Author Topic: moving from w-2 to either 1099 or forming LLC in 2018- any advice appreciated  (Read 592 times)

MEJG

  • Bristles
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Hi All,

Sometime in 2018, probably around May, I will start freelancing.  I currently work a w-2 PT job between 20-25 hrs a week averaging about $3,500 take home a month, benefits include $1500 in CE, and about $2,000 in fees and dues, and about $1,500 in services through the company.  I do not have insurance through my current job, and the 401k is dismal so we don't utilise it. 

Freelance rates in my area for my profession are $75-90/hr and there is a large demand leading to pretty flexible scheduling and terms.  I will probably continue to work 20ish hours a week on average.   To complicate things I may also teach one or two classes a semester at a local college next fall, that would be w-2 work.

Currently MFJ in the 25% tax bracket, this is variable year to year due to bonuses and we will probably fall in the 12% bracket if the proposed tax bill goes through. State tax 5.5%.

While I know things will change if any tax reform is passed I'm looking to educate myself a little since I have no idea about this area of finance.  I really like our accountant but he is retiring after this tax season.  So I'm hoping someone can point me toward some resources.

An individual in the same profession advised that she has an LLC, and does an s-corp election for taxes.  She pays herself $2,000/month salary so she can contribute to a solo 401k and then take an owner draw quarterly. It would be phenomenal to have a second 401k that was worth contributing too, we currently utilise my husbands HSA and 401k.

Any advise or thoughts are appreciated! thanks!

trollwithamustache

  • Bristles
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Whatever form you pick for the business, plan on a separate bank account and credit card. it makes the record keeping way cleaner and easier.

Also, the transition to freelancing means keeping receipts and keeping track of any and all expenses that the accountant may be able to write off.

Finally, you mentioned tax rates. This is seemingly not MMM, but if those are target brackets you want to hit, you can always run up legitimate business expenses to decrease business income. i.e. get a new computer? Its weird getting used to, but there are cases where if you spend pretax money you not only get the item effectively cheaper, but by lowering income you back off the tax rate on your spouse or your W-2 income. 

MEJG

  • Bristles
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  • Posts: 251
  • Location: Northeast US
Finally, you mentioned tax rates. This is seemingly not MMM, but if those are target brackets you want to hit, you can always run up legitimate business expenses to decrease business income. i.e. get a new computer? Its weird getting used to, but there are cases where if you spend pretax money you not only get the item effectively cheaper, but by lowering income you back off the tax rate on your spouse or your W-2 income.

I mentioned tax rates only because tax reduction is a major part of our yearly planning and I know moving to freelance work with increase my taxes in some major ways.  If I can move more income into tax deferred space all the better.  Our average monthly spending is $6,000 (family of 5, soon to be 6).

I can easily tack ongoing business expenses, and am particularly looking forward to deducting travel/car expenses! 

SeattleCPA

  • Pencil Stache
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This might be a useful blog post for you... the example income is a little higher than you'll experience if you work 20 hours a week. But the logic still applies.

https://evergreensmallbusiness.com/million-dollar-s-corporation-mistake/

Also, maybe check out the other post listed at the end of first about using S corporations for part time businesses... that can be problematic.
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

mousebandit

  • Bristles
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Can I ask what you do for work?  Data gathering for revamping my employability. 

MEJG

  • Bristles
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  • Location: Northeast US
Can I ask what you do for work?  Data gathering for revamping my employability.

I am a veterinarian :) not something I reccomend to anyone anymore and not a very muatachian career change. Happy to answer questions, but in general not really a good financial choice, and for many of us not a good lifestyle choice either.

Cubert

  • 5 O'Clock Shadow
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I would ask your accountant to refer you to another accountant! Don't mess around with that stuff.

Also note, LLCs are the realm of attorneys, not accountants. Tread with caution making decisions there, if asset protection is a priority for you.

Best!
https://abandonedcubicle.com
40-something corporate middle manager who's also a devoted husband, father of two, and gearing up to retire early from Corporate America in July, 2019.

SeattleCPA

  • Pencil Stache
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  • Age: 58
  • Location: Redmond, WA
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Also note, LLCs are the realm of attorneys, not accountants. Tread with caution making decisions there, if asset protection is a priority for you.

Attorneys as a generalization can help you set up an LLC... but unless they're tax attorneys they generally don't know how the tax accounting works. Or how to optimize elections an LLC can make.

Also, a single-employee-single-shareholder-employee situation is not one where there is much liability protection...
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan