Consulting - taxes, ACA and other things to consider

[bearkeley]

Couldn't say no to my old boss and quickly said yes to consulting, 8 months into retirement. I negotiated a fair rate covering FICA and total cash comp into my hourly rate. Now I'm wondering what impact (benefits hopefully) it has on our taxes, ACA and other things I should consider.

We have rental property investments, so assuming I could easily write off expenses incurred as a consultant. Is there anything else that's different? (Hubby is still working this year so impact on our tax rate should be minimal)

Any advice on Roth retirement contributions, healthcare (hoping to go on Obamacare in December), or anything else? Thanks!


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[RockyMtn]

ACA pretty much determined by MAGI so it is all going to depend on what that number is.

What exactly do you want to know about Roth contributions, healthcare or anything else? How they affect your ability to take advantage of ACA?

[Sunset]

You can open a Vanguard solo 401K this year (paperwork takes few weeks).

https://investor.vanguard.com/what-w...ndividual-401k

You as a consultant with yourself as the employee and employer are both eligible to contribute.
Then you can contribute as "your employee" the 401K limit PLUS as the employer you can contribute up to 25% of you Net profit.
The total max if you earn a lot is capped at $59,000.00

You can open a IRA type 401K and a roth type 401K, or just one if you only want one.
Note: the employer portion has to go into the IRA type 401K

You may also want to get professional error and omission liability insurance. It's not too expensive

[bearkeley]

Quote:

Originally Posted by RockyMtn What exactly do you want to know about Roth contributions, healthcare or anything else? How they affect your ability to take advantage of ACA?

I am wondering if there are advantages I'm not aware of....for example, would incorporating be worth considering? If we have the corporation, for example, pay for our medical (as employees of the corporation), would it be better than just buying insurance on the exchange? Any special opportunities to reduce taxable income?


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[MBSC]

In some areas, an insurance company's individual ACA plans (on and off exchange) are narrow network HMOs. Some families have formed small businesses to gain access to the insurer's small group PPO plan with a broad provider network. I am not qualified to speak to the tax consequences.

[FIREmenow]

Quote:

Originally Posted by Sunset You may also want to get professional error and omission liability insurance. It's not too expensive

+1. Do this.

[pb4uski]

The ACA question depends on your state... in my state small employers (under 50) must buy their insurance through the state exchange... but health insurance is not age-rated in our state so it is very similar to what small group policies were before ACA.

If you were near the top of the 15% tax bracket before your consulting income and have significant qualified dividends or long-term capital gains so your consulting income pushes you over the top of the 15% bracket then your marginal tax rate on you consulting income may be really high.... 45% or so would not be unheard of... and that is just federal.

For example, let's say you had $1k of interest income, $20k of qualified dividend income, $20k of LTCG and $50k of rental income/pensions, etc. Your federal tax bill, assuming joint filing and standard deductions would be $3,911. Add $20k of consulting income to that and your tax bill is now $12,911... a $9k increase on an additional $20k of income.

Use https://turbotax.intuit.com/tax-tool...ml5/index.html to see the impact on you and if you are in that situation look into a solo 401k.

[Dwhit]

Be sure to check out the IRS rules for independent contractors/consultants. If the IRS audits and decides you took significant direction from your employer, they can rule you as a regular employee. Then your deductions go out the window, and your employer gets a hit for not withholding taxes, Social Security, etc.

[Sunset]

Quote:

Originally Posted by Dwhit Be sure to check out the IRS rules for independent contractors/consultants. If the IRS audits and decides you took significant direction from your employer, they can rule you as a regular employee. Then your deductions go out the window, and your employer gets a hit for not withholding taxes, Social Security, etc.

Yes, but it does not hurt the contractor. Which is why years ago Microsoft Contractors sued to be considered employees.

So not a big threat in my books, larger threat is you screw up something and the software is broken for few hours. As an employee you fix it and that's the end of the story, as a contractor, you fix it and hope employer does not say "That outage cost us about $44,000 in lost sales, or we had to pay 30 workers 3 hours of idle time"

That's why I got liability ins for E&O.

[Animorph]

Quote:

Originally Posted by Sunset You can open a Vanguard solo 401K this year (paperwork takes few weeks). https://investor.vanguard.com/what-w...ndividual-401k You as a consultant with yourself as the employee and employer are both eligible to contribute. Then you can contribute as "your employee" the 401K limit PLUS as the employer you can contribute up to 25% of you Net profit. The total max if you earn a lot is capped at $59,000.00 You can open a IRA type 401K and a roth type 401K, or just one if you only want one. Note: the employer portion has to go into the IRA type 401K You may also want to get professional error and omission liability insurance. It's not too expensive

I used both 401k and Roth 401k. I was able to deduct about the first $30k of earnings I think by using the plain 401k. That might help your ACA subsidies if you are worried about that. You can also contribute to a Roth IRA independently as long as you have earned income (inside the 401k or not) to cover it.

[spncity]

Quote:

Originally Posted by Sunset You as a consultant with yourself as the employee and employer are both eligible to contribute. Then you can contribute as "your employee" the 401K limit PLUS as the employer you can contribute up to 25% of you Net profit. The total max if you earn a lot is capped at $59,000.00

Does the employee portion put into the Solo 401K take away from the net profit of the employer portion (the amount upon which the 25% is calculated?) I understand business expenses would be deducted to get the net profit - just wondering about that employee contribution part.

[Sunset]

Quote:

Originally Posted by spncity Does the employee portion put into the Solo 401K take away from the net profit of the employer portion (the amount upon which the 25% is calculated?) I understand business expenses would be deducted to get the net profit - just wondering about that employee contribution part.

No it doesn't, which I admit I thought was odd the first year.

You are correct it is on the NET profit.
The net profit is calculated a bit complex but its small, I put in all my employee amount, and then put in within $500 of the employer amount based on the Vanguard calculator (link at bottom of the page) , then when I do my taxes, the tax software gives me the exact number and I top off my contribution.
Simply put it is this:
Gross income - expenses - (a small tax amount) = Net Profit.

[spncity]

Quote:

Originally Posted by Sunset No it doesn't, which I admit I thought was odd the first year. You are correct it is on the NET profit. The net profit is calculated a bit complex but its small, I put in all my employee amount, and then put in within $500 of the employer amount based on the Vanguard calculator (link at bottom of the page) , then when I do my taxes, the tax software gives me the exact number and I top off my contribution. Simply put it is this: Gross income - expenses - (a small tax amount) = Net Profit.

Okay, good. Thanks. So does the employer contribution to Solo 401-K decrease MAGI for the purpose of ACA subsidy? Sorry if I'm asking what has been answered.

[Sunset]

Quote:

Originally Posted by spncity Okay, good. Thanks. So does the employer contribution to Solo 401-K decrease MAGI for the purpose of ACA subsidy? Sorry if I'm asking what has been answered.

I don't do ACA subsidy, so I can only tell you what I see on my return.
It lowers your Adjusted Gross Income (line 37 ) due to an entry on line 28 for the IRA contribution.

My opinion is:
However MAGI adds back IRA contributions, but the important question is does this refer to line 32 or line 28 on the return, and I think it refers to line 32.
As the line 28 (employer 401K contribution) does not reduce the tax of the employee, but reduces the gross income of the employer.

The way to tell would be to do a simple return with tax cut to see.

[pb4uski]

For Obamacare, MAGI does not add back deductible IRA contributions.

See http://laborcenter.berkeley.edu/pdf/..._summary13.pdf

[EastWest Gal]

And as an independent contractor, your health insurance premiums are deducted from your income. It is directly on the 1040, not a business expense.


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[target2019]

Having been working off a Schedule C for many years, as well as an employee on and off, it makes sense to try and project things as you are saying. First, open a Schedule C on your tax program. Add a 1099 with $X,XXX, see what happens. Then go to Sched C and fill in expected business deductions. Each deduction you take requires some understanding about what is permissible.

It's possible that you may not be profitable, and therefore can't deduct a retirement plan. Of course you can take all the 1099 income as profit, and maximize retirement plan deduction. Then you may affect ACA more.

[spncity]

All very helpful. Appreciate OP's topic and contributors to the thread.

[bearkeley]

Wow...a lot of great info to research! To qualify for employee and employer solo 401k deductions, will I need to incorporate or is a 1099 filing as an independent consultant enough? Since DH worked most of the year, this would be a great option.

For next year, however, if we can deduct healthcare premiums, it might be worthwhile to consult for just enough hours for the write off.....am I understanding this correctly? Would this also reduce MAGI for Obamacare subsidies given that it comes right out of the 1040?




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[spncity]

You don't have to incorporate.


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