I'm confused. I'll try to help, but there are a lot of confusing thoughts/questions here.
I know that I will have to lower contribution from my full time employer, but (if I understand this correctly) I would be avoiding 'double taxation' if I place the 1099 income into the 401k instead of my full time, W2 income.
I have no idea what you mean by double taxation here - are you referring to paying both halves of the SE/FICA taxes? Either you are W-2 and use a 401K, or you are 1099 and use a solo 401k/SEP type vehicle. Both do the same thing - defer federal (and state if applicable) income taxes. Neither gives you an inherent advantage over the other in tax savings that I'm aware of. The big difference between all of them is how much you are allowed to contribute annually and what the contributions are based on. Neither of them avoid double taxation.
My Roth is also being maxed.
Roth IRA? Roth 401K? Can you just do a traditional IRA contribution rather than creating a new vehicle?
I also recently starting doing promotional work on the side, from which I am usually paid as an independent contractor. I am considering opening a solo 401k to shelter this income from personal tax & self-employment taxes. I plan to make around 5k this year on the side and maybe around 10k next year.
So I'm not the leading expert on Solo 401k's, but I just did a lot more reading on them based on the bolded part above. In my experience preparing tax returns, if you are a sole proprietor or an LLC you don't get to deduct employer contributions to a retirement plan from the business operations. Maybe I'm missing something here, but I don't think a solo 401k by itself will help you avoid SE taxes. If anyone has evidence to the contrary I'd love to see it.
When should I think about classifying myself as an S-corp? Should I be making more to make this worth it?[/b]
Classifying as an S-Corp is an easy change that has advantages, but it also requires more annual paperwork. If you are sole-proprietor or LLC you can file all this activity on your Schedule C within your 1040. If you change to S-Corp you have to file an annual S-Corporation tax return, track your shareholder basis, and put the K-1 activity from he S-Corp into your 1040.
What an S-Corp can do for you is allow some SE tax avoidance, but usually only a small amount, and usually only to the extent that you have employees or equipment that you are earning a profit on. Any of the revenue earned solely by your efforts is considered earned income and therefore is technically supposed to be subject to SE tax. If you do an S-Corp and Solo 401k or Simple IRA, then you
might/should be able to deduct the employer contributions to the plan against your SE income which would therefore reduce your SE tax.
As to when you should do this, the added complications (and possibly costs depending on how much of this paperwork you are comfortable doing) is a personal choice. You might want to calculate what the potential cost savings might be, then evaluate how much it might cost you in your time and/or professional fees to accomplish this. Then don't do it until you cross over the breakeven point.
I hope that's helpful and not too confusing. If I'm wrong about anything here, please feel free to correct me mustachians, but that's how I see this scenario.