Since I’ve been discussing 1099 a lot the last few posts, I thought I would provide an example from beginning to end. Talking about what to do is nice but I always find it easier to comprehend when you can see or read an example of what something should look like. In today’s post I’ll discuss what to do with your 1099 income from beginning to end starting with your business structure, retirement, business expenses, taxes, HSA and finally your pay.
1099 Business Structure
For this scenario, let’s use my own 1099 income as an example. For this job, I test residents and patients at assisted living and skilled nursing facilities throughout the Bay Area. I get paid $65 per hour for this job. For most people, setting up a sole proprietor should be fine. If you get paid entirely by 1099 and make a significant amount of income, you may want to incorporate as a S corporation.
Under an S corporation, you can have some of your money paid to you as dividends, saving you payroll taxes. The hassle of doing this doesn’t outweigh the benefit if you’re not making a ton of 1099 income. As a rough rule, anyone making close to 150k or more in 1099 income should incorporate.
From The Beginning
Since I clearly don’t make this much money, I’ll set up a business for my 1099 money to funnel to first. I can set up an actual business with legalzoom. Prices start at $99 plus state fees for filing a sole proprietorship. Believe me it’ll be worth it to let someone else deal with the paperwork. Dealing with the paperwork and deadlines is a pain. Plus you can write it off as a business expense on Schedule C.
Once you created your business you can apply for an Employer Identification Number (EIN). You can use your social security but you can apply for an EIN for free. That way you’re not sending your social security number to everyone. Next you’ll be need to open a business checking account.
I suggest you find a local bank that offers little to no fees or minimums. After talking to First Republic, they agreed to waive the fees and minimums for me. If they didn’t I probably would of banked with Navy Federal. Their fees and minimums are small. You finally created your business and now can have your 1099 money go to your business checking account.
You can now take money out periodically, say every week, two weeks or a month and deposit it in your personal checking account. This will provide better separation between your business and you as an individual. Plus it’ll make things easier when deducting business expenses when you can clearly see them in your business checking account statements.
Business Expenses with 1099 Income
This is an area where you want to focus on. You can pay for business expenses with pre-tax dollars instead of post-tax dollars as an employee. The list includes anything related to your business. So as a medical provider it may look something like this.
- Miles driven for your business
- Part of your car maintenance/repairs
- Rent/mortgage if you work from home
- the employer half of payroll taxes
- part of your phone bill
- Retirement contributions
You want to calculate ALL of your business expenses before April 15th on Schedule C. You’ll itemize all of your business expenses on this form every year. I plan to use most of these for my business tax deductions. If you have any questions feel free to reach out to a CPA. The cost of them will be greatly outweighed by the business tax deductions you’ll save.
Taxes On 1099 Income
Here comes the part that we all love. Taxes. I know but we need to pay our taxes. In order for us to calculate our tax burden we will look at how much we made last year. Typically we’ll multiply what we paid in taxes by 1.10% and then divide it by 4. You’ll pay quarterly federal taxes. States vary by date but California follows the IRS.
There are some Safe Harbor Rules that you can use to make sure that you’re paying enough in taxes so you don’t get in trouble with the IRS. However, if you were a student like me last year and made a minimal amount of money you won’t have to worry about taxes until April 15th of the next year.
For this 1099 example, I made about 2.5k last year. My mother gave me some old savings bonds that my grandparents bought me when I was a child. Since I only made 2.5k last year, I can divide that by 4 to get $625 each quarter for my 1099 job. I work a W-2 job as well and have more than $625 paid in taxes each quarter so I’m okay by the IRS.
Next year, I’ll have to calculate my taxes from what I made this year. Just remember to have enough taxes come April 15th. All of that 1099 money is not yours so put it in something safe.
Just like everything else so far, you’re going to have to figure out your retirement plan. I plan to use Fidelity because their customer service is great and their fees are very low. Feel free to use any other mutual fund company like Vanguard, Charles Schwab or E Trade. Remember that as a business owner, you can contribute of up to 37.5k as of 2020. As the employee, you can contribute up to 19.5k.
Let’s continue with my 1099 example and say I made 100k in 1099 income. You can contribute up to 20% of your business profit to your retirement. So in this example I can contribute up to 20k to my retirement. Personally I’ll go for a solo 401(k) because I can make less money and contribute more to my retirement than a SEP-IRA. Plus I get a little bit more asset protection from it. Lastly, it won’t stop me from doing a backdoor Roth in the future like a SEP-IRA would.
What To Put In Your 401(k)
If you’re totally unsure what you want to put in your 401(k) you can get a target retirement mutual fund. Essentially it’s a mutual fund that gets less aggressive as you approach retirement. It starts out heavy in stocks and eventually transitions to more bonds. It’s automatic and you don’t have to worry about it. Just make sure that the expense ratio is low. I’ve seen some of these mutual funds expense ratio as low as 0.15%.
If you look at what is inside the fund, you could just buy the funds in it for cheaper. It just requires a little bit more work. Either way just max out your retirement. There are several asset classes that you should be aware of that you can place in your retirement account.
Personally I plan to be 100% stocks for a couple decades in my retirement account. This is pretty aggressive but I won’t retire for decades so I can afford to take this risk. I’ll probably have some split between large growth stocks like the S&P 500 or Total U.S. Stock Market, some amount in Total International Stocks and a portion to REITs.
This is my plan for my retirement account but feel free to do whatever you like. Just make sure the fees are low and you diversify your investments by investing in different asset classes. This example of your 1099 is very flexible. This plan doesn’t fit for everyone so I encourage you to read more.
HSA and 1099
If you have a high deductible low premium health care plan then you may qualify for an HSA. In this account, you can use pre-tax dollars and invest it in any asset class you like. It grows tax free and you can take it out for pre-qualified medical expenses for free. I’m personally looking at Kaiser because they’re a bit cheaper than most other companies. Personally, I’ve seen plans as low as $350/month.
After you have done all of this, can you put some of that money into your personal checking account. You can pay yourself weekly, biweekly or even monthly just do it regularly if you can. This whole process will make yourself more legitimate under the eyes of the IRS and allow you to keep as much of your money as possible. I hope this example of a 1099 will help you know what to do.
How did you set up your business? What steps were the hardest and do you prefer 1099 over W-2 income? Comment below.
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