W2 + 1099 Side Gig (CA) Advice

[ProjectUlt]

Probably should have made this post last year, but better late than never.

Have been out of residency for 2.5 years, until last year I simply had a salaried W2 job with annual salary in the low 320s. In 2022, I supplemented w/ a 1099 side gig (made about 150k last year) and I anticipate making around 250k this year with my 1099 side gig and maybe a little more with some 1099 side stuff. Married, filing jointly, two children, wife does not work outside.

Here's the problem (and please pardon my ignorance), with simply my W2 job I was taking home around 70% of my income in the past years. However, for my 2022 tax return, I'm paying almost a whopping ~60% in taxes for that additional 1099 income (15% self employment tax on top fed/state). So essentially, I'm taking home roughly 40% of that additional 150k that I made from my 1099 side gig in 2022. I have some minor deductions like home office, leased car (deducting a portion of that for business). I don't own a house (renting currently), so I obviously lose out some deductions like SALT, mortgage interest. With my CPA, I was only able to deduct about 18k from that 150k income.

1) Does it make sense to open an S-corp to save on self-employment tax? I've gotten various answers talking to a few folks. Since I already have a FT w2 job, how do you go about giving yourself a reasonable salary from the 1099 side gig portion of your income in order to save more on that15% self employment tax.

2) I was under the impression that QBI was an option for me. Given the fact I'm over 450k in total income, I don't qualify?

2) As of now, I've not started contributing to retirement. Have been planning on saving that money for a down payment for a house in our very HCOL (SoCal). Of course with current interest rates, prices still high, I'm still in the waiting game. Compounding the issue is that my W2 employer does not provide any sort of 401k matching. I do have the option of 457(b) with this employer.

3) In general, am I missing something big lol? Doesn't make sense to continue working at this rate to only bring home 40 cent on the dollar on that additional 1099 income.

[Kamban]

Probably should have made this post last year, but better late than never.

Have been out of residency for 2.5 years, until last year I simply had a salaried W2 job with annual salary in the low 320s. In 2022, I supplemented w/ a 1099 side gig (made about 150k last year) and I anticipate making around 250k this year with my 1099 side gig and maybe a little more with some 1099 side stuff. Married, filing jointly, two children, wife does not work outside.

Here's the problem (and please pardon my ignorance), with simply my W2 job I was taking home around 70% of my income in the past years. However, for my 2022 tax return, I'm paying almost a whopping ~60% in taxes for that additional 1099 income (15% self employment tax on top fed/state). So essentially, I'm taking home roughly 40% of that additional 150k that I made from my 1099 side gig in 2022. I have some minor deductions like home office, leased car (deducting a portion of that for business). I don't own a house (renting currently), so I obviously lose out some deductions like SALT, mortgage interest. With my CPA, I was only able to deduct about 18k from that 150k income.

1) Does it make sense to open an S-corp to save on self-employment tax? I've gotten various answers talking to a few folks. Since I already have a FT w2 job, how do you go about giving yourself a reasonable salary from the 1099 side gig portion of your income in order to save more on that15% self employment tax.

2) I was under the impression that QBI was an option for me. Given the fact I'm over 450k in total income, I don't qualify?

2) As of now, I've not started contributing to retirement. Have been planning on saving that money for a down payment for a house in our very HCOL (SoCal). Of course with current interest rates, prices still high, I'm still in the waiting game. Compounding the issue is that my W2 employer does not provide any sort of 401k matching. I do have the option of 457(b) with this employer.

3) In general, am I missing something big lol? Doesn't make sense to continue working at this rate to only bring home 40 cent on the dollar on that additional 1099 income.

I might be mistaken but I thought that around 160K was the max income limit for SS tax with holding. So you might not have to pay that 6.2 % x 2 for that side gig. The Medicare tax has no income limit cap.

[spiritrider]

As pointed out by Kamban, after your W-2 Box 3 Social Security (SS) wages exceed SS maximum taxable earnings (MTE), 2023 = $160,200. No more SS taxes are deducted. Also, no SS self-employment taxes are due.

It would be totally counter-productive to use an S-Corp, because SS taxes up to the SS MTE must be deducted from all W-2 employees regardless of an other employer's W-2 SS deductions.

While you can receive a credit on your tax return for the 6.2% excess employee share of SS FICA taxes, the 6.2% employer share can not be recovered.

Not too mention CA S-Corps are subject to an additional 1.5% franchise tax that a sole proprietor does not pay.

You are not paying anywhere near a 60% marginal tax rate for 2022. As a sole proprietor, you will only be paying (2.9% Medicare tax + 0.9% ACA Medicare surtax), federal and state income taxes.

You are paying a 3.8% marginal Medicare tax rate, a 32% federal marginal tax rate, 10.3%/11.3% CA marginal tax rates. By my calculations, that is closer to a 45% margin tax rate than 60%

An S-Corp would only make that worse.

[ProjectUlt]

spiritrider Thanks for the response. Looking at my W2 for my state job, box 3 and 4 are blank. So my state job (public sector) doesn't pay SS taxes. Is that why I'm having to pay the full 12.4% SS tax on the additional 1099 income? Also, I wasn't sure what your thoughts on QBI was. My AGI is 500K (150k - 1099; 50k - cap gains; 300k - W2) and I saw that the QBI had a max limit of 440,100 for joint filers. Is there anything I can do to try to qualify for that? In my head, the only thing you can do is decrease your income.

Given this situation, does it make sense to open an S corp since my W2 job doesn't pay any SS taxes?

[Hank]

With a 1099, you are the employer, so you pay both the employer and employee sides of FICA taxes. Your on the hook for both halves of social security taxes up to $160,200.

[Kamban]

spiritrider Thanks for the response. Looking at my W2 for my state job, box 3 and 4 are blank. So my state job (public sector) doesn't pay SS taxes. Is that why I'm having to pay the full 12.4% SS tax on the additional 1099 income? Also, I wasn't sure what your thoughts on QBI was. My AGI is 500K (150k - 1099; 50k - cap gains; 300k - W2) and I saw that the QBI had a max limit of 440,100 for joint filers. Is there anything I can do to try to qualify for that? In my head, the only thing you can do is decrease your income.

Given this situation, does it make sense to open an S corp since my W2 job doesn't pay any SS taxes?

Why does you W2 state employer not pay his share of the SS taxes and have the employee part taken from you. You need to find that out first.

The S corp makes no sense in your case. Not sure why you seem to cling to it.

[ProjectUlt]

Why does you W2 state employer not pay his share of the SS taxes and have the employee part taken from you. You need to find that out first.

The S corp makes no sense in your case. Not sure why you seem to cling to it.

I work in the public sector, so I’m exempt from SS tax (we have a pretty crappy pension plan instead). looks like it really bites me with any additional side job (with paying the full brunt of that 12.4% SS) unless I change my w2 job

[Kamban]

I work in the public sector, so I’m exempt from SS tax (we have a pretty crappy pension plan instead). looks like it really bites me with any additional side job (with paying the full brunt of that 12.4% SS) unless I change my w2 job

You need to change to a proper W2 employer who pays the employer portion of the Social security and Medicare wages . That will net you $12.2K extra. You hopefully will have a 401K and 459 plans. And your side gig will be SS tax free.

[spiritrider]

Kamban, it is not unusual for public sector employees with pensions to be exempt from SS taxes. They make pension contributions in lieu of SS taxes.

They are also subject to the windfall elimination provision (WEP). This reduces any SS benefits unless they have 30 years of a certain minimum SS earnings. The reductions are pro-rated with 20-30 years.

OP, having a SS tax exempt W-2 job does materially change the S-Corp/Sole proprietorship equation. Even with the 1.5% CA franchise tax, $150K - $250K in gross profits might justify an S-Corp. You would save (12.4% - 1.5% = 10.9%) on your distributions/employer contributions.