Author Topic: Independent Contractors: Advice to Yourself When Getting Started?  (Read 3211 times)

onemorebike

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I've recently fallen into multiple side gigs that now comprise several jobs where I will be taxed as an independent contractor. I'm curious to those of you out there that are independent contractors/1099ers: what advice would you have given yourself at the onset?

I'm looking for general advice but also, specifically:

1) How did you track expenses? (for example, can a cup of coffee or meal a day at a cafe count as rent when you don't have an office space? Or, is it easier to claim a part of your home as office space?)

2) Is it wise to set up a separate account or credit card to pay expenses? Recommendations on type of card?

3) How do you expense work travel when you use your bicycle to get to most meetings? :)

4) Other ideas for being smart while getting started?

Thank you in advance for your feedback!

-onemorebike

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #1 on: June 10, 2015, 07:19:56 PM »
Set aside 30% of every check, without exception, for taxes, that or change your withholding at your day job, but that's really only something you can plan for in Year 2, so for now, set aside.

CowboyAndIndian

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #2 on: June 10, 2015, 08:28:41 PM »
Here are some that I can suggest
  • Create an LLC, not an S-Corp. It will save you a lot of paper work such as quarterly filings.
  • Separate bank account for your LLC. Use the debit (Visa/MC) card for this account for any expenses. Much easier to keep track of expenses. Never mix this with personal bank account.
  • Set up your Individual 401k and stash away. You should be able to put unto 54k(ballpark figure) if you earn enough

Best of luck.

ChicagoGirl

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #3 on: June 10, 2015, 09:10:02 PM »
I second the comment about setting aside enough money for taxes because you are taxed at a different rate than those who receive a W2 vs. 1099

1. Familiarize yourself with IRS rules on deduction of expenses, specifically rent and home office deduction eligibility. (The answer to your question..NO, a cup of coffee/meal at a cafe cannot be counted as rent, but may be deductible if it fits the guidelines for Meal deductions, remember to keep your receipt and what it was for specifically.

2. Be organized. Keep meticulous records and save your receipts. Use a ledger, spreadsheet whatever works for you. Personally I track my expenses in an Excel spreadsheet and update it on a weekly basis. My gig isn't big enough to justify a Quickbooks purchase yet, so Excel works fine for me.

3. There are some great books to get at the library regarding home-based businesses and being an independent contractor that addresses many issues regarding expenses, what kinds of records to keep, etc. 

4. Maximize your tax deductions by familiarizing yourself of what can and cannot be deducted. Don't stretch the truth when filing your taxes, the IRS does not mess around. 

5.  Yes, I would keep a separate account for your side business.

As for how it would work using your bike as a transportation expense...you might want to ask a tax expert if maintenance, etc is deductible.  My guess is no...but a tax professional might know better.

Good luck!





hokiegb

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #4 on: June 11, 2015, 05:38:06 AM »
For my rental house I am using an open source bookkeeping program (GnuCash) to track all of my expenses. And I'm saving all of the receipts to back up the expenses. The tough part (for me) is making myself sit down routinely and enter everything into the program, but once I do it makes tax prep so much easier.

onemorebike

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #5 on: June 14, 2015, 04:57:47 AM »
Thanks everyone for the tips! I set up a separate savings account on Friday to funnel the ~30% into and applied for a separate credit card that I'll use exclusively for work related expenses. I am actively using "Expensify", a neat little app that let's you snap a pic of a receipt and then associates it with the expense from your CC making expense tracking a breeze. I believe it also has a mileage feature, though I still haven't figured out how I can write off bike mileage.


BlueHouse

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #6 on: June 14, 2015, 06:49:45 AM »
I think it makes great sense to become an s-corp or Llc when income exceeds $150k. There is a cutoff, but I'm not sure exactly what it is.
Reasons: 
1.  Take 150k in salary so you can stash 53k in a 401k - (defer taxes on 53k x .33)
2. Income over 150k can be taken as shareholder distribution- (save 2.9% on all earnings over your salary)
3. Expenses come off the the top.

Under 150k, I'm not sure the extra paperwork is worth it.

forummm

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #7 on: June 14, 2015, 07:06:24 AM »
Nolo has some very good and inexpensive books about running a small business and tax rules for small businesses. And creating an LLC. You'll want an LLC. Definitely keep your business expenses and income in separate accounts. You can "pay yourself" by transferring funds to your personal account. But for tax purposes keep things separate.

protostache

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #8 on: June 14, 2015, 10:05:09 AM »
I think it makes great sense to become an s-corp or Llc when income exceeds $150k. There is a cutoff, but I'm not sure exactly what it is.
Reasons: 
1.  Take 150k in salary so you can stash 53k in a 401k - (defer taxes on 53k x .33)
2. Income over 150k can be taken as shareholder distribution- (save 2.9% on all earnings over your salary)
3. Expenses come off the the top.

Under 150k, I'm not sure the extra paperwork is worth it.

There's no statutory cutoff, if that's what you're saying. The thing that makes an S-corp election worth it is that you can pay yourself a reasonable W2 salary and then take the rest of the profit as distributions. You have to pay Federal and state tax on everything but you only pay Social Security and Medicare on the W2 portion, saving 15.3% on the excess.

The social security max for 2015 is $118,500. Any W2 above that you're just paying Medicare on. The maximum tax deduction for 401(k) contributions is $53k.  You max your tax-deductable 401(k) at $140k W2 salary ($18k + ($140k * 25% = $35k)). To completely max out your 401(k) that means you need to gross at least $184k ($140k W2 + $35k employer contribution + $9k for SS/Medicare) plus other deductible expenses.

Depending on how fancy you get with the 401(k) and your exact income it may make sense to make non-Roth voluntary contributions above the elective deferral instead of maxing your W2 salary, since you can roll those into a Designated Roth sub-account and then into a Roth IRA. I haven't done the math on this.

BlueHouse

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Re: Independent Contractors: Advice to Yourself When Getting Started?
« Reply #9 on: June 14, 2015, 03:26:57 PM »
I think it makes great sense to become an s-corp or Llc when income exceeds $150k. There is a cutoff, but I'm not sure exactly what it is.
Reasons: 
1.  Take 150k in salary so you can stash 53k in a 401k - (defer taxes on 53k x .33)
2. Income over 150k can be taken as shareholder distribution- (save 2.9% on all earnings over your salary)
3. Expenses come off the the top.

Under 150k, I'm not sure the extra paperwork is worth it.

There's no statutory cutoff, if that's what you're saying. The thing that makes an S-corp election worth it is that you can pay yourself a reasonable W2 salary and then take the rest of the profit as distributions. You have to pay Federal and state tax on everything but you only pay Social Security and Medicare on the W2 portion, saving 15.3% on the excess.

The social security max for 2015 is $118,500. Any W2 above that you're just paying Medicare on. The maximum tax deduction for 401(k) contributions is $53k.  You max your tax-deductable 401(k) at $140k W2 salary ($18k + ($140k * 25% = $35k)). To completely max out your 401(k) that means you need to gross at least $184k ($140k W2 + $35k employer contribution + $9k for SS/Medicare) plus other deductible expenses.

Depending on how fancy you get with the 401(k) and your exact income it may make sense to make non-Roth voluntary contributions above the elective deferral instead of maxing your W2 salary, since you can roll those into a Designated Roth sub-account and then into a Roth IRA. I haven't done the math on this.
Prostacyclin nailed it. You want to hit the sweet spot on taking salary so that you can get the max into your 401k. That means take at least 140K as salary. Then use extra profits to get that 401k to the max 53k.
Yeah, I didn't mention the social security savings, because at this level, you would have already paid out the max contribution to SS, so no additional savings there.