Yes, I am a numb nut and not post savvy. Someone tell me how you quote parts of someone's post and then comment below?? In the meantime, I have tried to respond doing it the old fashioned way with cut/paste. My comments in caps...
The Strategy
-Entity:Self-Employed with LLC Business (S-Corp Election)?
Why: Business revenues minus business expenses = profit. Profit is passed through to
business owner for taxation. With an S-Corp election, business owner must pay themselves a
"reasonable salary" tied to industry norms while also paying payroll expenses like federal taxes
and FICA.
The tax advantage is found when it comes to excess profits, known as distributions. Any
remaining profits from the company can be distributed to the owner as dividends, which are
taxed at a lower rate than income with no FICA. FICA is around 14-17% (?).
I HAVE BEEN SELF EMPLOYED FOR 28 YRS, 1099, NO LLC/S-CORP/OTHER. BASED ON DISCUSSIONS WITH MY CPA AND BEEING PRIMARILY A SINGLE SOMETIMES 2 PERSON OPERATION, THERE WAS NO REAL ADVANTAGE TO CREATING AN ALTERNATIVE ENTITY. THIS COULD OBVIOUSLY BE DIFFERRENT FOR OTHERS DEPENDING UPON YOUR BUSINESS, STRUCTURE, NUMBER OF EMPLOYEES. I PLAN TO FIRE IN 4 - 5 YRS.
-Pre-Tax Business Expenses: (?)
What? The name of the game is getting revenue high, expenses low and passing
through the profits to your personal investments and personal bank account.
Make sure you track all legitimate business expenses. These include the obvious such as
supplies and office rent (if needed), but also include miles driven (.575 cents a mile if
your personal car is used), business meals (50% deduction?), business trips...
What else?
Link to a business deduction link coming.
I hired a CPA / book-keeper who keeps track of what is a business expense deduction vs
what should be capitalized and depreciated (and to watch out for what should be a
personal expense). They also help me determine what to send in for FICA, what
to send in for estimated quarterly taxes and keep me updated with a monthly profit and
loss statement (P&L).
I did try and keep track of this myself at one point. I found I would rather outsource this
and spend my time building my company and spending time with my family.
How much are you paying for a CPA/Book keeper a month?
AS A PRIMARILY SINGLE PERSON SOLE PROPRIORTISHIP, I TRACK MY EXPENSES MYSELF, PAY MY QUATERLY TAXES, AND MEET WITH MY CPA ONCE A YR TO DO MY TAXES.
-Health (Insurance) Plan: (?) A new twist to the money puzzle as a self-employed U.S. resident is the
Affordable Care Act and Federal Exchange health insurance policies.
The less pass through income you
have to report, the less you will pay out of pocket for your health
insurance policy.
For a family policy, if you can show less than $50,000 of earned income,
you will see a significant up front tax credit to help off set some of your
policy cost.
So, my strategy is to put some business earnings into a tax advantaged
investment account before they become taxable income.
THIS IS EVER CHANGING AS I AM CURRENTLY ON A PPO THRU BCBS, HOWEVER, I HAVE BEEN TOLD MY POLICY IS GOING AWAY BY END OF YR SO I AM BACK TO HUNTING A NEW POLICY OR SOME SORT OF OBAMA CARE SOLUTION TBD. I HAVE A STAY AT HOME WIFE AND HAVE 4 KIDS, ALTHOUGH 2 OF THEM ARE EFFECTIVLY ON THEIR OWN POLICIES NOW. WE ARE ALL HEALTHY PEOPLE SO I HAVE ALWAYS SUBSCRIBED TO THE HIGH DEDUCTABLE POLICYS EFFECTIVELY SELF INSURING THE FIRST $7500/PERSON/YR OTHER THAN CO-PAY VISITS. MY INCOME IS TOO HIGH FOR SOME OF THE OTHER TAX ADVANTAGE PLANS.
-Pre-Tax Investing (?) Individual-401k:
Where: Vanguard
https://investor.vanguard.com/what-we-offer/small-business/compare-plans?Link=facet Why?:
Your Contribution (as Employee of your business)
•$18,000 for the 2015 tax year ($24,000 for employees age 50 or
older). FICA taxes must be paid on this.
•Can't exceed 100% of compensation.
Contribution from your business:
•For the 2015 tax year, overall employer plus employee contribution
limit is 100% of compensation with a maximum of $53,000 ($59,000
if the employee is age 50 or older).
•Maximum tax deductible employer contribution is 25% of
compensation.
•Contributions are deductible as a business expense and aren't
required every year. Does this mean FICA tax does not apply?
-What if you need the money before age 55 - 59.5? I have seen a
number of articles on rolling the 401k to a traditional IRA and then
rolling it into a Roth IRA to minimize the tax impact. Post your thoughts
on this or link to the optimized strategy below.
INITIALLY, I USED A SEP WHICH WAS THE BEST OPTION FOR SELF-EMPLOYEED PEOPLE I COULD FIND AND MAXIMIZED IT EVERY YEAR. ABOUT 10+ YRS AGO I WAS INTRODUCED TO A DEFINED BENEFIT PLAN WHICH BASED ON A COMPLICATED FORMULA WOULD ALLOW M TO LITTERALLY PUT AWAY $200K - $300K/YR IN MANY YRS AND TAKE IT AS A DEDUCTION ON MY TAX RETURN. THIS PROVIDES A DOUBLE BENEFIT... LARGE TAX DEDUCTION AND LARGE TAX DIFFERRED CONTRIBUTION. NO PLANS TO TOUCH ANY OF MY TAX DIFFERRED ACCTS UNTIL AFTER 59.5. I HAVE OTHER INVESTMENTS SUCH AS RE AND TAXABLE ACCTS TO ADDRESS MY INCOME NEEDS WHEN I FIRE AROUND 55.
-Post tax personal dollar investing (?)
-Order:
-Roth IRA: Invest Max $5500 for you and Max $5,550 for spouse
Where?
-TD-Ameri-Trade offers over 100, $0 trade cost ultra low cost ETF Funds. This
allows you to dollar cost average your investment money into the funds over
time. (thread on this being developed).
-Self Directed Roth IRA: For diversifying out of the market - (thread on this
being developed).
-Taxable Investments: If you have additional money to invest that has passed through
from your business to your personal assets and you have maxed out your pre-tax
investments and post tax Roth IRA accounts:
Where:
-Vanguard investment account to put money in low cost index / ETF funds such
as...
-Robo Investor account such as Betterment or Wealthfront
Diversifying out of the market: Since 1945, in 20 year segments, the S&P 500
Index has returned an average of 10-12%
https://books.google.com/books?id=HIdOGhPlKvEC&pg=PA142&lpg=PA142&dq=the+stock+market+has+returned+how+much+since+1945+on+average&source=bl&ots=OY2mbYmyKU&sig=kc4dM4Mkw3MAK9seS764OdAMOls&hl=en&sa=X&ei=OYp0VazdN8SyggSioYTABw&ved=0CEkQ6AEwBg#v=onepage&q=the%20stock%20market%20has%20returned%20how%20much%20since%201945%20on%20average&f=false However, investing at unknown market peaks, seeing a significant correction
lower and the resulting time period needed to recover may delay your financial
independence past the point of being able to physically and mentally enjoy it.
So, I have diversified into the following:
-Real Estate: Rental properties that earn money from bringing in more rent
than expenses (including having someone else pay the mortgage) and could
go up in value over time.
-Private Equity Investing: Link to this coming.
-Peer to peer lending with without and with collateral (such as a real
estate lien)
I HAVE SIZABLE TAXABLE ACCTS, TAX DIFFERRED ACCTS, AND VARIOUS REAL ESTATE PROPERTIES MAKING UP MY PRIMARY ASSETS. MY AA IS CURRENTLY AROUND 80/20.