 income to total around 200K this year. I also have approximately 225-250K in W2 income.

My CPA is telling me I should pay 18K in taxes for Q1. Can you all remind me what I can deduct to reduce this tax burden? An effective rate of 36% in a state with no state income tax sounds pretty awful to me.

I will have about 2500 miles to deduct and some scrubs purchases (I don’t wear scrubs for my W2 job). I also have a solo 401K that I plan to contribute to - although I’m still concerned about what I’m actually allowed to contribute. Do most people just figure this out at the end of the year once they’ve established their profits for their 1099 work? I would love to contribute as I go along but if I have additional business expenses it may have me over-contributing. I can ask about a home office although I’m not sure that one will fly.

With all of that accounted for I believe that’s still a taxable 1099 income of just over 38K. Does this sound right? Anything I’ve forgotten here?

Thanks in advance!

[The White Coat Investor]

Deduct all business expenses and max out a tax-deferred contribution for the employee and the employer to the solo 401(k).

https://www.irs.gov/pub/irs-pdf/p535.pdf

Common deductions for docs include equipment, clothing, work mileage (not commuting), licensing costs, board certification costs, DEA costs, CME costs, memberships, subscriptions etc.

To get the home office deduction you must have a space which is used regularly and exclusively for your business.

[Dogtor]

Deduct all business expenses and max out a tax-deferred contribution for the employee and the employer to the solo 401(k).

https://www.irs.gov/pub/irs-pdf/p535.pdf

Common deductions for docs include equipment, clothing, work mileage (not commuting), licensing costs, board certification costs, DEA costs, CME costs, memberships, subscriptions etc.

To get the home office deduction you must have a space which is used regularly and exclusively for your business.

Thank you!

My W2 job covers all of my licensing, DEA, CE, etc. I also max out my 401k with them for the measly match they offer, but I’ll contribute the employer portion to my solo 401k.

Sounds like I’m probably already hitting all the big things.

[spiritrider]

I have just replied to this issue of the timing of self-employed one-participant 401k plan employer contributions on another thread. However, that reply was tangential to the OP's question. I will repeat it here as it is far more on point.

• Self-employed maximum employer contributions are 20% of net earnings from self-employment (self-employed earned income) = business profit - 1/2 SE tax.
• You have until your tax filing deadline including extensions to make employer contributions.
• Excess employer contributions made during the tax year:
  • can not normally be returned
  • are non-deductible
  • require the filing of Form 5330
  • Subject to a 10% excise tax on the excess employer contribution balance until reconciled
• For this reason, many CPAs recommend only making employer contributions when filing their tax return
• This conservative approach is the safest, but I recommend a more moderately safe approach:
  • Make employer contributions no more than the maximum based on estimated taxable income for the IRS "quarter" on the respective dates (4/15, 6/15, 9/15 and 1/15)
  • The employer contributions for the 4th quarter will be made in the following

[livtex]

Another 1099 related question.

Started consulting late feb early March. I have a detailed log of hours. The company I’m consulting for just sent me directions for reimbursement so likely won’t be getting a first check for 1-2 weeks.

Do I pay taxes this quarter? Or on July 15 since the first paycheck i am receiving is in April?

Thank you!

[spiritrider]

You are a cash basis taxpayer and constructive receipt occuring after 3/31 would be in the second quarter. Refer to Form 1040-ES and instructions on estimated taxes.

IRS "quarters" are; 1/1 - 3/31, 4/1 - 5/31, 6/1 - 8/31 and 9/1 - 12/31. Estimated taxes for those quarters a respectively due; 4/15, 6/15, 9/15 and 1/15.

As my post immediately preceding yours indicated. The second quarter estimated taxes are due by 6/15 and not 7/15.

[livtex]

Spiritrider, you are my hero.

Another dumb question.

If I am a single member LLC (I have no employees, I am essentially doing consulting on my own for a large medical group). How do I fill out section 3 of the W9?

Do I check the line that says 'indiviual/sole properietor or single member LLC'?

Or do I check the following line 'Limited Liability Company. Enter the tax classification, C, S, P'.

Thank ya'll again for your help.

[TheTodd]

I am in a similar boat. I have a W2 job which will the vast majority of my time. This covers my licensure, boards, etc and already have maxed out profit sharing/cash balance plans.

I then am starting a 1099 job consulting for a medical device company, but limited in scope, <5% of my income.

In this setting, what can i deduct? I know mileage driving to and from my 1099 gig (not my main place of employment), but can I deduct the cost of the car payments? If so should it be prorated by the % of time spent using it for consulting vs. W2 gigs?. I don't have a true home office and already can deduct my phone/internet plans through my main employer. I don't need any other new equipment. Any other deductions I might be missing?

[IMinMS]

My non-medical wife is in a situation in which she will make ~50k of 1099 income while she builds up her consulting business (transitioned from previous W2 so only 10k in W2 this year). She will deduct SE tax as above as well as the home office deduction. That said, we intend to try to maximize her QBI deduction so I’m thinking we may shy away from pretax solo401k contributions as our marginal taxable income bracket will likely be 24% given a transition of jobs on my end this year. Instead, I was thinking of doing after tax 401k contributions (therefore not limiting her QBI deduction) with immediate rollover to Roth IRA through Fidelity solo 401k to Roth IRA (essentially MBD Roth) given the relatively low marginal tax bracket we’re in, even if that would leave her with available pretax 401k. We have already been able to max out pretax 401k, governmental 457b and my own MB Roth in addition to his/hers BD Roths for this year. That calculus may change next year when we would be in the 32-35% bracket but does this seem like a reasonable plan? If she were to get a new W2 job later this year, we would of course max out her remaining pre-tax 401k space at that time.

[jfoxcpacfp]

My non-medical wife is in a situation in which she will make ~50k of 1099 income while she builds up her consulting business (transitioned from previous W2 so only 10k in W2 this year). She will deduct SE tax as above as well as the home office deduction. That said, we intend to try to maximize her QBI deduction so I’m thinking we may shy away from pretax solo401k contributions as our marginal taxable income bracket will likely be 24% given a transition of jobs on my end this year. Instead, I was thinking of doing after tax 401k contributions (therefore not limiting her QBI deduction) with immediate rollover to Roth IRA through Fidelity solo 401k to Roth IRA (essentially MBD Roth) given the relatively low marginal tax bracket we’re in, even if that would leave her with available pretax 401k. We have already been able to max out pretax 401k, governmental 457b and my own MB Roth in addition to his/hers BD Roths for this year. That calculus may change next year when we would be in the 32-35% bracket but does this seem like a reasonable plan? If she were to get a new W2 job later this year, we would of course max out her remaining pre-tax 401k space at that time.

I think you may be hyper focusing on the QBI for whatever reason. I would put retirement first but you are ending up there with Roth/after-tax/MBDR 401k contributions. And I love me some Roth IRA space! However, you may be getting into needing a (qualified) CPA territory, one who understands all of these issues, how they intersect, and the resulting choices. Which could, of course, lead to related financial planning to determine where your choices will lead you to in the future and understanding how they compare to your future goals.

[IMinMS]

I think you may be hyper focusing on the QBI for whatever reason. I would put retirement first but you are ending up there with Roth/after-tax/MBDR 401k contributions. And I love me some Roth IRA space! However, you may be getting into needing a (qualified) CPA territory, one who understands all of these issues, how they intersect, and the resulting choices. Which could, of course, lead to related financial planning to determine where your choices will lead you to in the future and understanding how they compare to your future goals.

I think the comparison is either taking a 24% deduction (given our marginal bracket) to contribute to a pre-tax 401k (and thereby foregoing the 20% QBI deduction on that income) or biting the bullet and contributing either directly to a Roth solo401k or the MBDR Roth solo 401k while still benefiting from the 20% QBI deduction. It seems clear to me that paying that 4% tax differential now is a small price to pay to be able to lock in more Roth space, especially considering I’ll have to eventually pay tax on my pre-tax 401k contributions at a rate much higher than 4%. Just checking to see if there’s anything I’m missing/not thinking about correctly.