The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: CanuckExpat on February 01, 2017, 09:58:20 PM
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Thread created to break off tax strategy discussion from Selling Tradelines Side Gig (http://forum.mrmoneymustache.com/share-your-badassity/selling-tradelines-piggybacking-part-ii-$1000hr-20-40kyr-side-gig) thread.
Hopefully there's good discussion and I will try to summarize and update this first post with useful information as it's gathered.
Perhaps it's as easy as a definite article which covers everything we need to know, if it is exists, somebody hopefully knows what it is.
Questions to answer
Report as small business or miscellaneous income and advantages of each
Advantages and disadvantageous of being subject to FICA taxes
Best, cheapest, easiest, SEP, SIMPLE IRA or Individual 401(k) account
Too late to shelter 2016 income from taxes?
S Corp advantages, complexity, disadvantages: When does it make sense?
Others...?
Relevant Articles
MMM: Should You Do Your Own Taxes? (and Why I Don’t) (http://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/)
Oblivious Investor: SEP vs. SIMPLE vs. Solo 401(k) (http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/)
Others...?
Relevant forum threads
Misc Income vs. Self employed income for referral fees (http://forum.mrmoneymustache.com/taxes/misc-income-vs-self-employed-income-for-referral-fees/)
1099 SSN vs EIN (http://forum.mrmoneymustache.com/taxes/1099-ssn-vs-ein/)
LLC, S Corp, or Sole Proprietorship? (http://forum.mrmoneymustache.com/taxes/llc-s-corp-or-sole-proprietorship/)
S-Corp contribution to solo 401k (http://forum.mrmoneymustache.com/taxes/s-corp-contribution-to-solo-401k/)
Others, prune any above..?
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Reserved for future use if needed, currently carrying over relevent quotes from other discussion:
I plan to just file as misc income and not file as a business subject to FICA taxes.
I don't know if that's a choice, but if you do recognize it as self employment income (which i believe it probably is) You could always open a SEP, SIMPLE IRA or Individual 401(k) and funnel it all (less the SE taxes) into retirement accounts.
i'd also argue that if it was a choice, you probably should recognize it as SE income until you are above the Second Bend Point:
https://thefinancebuff.com/early-retirement-social-security-benefits.html
I plan to exclude it all under FEIE, being an expat, but I'm interested in the discussion both for when I eventually go back to the states, and as an intellectual curiosity.
looks like they raised that number to 127200 for when your IRS payments stop. I feel like this is the perfect scenario for an S corp. Its easy to argue that the level of effort involved is so small that it would justify you paying your self 300 an hour ... and the real value is in the assets(credit lines) you company holds. so figure out the balance of taxes with that. i havent researched it a ton. but just avoiding fica would save quite a bit of money.
It would be beneficial if the tradeline income was income for my wife instead of myself, as I have a lot more social security wages.
She already handles a lot of the work, and it would be straightforward to have her handle all the tradeline stuff. No business set up though.
Do it under her Ssn or register a tax ID number for her.
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I was thinking this discussion might be relevant to others with side hustle income, 1099 misc income from contracting/consulting, etc.
My first questions are what is the best way to shelter the income from taxes, and the trade offs and advantages of each. What is everyone doing currently?
I realized we did nothing to shield the tradelines revenue (reported on 1099) from taxes, and at our ordinary marginal tax rate will probably pay 30% - 40% in 2016 on that income if it is simply reported as miscellaneous income. I think it might be too late to do anything about that for 2016 (correct me if I'm wrong), but what would be the best approach for someone in future years?
The other thing that seems to be worth considering is whether you want to pay FICA taxes, and earn SS credits, or find a way to avoid that if that is optimal in your situation. Does that summarize correctly?
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Nice thread! Canuck! Posting to follow.
Some of my other posts about friends' side gigs got culled by mods as 'off topic', so maybe they'll be more appropriate here.
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Posting to follow.
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Following!
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Posting to follow. It would seem like the tradeline income is self-employment income and FICA taxes would be due. I'm already maxing my 401k but would like to funnel additional amounts into other retirement accounts if possible. What's the main difference between the SEP IRA and SIMPLE IRA? Can you contribute to these in excess of your 401k? What are the limits? Where chan you set one up and what is the minimum m amount needed? (I only have two tradeline cards for sale so my expected income may be low)
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
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My opinion would be that it is subject to self employment.
"You must pay SE tax if you had net earnings of $400 or more as a self-employed person. If you are in business (farm or nonfarm) for yourself, you are self-employed. " https://www.irs.gov/pub/irs-pdf/i1040sse.pdf (https://www.irs.gov/pub/irs-pdf/i1040sse.pdf)
Further:
"A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business." https://www.irs.gov/businesses/small-businesses-self-employed/business-activities (https://www.irs.gov/businesses/small-businesses-self-employed/business-activities)
Since the activity is being pursued for profit, and you are making an ongoing effort (adding and removing authorized users), I would think you would have to pay SE tax.
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Following...thanks!
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It would be very difficult to set this up as an S-Corp. The credit cards are (presumably) in your name, and the 1099 will come to you personally. You cannot assign income from yourself to the Corp, especially if the reason for this is tax avoidance. You would need the credit cards to be in the name of the business.
Can you find an accountant who would do it anyway? Sure - but that doesn't mean it won't blow up in your face. And is it worth the potential penalties/interest and court costs (if it goes that far)?
My initial thought for sheltering some income is to run it through your schedule C with a SEP-IRA, Solo 401k or similar. I will let someone with more knowledge of those plans chime in with the benefits/detriments of each.
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I am trying to figure out which of the self employment accounts are best. Is SEP IRA the best bet? And does the Solo 401k limit of $18,000 conflict with the limit at my employer? (no double dipping basically?)
I found a few articles comparing the different account types:
https://www.fidelity.com/retirement-ira/small-business/compare-plans
https://www.nerdwallet.com/blog/investing/retirement-plans-self-employed/
http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/
Could the income from both my wife and I be combined with any of these so we could just have one account? I am thinking even if we could only do the Employer contributions for one of these accounts it might shelter a few thousand dollars.
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I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):
"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."
Because at this point the income is sporadic activity. I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business. There are a few other facts that support it not being a business:
- I'm depositing the income into my personal checking account
- I am using my SSN, not a business EIN
- I am using my personal credit cards
- I don't spend much time on this
- I have fun doing this
For me, as a recently retired person, this also works well with respect to Social Security and sheltering income from taxes. With regards to Social Security, I personally passed the second bend point in 2014, so I don't think paying the SE taxes is worth it. And if I get additional after tax money, it gets funneled into my spending and ends up reducing the amount of money I need to convert into my Roth pipeline. OTOH, I guess it does somewhat increase any potential RMD tax torpedo issue I may have.
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I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):
"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."
Because at this point the income is sporadic activity. I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business. There are a few other facts that support it not being a business:
- I'm depositing the income into my personal checking account
- I am using my SSN, not a business EIN
- I am using my personal credit cards
- I don't spend much time on this
- I have fun doing this
For me, as a recently retired person, this also works well with respect to Social Security and sheltering income from taxes. With regards to Social Security, I personally passed the second bend point in 2014, so I don't think paying the SE taxes is worth it. And if I get additional after tax money, it gets funneled into my spending and ends up reducing the amount of money I need to convert into my Roth pipeline. OTOH, I guess it does somewhat increase any potential RMD tax torpedo issue I may have.
I think it would depend on the regularity.
For example, if you sell 6 slots over the course of a year, ok, probably not SE.
If you are consistently selling 3, 4 or more slots a month, then it would be hard to argue it is sporadic. You may not know the exact amount you will make each month, but you are reasonably certain that the income will be there.
Again, just one man's opinion here. I am certainly open to opposing arguments, and I'm certainly not saying there is only 1 correct way to present the income.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
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Posting to follow. Thanks OP!
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Following. I'm all about depriving Uncle Sam as much as possible.
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Thank you, thank you, thank you for starting this. Following.
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I am trying to figure out which of the self employment accounts are best. Is SEP IRA the best bet? And does the Solo 401k limit of $18,000 conflict with the limit at my employer? (no double dipping basically?)
Yes, the $18k Employee contribution limit is cumulative across all 401k/403b plans, so they would conflict. If you're already maxing out another 401k this would effectively make the contribution limit of SEP and Solo 401k the same 25% of net business income (remember that this is after the employer portion of self employment tax and after the contribution itself making it more like 20% for sole proprietors).
Despite that, the solo 401k could still be a better option because, 1) unlike a SEP, it would not interfere with a backdoor roth, 2) some providers allow you to roll over existing IRAs into the 401k (which would help with a backdoor roth if you have existing traditional IRAs), 3) some providers allow roth contributions on the employee portion (only interesting if at some point you want to use a roth and no longer have another 401k), and 4) it has significantly higher contributions limits at lower income levels if at some point you don't have another 401k.
The main advantage of the SEP is that it can be opened any time up to your tax filing deadline, while the Solo 401k has to be opened in the year for which you want to make contributions.
If it was me and I had a 401k I was happy with through my employer I would probably open the SEP for this income then plan on opening a solo 401k at a provider that allows rollovers if I ever end up without another 401k, and roll the SEP into that.
I have my solo 401k at Fidelity. They allow access to the full slate of fidelity index (and active) funds. They allow incoming rollovers from traditional IRAs. They do not have a roth option.
Vanguard is always high on the list for investing too of course. They only allow access to investor class shares (not admiral). They do not allow incoming rollovers. They do allow a roth option. There might be an additional fee ($20/year?) unless you have flagship status (over $50k with vanguard), but I'm not sure about that.
I think etrade allows incoming rollovers and roth employee contributions, but I don't know what kinds of fee free index funds or ETFs they have, so you'd want to look into that.
Solo 401ks with a balance over $250k requiring filing a form 5500. I don't get the impression it's terribly complicated, but it is something else you'd have to do every year.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold. to make this 20k i estimate it takes 20 hours of work. how would you setup and pay yourself out of this Corp to minimize taxes.
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Following. The ObliviousInvestor post linked is a great resource. Thanks for sharing.
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The main advantage of the SEP is that it can be opened any time up to your tax filing deadline...
I think another advantage of a SEP over a 401(k) is that you don't set yourself up for problems if you later add an employee. Pension funds come with a permanency requirement. I talk in quite a bit more detail about this requirement at the blog post provided below (scroll down to the "Permanency Requirement" discussion...)
http://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/
BTW, the permanency requirement means you really shouldn't cancel your pension plan because you hire a new employee... so if you have a solo 401(k) and you hire someone, you probably need to replace your solo 401(k) with a real 401(k)... Note that a SEP lets you delay covering some new employee until year 4... so you may sidestep the permanency requirement pretty easily in a small business setting.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold. to make this 20k i estimate it takes 20 hours of work. how would you setup and pay yourself out of this Corp to minimize taxes.
Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.
You might find this blog post on setting an S corporation wage to zero helpful:
http://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/
Also, this post of the problems of using an S corporation for a sideline or part-time business:
http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.
And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures? Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.
Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold. to make this 20k i estimate it takes 20 hours of work. how would you setup and pay yourself out of this Corp to minimize taxes.
Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.
You might find this blog post on setting an S corporation wage to zero helpful:
http://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/
Also, this post of the problems of using an S corporation for a sideline or part-time business:
http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.
And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures? Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.
Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.
I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.
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I think another advantage of a SEP over a 401(k) is that you don't set yourself up for problems if you later add an employee. Pension funds come with a permanency requirement. I talk in quite a bit more detail about this requirement at the blog post provided below (scroll down to the "Permanency Requirement" discussion...)
http://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/
BTW, the permanency requirement means you really shouldn't cancel your pension plan because you hire a new employee... so if you have a solo 401(k) and you hire someone, you probably need to replace your solo 401(k) with a real 401(k)... Note that a SEP lets to delay covering some new employee until year 4... so you may sidestep the permanency requirement pretty easily in a small business setting.
Great, and interesting point. Thanks for the link.
In the case of this thread, it seems highly unlikely that someone will hire an employee to help with their tradelines "business," but I wonder if opening a solo 401k might still cause problems for that person in future business endeavors? My understanding is that if you have multiple businesses they're considered as one for plans like these (called a controlled group I think?). Given that, if someone were to start a new business that might someday have employees, would discontinuing the tradelines activity constitute a viable business reason for shutting down the solo 401k so it won't cause the problem you've outlined in the future? Or is a solo 401k considered to be a retirement plan for any business you engage in regardless of whether the trade/business it was originally opened for is not the same trade/business you're now in?
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold. to make this 20k i estimate it takes 20 hours of work. how would you setup and pay yourself out of this Corp to minimize taxes.
Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.
You might find this blog post on setting an S corporation wage to zero helpful:
http://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/
Also, this post of the problems of using an S corporation for a sideline or part-time business:
http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.
And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures? Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.
Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.
Thanks for the info. So this is from ARS's tradeline system and i expect to be pulling 40k in 2018 based on conservative 60% fill projections. And this number will grow annually.
My question lies more in what qualifies as LLC income, only income after the setup or can i set this up in October and it will work for all 2017 income.
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We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.
But a true side hustle isn't that big a percentage of your income right? so we are talking under 25k a year?
The problem with SEP IRAs and what not is you have to have taxed income to contribute.
A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.
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We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.
But a true side hustle isn't that big a percentage of your income right? so we are talking under 25k a year?
The problem with SEP IRAs and what not is you have to have taxed income to contribute.
A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.
see above i'm talkin 40-100k ... this year conservative is 20k for me. next year conservative is 40k. and it just climbs from there. in 5 years this could easily be worth 6 figures if i can get new cards and my current cards dont get shutdown.
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I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):
"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."
Because at this point the income is sporadic activity. I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business. There are a few other facts that support it not being a business:
- I'm depositing the income into my personal checking account
- I am using my SSN, not a business EIN
- I am using my personal credit cards
- I don't spend much time on this
- I have fun doing this
For reference, 26 CFR 1.183-2 (https://www.gpo.gov/fdsys/pkg/CFR-2016-title26-vol4/pdf/CFR-2016-title26-vol4-sec1-183-2.pdf) (which is a federal tax regulation, meaning that it represents the Treasury Department's official interpretation of the federal tax code) provides guidance on how to determine whether an activity is a business or a hobby for tax purposes. It says that that determination "is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case," and it provides both a non-exhaustive list of relevant factors to be taken into account and a set of examples illustrating its provisions.
IRS Publication 535 (https://www.irs.gov/pub/irs-pdf/p535.pdf) (which is informal guidance published by the IRS (one of the Treasury Department's several bureaus), and which does not have the force of law) also provides guidance on making this determination in the "Not-for-Profit-Activities" section starting on page 5.
Note that I am providing these links for reference and informational purposes only and I express no view as to whether your specific situation, or the activity of selling tradelines generally, constitutes a business or a hobby for tax purposes, or whether the factors you identified are relevant for purposes of making that determination.
***This post, like all my posts in the forum, does not constitute tax or legal advice.***
Edited solely to remove an extraneous hanging parenthesis (one of the drafting hazards faced by heavy users of parentheses (like me)).
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I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.
I'm not a tax expert... I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it. I imagine you are implying there is more to it from a tax perspective. Is that what you mean?
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I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.
I'm not a tax expert... I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it. I imagine you are implying there is more to it from a tax perspective. Is that what you mean?
Yes. I haven't sold tradelines - will they accept a W-9 for a corporation when listing your personal credit cards? For anyone who receives a 2016 1099 it would be too late, you can't reassign the income.
You would also have to have separate bank accounts. etc open for separation of business and personal use.
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I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.
I'm not a tax expert... I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it. I imagine you are implying there is more to it from a tax perspective. Is that what you mean?
Yes. I haven't sold tradelines - will they accept a W-9 for a corporation when listing your personal credit cards? For anyone who receives a 2016 1099 it would be too late, you can't reassign the income.
You would also have to have separate bank accounts. etc open for separation of business and personal use.
Yes, they will accept the W9 any way you send in my experience.
Thanks for your other points. Good info in this thread!
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I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
If the wife and I are both above that threshold just from TL sales (at least 20, maybe 30k each, and growing).
Right now we're looking at excluding it all with FEIE for at least this year, and probably the next, but when we're in the States, it sounds like an S Corp would be the way to go, if possible. I do have the concern others have brought up--if it's done under your SSN, with your personal cards (business cards cannot do tradelines, they report AUs differently), can that qualify? Also, would the wife and I each need our own, or could it be done under one corporation?
For that matter, can multiple side-gigs be done under one corporation? The wife's writing (romance novels) gig, my consulting, etc. Much of that is donated to charity, so would it be beneficial to be under the corporation?
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[...My understanding is that if you have multiple businesses they're considered as one for plans like these (called a controlled group I think?)
You are correct. Pretty much all your ventures get lumped together and treated as a single employer. And then once that happens. you can't discriminate by providing owner with a killer pension plan and rank-and-file employees with a crummy plan or no plan.
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We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.
But a true side hustle isn't that big a percentage of your income right? so we are talking under 25k a year?
The problem with SEP IRAs and what not is you have to have taxed income to contribute.
A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.
see above i'm talkin 40-100k ... this year conservative is 20k for me. next year conservative is 40k. and it just climbs from there. in 5 years this could easily be worth 6 figures if i can get new cards and my current cards dont get shutdown.
I've got a buddy who does this with his girlfriend. Sold trade lines for several years to fund his small business. I know he made easily $50k between them, just on tradelines. I wonder if he ever got up into the 6 figures, as he quit a 80k job. Now they live mostly outside the USA running their travel business, which I'm sure complicates their tax bill even more, though likely reduces it.
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I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
If the wife and I are both above that threshold just from TL sales (at least 20, maybe 30k each, and growing).
Right now we're looking at excluding it all with FEIE for at least this year, and probably the next, but when we're in the States, it sounds like an S Corp would be the way to go, if possible. I do have the concern others have brought up--if it's done under your SSN, with your personal cards (business cards cannot do tradelines, they report AUs differently), can that qualify? Also, would the wife and I each need our own, or could it be done under one corporation?
For that matter, can multiple side-gigs be done under one corporation? The wife's writing (romance novels) gig, my consulting, etc. Much of that is donated to charity, so would it be beneficial to be under the corporation?
Regarding the foreign earned income exclusion, I think you are correct that the S corp option usually doesn't make sense. You exclude *earned* income... so pushing down your earned income to save payroll taxes mean you push down your FEIE tax savings--and your possible pension plan contributions and savings. BTW, the one sort of person who does save money with an S corporation when he or she operates offshore and gets the FEIE is when he or she make sa *lot* of money. E.g., if you make $200K, pay yourself a wage of $100K which doesn't get taxed because of the FEIE and then your shareholder gets a K-1 with $100K on it, you only pay income taxes on that last $100K... you only pay payroll taxes on that first $100K... that's a pretty good deal.
Regarding maybe delaying this until you're back stateside, I think that's a good idea.
You should be able to use one S corporation for all of a couple's ventures... that's a way to economize. And if some of that money is being donated (like from romance novel writing), it's better to have the donation come from the S corporation because the charitable contribution works the same way regardless of whether it's originally made by your S corp or by you or your spouse... and making the charitable donation from the S corporation dials down your risk of IRS claiming you're paying your shareholder too little.
With regard to ventures where you start initially using your SSN... yes, that's an issue. Good point. Actually the most recent significant S corporation tax court case is example of risks here... basically a judge called "bogus!" when a guy tried to say that his S corporation was operating the business when really all the documentation said it was him. I feel kind of spammy (sorry arebelspy!) about linking to this, but here's another post I did about this guy and his dilemma:
http://evergreensmallbusiness.com/s-corporation-paperwork-problems/
The taxpayer was running a financial planning business using his SSN but he told IRS it was his S corporation... Wailing and gnashing of teeth ensued...
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Great thread, posting to follow.
Im new to tradelines- so Im hoping there will be income, but its unproven so far.
I am a homemaker, my husband has a FT job, but the TL are all on my cards. Im definitely interested in lowering our tax burden. I currently have a roth and a traditional IRA. I guess I should research if another type of IRA is better?
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Following.
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So Seattle CPA you've been great but a few questions
1. cant i just setup an LLC with my state myself for around 50 bucks in my state i believe
2. File the taxes myself as an S corp.
Wouldnt this bypass all those fees you're talking about and allow me to pay myself as a shareholder. and just compensate myself for the "work" i do at x dollars per hour.
i'm serious when i say the hours i spend to make that 20k will be less than 20 hours of actual work from me.
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So Seattle CPA you've been great but a few questions
1. cant i just setup an LLC with my state myself for around 50 bucks in my state i believe
Sure. Filing the articles of formation or the articles of organization is about as simple as you can get. You provide the LLC's name, its address, name your registered agent... it is, in my states, super easy. Definitely DIY... Also, in many states, very, very fast because you do the filing through an online portal.
2. File the taxes myself as an S corp.
So here, we maybe disagree. I don't think an 1120S and the related schedules are easy enough to DIY... You can peek at the forms available at Internal Revenue Service website. But maybe this additional bit of info helps. I find that many 1040-centric CPAs and EAs don't do enough 1120S returns to really do a safe job.
Also, you will need do payroll (even if its very modest)... and that's a serious amount of fiddling. We've got a hack we call "Five Minute Payroll" system which works in many states... but if it won't work or someone isn't organized enough, you need to outsource your payroll too. (I didn't explicitly count that cost because I forgot but I think Gusto is maybe $500 a year... so you can probably keep the whole deal, still, below $2K).
Wouldnt this bypass all those fees you're talking about and allow me to pay myself as a shareholder. and just compensate myself for the "work" i do at x dollars per hour.
i'm serious when i say the hours i spend to make that 20k will be less than 20 hours of actual work from me.
I understand. But I still think you'd need to do the return in way that (a) pays boarder42 something that looks like a reasonable wage when the IRS computers read and analyze the return and that (b) dials down the perception that there's abuse going on. E.g., you do not want to pay boarder42 the shareholder $18K and then boarder42 the employee $2K. I don't know how well you know your way around the 1120S form, but the form makes it extremely explicit that you're doing something like this...
One other related comment: The IRS often takes the position in a case like we're talking here that all of the profits need to go out to shareholder as wages. I don't think you necessarily need to think that way. But I think you want to arrange things so as to not trigger a query and so as to have a more likely than not chance of prevailing in any argument with the IRS.
Hope that helps.
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Thanks for all the great information everyone. I'm definitely interested in this topic.
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I'm not sure how you guys want content collected here.
Thanks everyone for the awesome discussion so far, please keep it coming!
If anyone has suggestions on how to summarize, let me know. In the meantime, I'll go through the thread and try to link back from the first post to any questions that have been answer/discussed, and add new questions and discussion items as they come up.
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
Follow up questions to that point:
If you are over the SS max (~$120k) would there be any reason not to file as self employment income, perhaps except more complex taxes?
If you have multiple sources of misc 1099 income, some business-y and some more miscellaneous-y, can you pool them all for the purposes of filing and funding a pension?
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
So for someone who has side hustle business income from the previous year and didn't think about sheltering the taxes earlier, it sounds like a SEP would be the only choice after the year ended, but before the tax filing deadline. With the caveat that you should consider the implications if you also performed a backdoor Roth:
Despite that, the solo 401k could still be a better option because, 1) unlike a SEP, it would not interfere with a backdoor roth
Given that, before the filing deadline, could you first set up a SEP to accept as much 2016 income as allowed, and also set up a solo 401k based on anticipated 2017 income, then perform a rollover relatively immediately from the SEP to the solo 401k in order to avoid interfering with the backdoor roth?
The ObliviousInvestor post linked is a great resource. Thanks for sharing.
I thought so too, will add to the top
We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.
This is something worth considering from a non taxes point of view. I've run into this in the past before as well, where a consulting firm would only enter into a 1099 relationship with me if I was corporation; otherwise it had to be a W2 relationship. I don't know how you would figure out if it's worth the complexity for the chance that this might happen.
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Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
Follow up questions to that point:
If you are over the SS max (~$120k) would there be any reason not to file as self employment income, perhaps except more complex taxes?
If you have multiple sources of misc 1099 income, some business-y and some more miscellaneous-y, can you pool them all for the purposes of filing and funding a pension?
I think your main question is if you're already in a W-2 job over the FICA limit, does it still make sense to consider the S corporation...
And my answer to that question is "no probably not"... If you're over or close to the FICA limit, your tax savings from an S corporation are the Medicare or Obamacare taxes... those equal 2.9% or 3.8%... and that lower tax rate makes it hard to accumulate enough tax saving to justify costs and hassle factor of an S corporation.
BTW, in that situation, you may also have opportunity at your regular job to max a 401(k) and so a SEP in your side business is best deal. Further, if you have minor children, a sole proprietorship does offer you that little trick where you can pay your kids, deduct the payroll, but kids aren't taxed.
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SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
So for someone who has side hustle business income from the previous year and didn't think about sheltering the taxes earlier, it sounds like a SEP would be the only choice after the year ended, but before the tax filing deadline. With the caveat that you should consider the implications if you also performed a backdoor Roth:
Yes, I think that's right.
P.S. Sorry I didn't answer or address all comments in same message. The nested quotes made it hard for me to keep things straight on a small screen...
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BTW, in that situation, you may also have opportunity at your regular job to max a 401(k) and so a SEP in your side business is best deal.
Does this depend on the $$$ earned in the side business? My understanding is that a SEP is an employer contribution that is limited to around 20% of your profits. If your side hustle is say, $20k, would the SIMPLE IRA be more beneficial as it seems to allow a $12,500 employee deduction which is apparently seperate from the employee part of a work 401(k) or a traditional/Roth IRA
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If you're making a few thousand per year in retirement, and paying self employment taxes, and have children, you're potentially eligible for up to $6,269/year (for 2016) in Earned Income Tax Credit, which may offset a significant portion of your self employment taxes.
It's a sliding scale. Three kids pays the most, and maxes out at about $16k/year of MFJ income.
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts
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If you're making a few thousand per year in retirement, and paying self employment taxes, and have children, you're potentially eligible for up to $6,269/year (for 2016) in Earned Income Tax Credit, which may offset a significant portion of your self employment taxes.
It's a sliding scale. Three kids pays the most, and maxes out at about $16k/year of MFJ income.
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts
You need to have less than $3k (3.5k?) of investment income to qualify for that tax credit.
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You need to have less than $3k (3.5k?) of investment income to qualify for that tax credit.
In your taxable accounts, yes.
You'd probably need to move your bonds and dividend paying stocks into your Roth or 401k or something. VTSAX pays 1.86% dividend, so you can hold $182,795 of VTSAX in your taxable brokerage account and still qualify.
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What's everyone's take here on the formation of an LLC for this (and other ventures) with one's spouse?
In our case, we are both W-2 employees and residents of a common-law (vs. community-property) state, but we have rented out our house (filing Schedule E) and I'm starting to sell tradelines. I may also add other side businesses going forward, though I doubt we'd engage any employees. We have a property manager for our rental, whom I issue a 1099 each year.
Should we have a single LLC for all our business ventures, or a separate one, say, for the rental properties? Should we set it up as a single-member or multi-member LLC?
I'm especially interested in the possibility of expanding our retirement fund buckets to (most likely) a SEP-IRA.
Elysian
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What's everyone's take here on the formation of an LLC for this (and other ventures) with one's spouse?
In our case, we are both W-2 employees and residents of a common-law (vs. community-property) state, but we have rented out our house (filing Schedule E) and I'm starting to sell tradelines. I may also add other side businesses going forward, though I doubt we'd engage any employees. We have a property manager for our rental, whom I issue a 1099 each year.
Should we have a single LLC for all our business ventures, or a separate one, say, for the rental properties? Should we set it up as a single-member or multi-member LLC?
I'm especially interested in the possibility of expanding our retirement fund buckets to (most likely) a SEP-IRA.
Elysian
In a non-community property state, the usual rules for classification of a multiple member LLC apply... which means the husband and wife LLC needs to file a partnership tax return.
Because that's not a DIY project and because it's not cheap, I would think you want to be really careful and do thorough, specific-to-your-situation before doing this.
BTW, if you really want to dig into the weeds on this, a few years ago, I wrote a really lengthy article about how LLCs are taxed here:
http://www.llcsexplained.com/llc-faq/what-you-must-know-about-llc-taxation/
Note that the FICA limits mentioned in the article are out of date. The 2017 limit for FICA is $127.200...
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For those of you who sold AU's last year, what type of business are you filing your schedule C as? IIRC there's a list of numeric code to choose from which you put on the schedule C near the top corner?
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SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
So for someone who has side hustle business income from the previous year and didn't think about sheltering the taxes earlier, it sounds like a SEP would be the only choice after the year ended, but before the tax filing deadline. With the caveat that you should consider the implications if you also performed a backdoor Roth:
Yes, I think that's right.
P.S. Sorry I didn't answer or address all comments in same message. The nested quotes made it hard for me to keep things straight on a small screen...
For someone who does has a backdoor Roth to worry about, would it be legitimate to open a SEP and fill with the maximum allowed for 2016, then immediately (or shortly there after) open a solo 401k based on current years income and do a roll over before the tax filing deadline, to be on the right side of the IRA pro rata rule?
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For those of you who sold AU's last year, what type of business are you filing your schedule C as? IIRC there's a list of numeric code to choose from which you put on the schedule C near the top corner?
In Taxact, there were two drop down selections. I chose something like Professional Services - Other and then Consulting.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
SeattleCPA,
Any ideas how to find a good CPA in Michigan other than just 'ask around'? Is there any way to know if they are really a good CPA for all our typical FIRE requirements (rentals, vanguard, small business hussles, roths and IRAs and rollovers etc)?
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posting to follow...
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For those of you who sold AU's last year, what type of business are you filing your schedule C as? IIRC there's a list of numeric code to choose from which you put on the schedule C near the top corner?
In Taxact, there were two drop down selections. I chose something like Professional Services - Other and then Consulting.
When you get a chance can you note the specific numeric code that was, so that everyone has that here for future reference?
Thanks!
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For those of you who sold AU's last year, what type of business are you filing your schedule C as? IIRC there's a list of numeric code to choose from which you put on the schedule C near the top corner?
In Taxact, there were two drop down selections. I chose something like Professional Services - Other and then Consulting.
When you get a chance can you note the specific numeric code that was, so that everyone has that here for future reference?
Thanks!
Business Activity Type=Professional, Scientific, & Tech-Other
Business Activity Code=541990 - All Other professional, scientific, and technical services
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale. I only made 2500 in 2016 so I'm not filing as a bus
In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.
I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.
Or any other ways to minimize taxes
I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)
SeattleCPA,
Any ideas how to find a good CPA in Michigan other than just 'ask around'? Is there any way to know if they are really a good CPA for all our typical FIRE requirements (rentals, vanguard, small business hussles, roths and IRAs and rollovers etc)?
I don't. Sorry. My default idea, which I've shared a few places, is to keep your finances simple enough that you don't need a CPA. Or an EA.
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Question for y'all who have a normal job and side income reported to the IRS. Obviously your tax withholding is through your employer and come April you'll pay taxes due on the side income. If those taxes are high enough, will you be subject to a penalty for not paying them throughout the year?
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Yes, the IRS does not care about the source of the income or tax payments. If you are over the threshold for the safe harbor payment, you will owe penalties. The safe harbor is either based on current year tax or PY tax, depending on which is most beneficial (please read the publication for the exact calculation).
I have it this year just with W-2 earnings. I managed to screw up my W-4 apparently, and too little tax was withheld, so now I have to pump money into my IRA to avoid the penalty.
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Yes, the IRS does not care about the source of the income or tax payments. If you are over the threshold for the safe harbor payment, you will owe penalties. The safe harbor is either based on current year tax or PY tax, depending on which is most beneficial (please read the publication for the exact calculation).
I have it this year just with W-2 earnings. I managed to screw up my W-4 apparently, and too little tax was withheld, so now I have to pump money into my IRA to avoid the penalty.
That sucks, especially for an income source like the tradelines which is very unpredictable...
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Yes, the IRS does not care about the source of the income or tax payments. If you are over the threshold for the safe harbor payment, you will owe penalties. The safe harbor is either based on current year tax or PY tax, depending on which is most beneficial (please read the publication for the exact calculation).
I have it this year just with W-2 earnings. I managed to screw up my W-4 apparently, and too little tax was withheld, so now I have to pump money into my IRA to avoid the penalty.
That sucks, especially for an income source like the tradelines which is very unpredictable...
Make quarterly estimated tax payments.
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Yes, the IRS does not care about the source of the income or tax payments. If you are over the threshold for the safe harbor payment, you will owe penalties. The safe harbor is either based on current year tax or PY tax, depending on which is most beneficial (please read the publication for the exact calculation).
I have it this year just with W-2 earnings. I managed to screw up my W-4 apparently, and too little tax was withheld, so now I have to pump money into my IRA to avoid the penalty.
Make quarterly estimated tax payments.
That sucks, especially for an income source like the tradelines which is very unpredictable...
Yea, sorry, I thought estimates were implied.
The other option is to bump up your withholding a little. Then you don't have to worry about whether you made the estimates early enough in the year.
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The other option is to bump up your withholding a little. Then you don't have to worry about whether you made the estimates early enough in the year.
Do we know approx. what the penalty % is? Because it may money out to not withhold additional, invest those dollars instead, and pay the penalty to the IRS for "borrowing" the money.
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https://www.irs.gov/pub/irs-pdf/f2210.pdf (https://www.irs.gov/pub/irs-pdf/f2210.pdf)
https://www.irs.gov/pub/irs-pdf/i2210.pdf (https://www.irs.gov/pub/irs-pdf/i2210.pdf)
Looks like it's ~2.6% of the difference between your safe harbor and actual payments, less a discount for paying before 4/15.
Safe harbor is 90% of current year, or 100% of PY tax due. For "high incomes," safe harbor amount for the prior year is 110% instead of 100%.
I would fill out a dummy 2210 to see what the effect really is.
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https://www.irs.gov/pub/irs-pdf/f2210.pdf (https://www.irs.gov/pub/irs-pdf/f2210.pdf)
https://www.irs.gov/pub/irs-pdf/i2210.pdf (https://www.irs.gov/pub/irs-pdf/i2210.pdf)
Looks like it's ~2.6% of the difference between your safe harbor and actual payments, less a discount for paying before 4/15.
Safe harbor is 90% of current year, or 100% of PY tax due. For "high incomes," safe harbor amount for the prior year is 110% instead of 100%.
I would fill out a dummy 2210 to see what the effect really is.
Good idea. For 2.6% (or less if discounted) I'd just "borrow" that money and invest it instead.
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Hello all
If someone has a W2 income of 100K, and trading income of ~100K, can he file a sole prop (schedule C)?
In that case, does need to file schedule SE (self employment taxes). If yes, than can he contribute to a SEP IRA?
Someone told me that trading income is not earned income, so cannot contribute to SEP, even though self-employment taxes are paid.
If SE taxes are paid, doesnt that income become "earned income"
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Hello all
If someone has a W2 income of 100K, and trading income of ~100K, can he file a sole prop (schedule C)?
In that case, does need to file schedule SE (self employment taxes). If yes, than can he contribute to a SEP IRA?
Someone told me that trading income is not earned income, so cannot contribute to SEP, even though self-employment taxes are paid.
If SE taxes are paid, doesnt that income become "earned income"
What is trading income? Trading stocks? That is not earned income and not subject to self employment.
I don't know of a way that you pay SE taxes on something that is not earned.
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What is trading income? Trading stocks? That is not earned income and not subject to self employment.
Why can't (some little portion of) it be earned income? Most asset managers will charge between 1 and 2% per year to manage your investments. If you start your own business and then manage your own assets, why can't you pay yourself 1.5% per year as salary?
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What is trading income? Trading stocks? That is not earned income and not subject to self employment.
Why can't (some little portion of) it be earned income? Most asset managers will charge between 1 and 2% per year to manage your investments. If you start your own business and then manage your own assets, why can't you pay yourself 1.5% per year as salary?
Because that's at best a hobby. Certainly not a business.
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What is trading income? Trading stocks? That is not earned income and not subject to self employment.
Why can't (some little portion of) it be earned income? Most asset managers will charge between 1 and 2% per year to manage your investments. If you start your own business and then manage your own assets, why can't you pay yourself 1.5% per year as salary?
Because that's at best a hobby. Certainly not a business.
The IRS certainly don't count most things that make lots of money and you may spend significant time at as a hobby, instead of a business.
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What is trading income? Trading stocks? That is not earned income and not subject to self employment.
Why can't (some little portion of) it be earned income? Most asset managers will charge between 1 and 2% per year to manage your investments. If you start your own business and then manage your own assets, why can't you pay yourself 1.5% per year as salary?
Because that's at best a hobby. Certainly not a business.
The IRS certainly don't count most things that make lots of money and you may spend significant time at as a hobby, instead of a business.
So you believe that you can just decide to pay yourself a 2% asset management fee and treat it a business because you want to ?
http://www.investopedia.com/articles/trading/09/incorporate-active-trading.asp
To be engaged in a business as a trader in securities, a person must trade on a full-time basis, and derive most of his or her income through day trading. According to the IRS, a trader is someone who trades significantly and continuously in order to profit from the short-term fluctuations in security prices.
Traders are individuals who make multiple trades daily to profit from intraday market swings and do so continuously throughout the year. They spend a considerable amount of time documenting and researching trades and strategies and incur a significant amount of expenses in order to conduct their business activities. Although not specifically required, most qualified traders will open and close multiple trades daily and hold their positions for less than 30 days.
For active traders, the benefits of qualifying are obvious, but these guidelines are open to interpretation by the IRS and the courts. Only a small percentage qualify, even some whose only income is derived through trading.
The only way to ensure that you are receiving the same tax treatment as a qualified trader is to create a separate corporate entity to trade through. By creating a limited liability company or a limited partnership, you can receive all the same tax treatment as a qualified trader without having to qualify. The legal entity usually receives less scrutiny by the IRS because the assumption is that no one would go through the trouble and expense of forming the entity, unless they were committed to trading as a business venture.
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Because that's at best a hobby. Certainly not a business.
The IRS certainly don't count most things that make lots of money and you may spend significant time at as a hobby, instead of a business.
So you believe that you can just decide to pay yourself a 2% asset management fee and treat it a business because you want to ?
No, my point is hobby and business are specific terms to the IRS, and you can't merely tell by whether or not it makes money, or even how much time is spent. You need to go by their guidelines (as you quoted above). :)
It seems like we're in agreement.
The IRS rules a lot of times are counterintuitive, even. Don't try to use logic or common sense. ;)
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So you believe that you can just decide to pay yourself a 2% asset management fee and treat it a business because you want to ?
Yes, I do. 2% might be pushing it though. We've had several different reports on this forum of people doing exactly this, legally.
And it doesn't make you a "trader" it makes you an "investment manager".
Betterment (or any random local "financial guy") will charge you an annual fee to manage your money for you. They will decide on your asset allocation, rebalance periodically, tax loss harvest at the end of the year, and if you pay them enough they'll even collect your tax forms and file your taxes for you. These are all things you can learn to do yourself.
Basically, anything that you normally have to pay someone else to do, you should be able to pay yourself to do instead. It's not usually a good idea, because you have to bear the cost of operating a business and then paying all of the various taxes involved, but it's not impossible. In some rare cases, it makes sense to decrease your stash by paying extra taxes by operating as a business. It can be and has been done legally.
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So you believe that you can just decide to pay yourself a 2% asset management fee and treat it a business because you want to ?
Yes, I do. 2% might be pushing it though. We've had several different reports on this forum of people doing exactly this, legally.
And it doesn't make you a "trader" it makes you an "investment manager".
Betterment (or any random local "financial guy") will charge you an annual fee to manage your money for you. They will decide on your asset allocation, rebalance periodically, tax loss harvest at the end of the year, and if you pay them enough they'll even collect your tax forms and file your taxes for you. These are all things you can learn to do yourself.
Basically, anything that you normally have to pay someone else to do, you should be able to pay yourself to do instead. It's not usually a good idea, because you have to bear the cost of operating a business and then paying all of the various taxes involved, but it's not impossible. In some rare cases, it makes sense to decrease your stash by paying extra taxes by operating as a business. It can be and has been done legally.
The person I was initially responding to mentioned trading income specifically. I didn't get the impression that this person has registered as an RIA to "professionally" manage their own investments. A random local "financial guy" isn't something that exists in America. Financial management is a very regulated profession. Either through the RIA route or the commissioned broker route.
Is there a situation where it's worth pursing that? Maybe there is.
Certainly if you can rationally (in the eyes of the IRS) stretch an income producing hobby (especially one that has any major associated expenses) into a business structure, it would a good idea to do that.
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I have a couple of quick tax questions. Background information: a full time job and 2 side gigs, one of them selling tradelines.
-I made a few hundred dollars selling tradelines last year, but I also paid an annual fee for one of the cards I'm using. Can I deduct the annual fee as expenses?
-I have another side gig which lost money last year (around 2-3K loss). I didn't get 1099 form for that, but I can document my revenues and expenses. Can I subtract this loss from the tradelines business revenue and enter about $2000 business loss for 2016 in the tax form as a result? If I do that, will I get a tax deduction from this loss (from the taxes I pay for full time job income)?
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following
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Seems like most of you are concerned with reporting very large sums. Anyone understand how smaller ones would be reported/taxed? I'm thinking less than 2k given I'd be starting with only 1 card. Seems like hobby income is questionable given that profit is intended... can we just claim as miscellaneous additional income? Or do we need to file as self-employment profit? I realize it's not as much of an issue for small sums, but in case I decide to go all in I'd like to understand it better.
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Seems like most of you are concerned with reporting very large sums. Anyone understand how smaller ones would be reported/taxed? I'm thinking less than 2k given I'd be starting with only 1 card. Seems like hobby income is questionable given that profit is intended... can we just claim as miscellaneous additional income? Or do we need to file as self-employment profit? I realize it's not as much of an issue for small sums, but in case I decide to go all in I'd like to understand it better.
If you get a 1099-Misc with box 7 checked, it is self employment income. You need to fill out Schedule C (or C-EZ) and Schedule SE.
If it's less than $600, maybe they just don't send you a 1099 at all.
https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/interest-dividends-other-types-of-income/1099-misc-independent-contractors-and-self-employed/1099-misc-independent-contractors-and-self-employed-1
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Seems like most of you are concerned with reporting very large sums. Anyone understand how smaller ones would be reported/taxed? I'm thinking less than 2k given I'd be starting with only 1 card. Seems like hobby income is questionable given that profit is intended... can we just claim as miscellaneous additional income? Or do we need to file as self-employment profit? I realize it's not as much of an issue for small sums, but in case I decide to go all in I'd like to understand it better.
If you get a 1099-Misc with box 7 checked, it is self employment income. You need to fill out Schedule C (or C-EZ) and Schedule SE.
[snip]
Unless it isn't self employment income. Per the 1099-MISC, Instructions for Recipient, Box 7, last sentence: "If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."
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Seems like most of you are concerned with reporting very large sums. Anyone understand how smaller ones would be reported/taxed? I'm thinking less than 2k given I'd be starting with only 1 card. Seems like hobby income is questionable given that profit is intended... can we just claim as miscellaneous additional income? Or do we need to file as self-employment profit? I realize it's not as much of an issue for small sums, but in case I decide to go all in I'd like to understand it better.
If you get a 1099-Misc with box 7 checked, it is self employment income. You need to fill out Schedule C (or C-EZ) and Schedule SE.
[snip]
Unless it isn't self employment income. Per the 1099-MISC, Instructions for Recipient, Box 7, last sentence: "If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."
If you weren't an employee of the payer, where you report the income depends on whether your activity is a trade or business. You're in a self-employed trade or business if your primary purpose is to make a profit and your activity is regular and continuous.
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PTF
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Same question and confused about what to do.
I have ~$1000 in income from selling tradelines. I can't think of any reasonable expenses to offset this on a schedule C, unless I did the card fee (yes...old card with a fee...benefits us enough currently to be worth it).
Do I put this as 1099 box 7 as it is reported, and do a Sched C and pay the extra taxes or do I just call it "misc" income and go the "hobby" route? What do others in a similar situation do?
Thank you.
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Arebelspy - could you clarify what you mean? Report as nonemployee compensation with a Schedule C as if you're running a "business", or go the "hobby" route and report under misc income? I'm talking a small amount, ~1000
Because that's at best a hobby. Certainly not a business.
The IRS certainly don't count most things that make lots of money and you may spend significant time at as a hobby, instead of a business.
So you believe that you can just decide to pay yourself a 2% asset management fee and treat it a business because you want to ?
No, my point is hobby and business are specific terms to the IRS, and you can't merely tell by whether or not it makes money, or even how much time is spent. You need to go by their guidelines (as you quoted above). :)
It seems like we're in agreement.
The IRS rules a lot of times are counterintuitive, even. Don't try to use logic or common sense. ;)
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Arebelspy - could you clarify what you mean? Report as nonemployee compensation with a Schedule C as if you're running a "business", or go the "hobby" route and report under misc income? I'm talking a small amount, ~1000
<<snip>>
Not ARS, but I would refer you to the resources referenced upthread by brooklynguy here:
https://forum.mrmoneymustache.com/taxes/small-business-and-miscellaneous-income-best-practices/msg1413103/#msg1413103
I'd recommend following the rules straight from the horse's mouth rather than what some other random (no offense, ARS :-) ) person on the Internet does.
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
SEP contributions definitely don't escape FICA if you're a sole proprietor, I'm not sure about S-Corp.
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
SEP contributions definitely don't escape FICA if you're a sole proprietor, I'm not sure about S-Corp.
Does this change if you already hit the limit on FICA under W2 wages?
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
SEP contributions definitely don't escape FICA if you're a sole proprietor, I'm not sure about S-Corp.
Does this change if you already hit the limit on FICA under W2 wages?
If you've already hit the social security income limit you'll pay the employer portion of FICA and the Employee portion of medicare tax, but not the employee portion of social security tax. A SEP contribution won't matter either way.
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
SEP contributions definitely don't escape FICA if you're a sole proprietor, I'm not sure about S-Corp.
So far I'm not seeing the benefit to a SEP then, given that I have IRA space. Am I missing something?
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I'm trying to decide if doing a SEP would be worth it, if I have regular IRA space available. Do you pay less in FICA if the "employer" deposits the 20% as the employer contribution?
SEP contributions definitely don't escape FICA if you're a sole proprietor, I'm not sure about S-Corp.
So far I'm not seeing the benefit to a SEP then, given that I have IRA space. Am I missing something?
If you're over the income limit for deducting a traditional IRA you could still deduct a SEP which would probably be better than a Roth, since it means you're in a pretty high bracket compared to a mustachian retirement budget. The SEP would cause issues with a backdoor roth though, so in that case you might be better off with a solo 401k even though you've already maxed the employee portion elsewhere. If you're under the traditional IRA deduction limit, have a good workplace retirement plan, and have not already maxed all other tax advantaged space, then no, I wouldn't bother with a SEP.
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Following.
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I was trying to figure out what my taxes will be for this year, and wanted to see if I understood the new 20% pass-through deduction correctly.
I will probably make around $5,000 in self-employment income this year (tradelines and a few other things).
Would my available deductions looks like this:
$5,000 total income
20% pass through deduction = $1,000 deducted
20% contributed to SEP IRA = $1,000 deducted
Half of self-employment tax = $382.50 deducted
So I only have to pay tax on 52.35% of the income. Does this look right?
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I was trying to figure out what my taxes will be for this year, and wanted to see if I understood the new 20% pass-through deduction correctly.
I will probably make around $5,000 in self-employment income this year (tradelines and a few other things).
Would my available deductions looks like this:
$5,000 total income
20% pass through deduction = $1,000 deducted
20% contributed to SEP IRA = $1,000 deducted
Half of self-employment tax = $382.50 deducted
So I only have to pay tax on 52.35% of the income. Does this look right?
Others who are more qualified will comment, I am sure.
But three things:
1. The 20% pass through is only for qualifying pass through entities. In looking at it I think tradeline sales qualifies, but doublecheck that you do in fact qualify.
2. The 20% pass through might be after the SEP deduction, so it might only be 20% of $4,000, so $800.
3. You may only be paying income tax on the remainder, but you're still also paying the 15.3% SE tax on the $5K, so $765. This offset by the SE tax deduction by about half, of course.
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I see, I guess I'll have to wait for some data points to see if it ends up qualifying.
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I don't know if it's legal to file as misc income and not claim small bus and pay FICA.
According to my research, you have the option of reporting side gig income as "hobby" income, which means it is just misc income and not subject to SE. You would not be able to write off related expenses, though, and my tax guy says that if you make money at your "hobby" for 3 out of the last 5 years, the IRS is likely to consider this a business, so you'd need to start filing as a pass-through at that point, with all the fixins (expense write-offs, SE tax, etc.)
As always, YMMV.
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Long time lurker here.
I'm late to the party. I only started doing tradelines a few months ago.
I see several references above to the small amount of time being put into this and I just want to point out that I think the amount of time actually spent on tradelines is probably quite a bit more than you think. No, it's not 40 hours a week, but just look at this thread and the 'main' 2 threads dealing with this topic that total 65 pages.
How much time have you spent in reading those threads to understandtradelines? How many other articles have you read about tradelines? How much time did you spend researching the new and old companies and figuring out what credit cards would work? How about this thread and others looking at tax strategies? How much time have you spent telling a friend or coworker that they should do this (and you would get 'referral' pay)? How much time have you spent researching what credit cards to apply for so they can be used for this in the future? How many times have you called credit card companies asking for a CL increase (or did it online)? Or called reconsideration lines but first spent the time to look at your credit report and educated yourself with the exact reasons that you need this new, specific card?
I point this out not to minimize the hourly wage or rip on tradelines but to simply state that there is more time involved in this than the 20 minutes a month in adding AU's - and that it might change your taxes. Additionally, people like Boarder42 obviously have even more time invested than others who are doing this from a more passive angle. There also is a lot more time put in for the 'start up' than 'down the road'.
I should also say that I'm not an accountant or lawyer.
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Long time lurker here.
I'm late to the party. I only started doing tradelines a few months ago.
I see several references above to the small amount of time being put into this and I just want to point out that I think the amount of time actually spent on tradelines is probably quite a bit more than you think. No, it's not 40 hours a week, but just look at this thread and the 'main' 2 threads dealing with this topic that total 65 pages.
How much time have you spent in reading those threads to understand tradelines? How many other articles have you read about tradelines? How much time did you spend researching the new and old companies and figuring out what credit cards would work? How about this thread and others looking at tax strategies? How much time have you spent telling a friend or coworker that they should do this (and you would get 'referral' pay)? How much time have you spent researching what credit cards to apply for so they can be used for this in the future? How many times have you called credit card companies asking for a CL increase (or did it online)? Or called reconsideration lines but first spent the time to look at your credit report and educated yourself with the exact reasons that you need this new, specific card?
I point this out not to minimize the hourly wage or rip on tradelines but to simply state that there is more time involved in this than the 20 minutes a month in adding AU's - and that it might change your taxes. Additionally, people like Boarder42 obviously have even more time invested than others who are doing this from a more passive angle. There also is a lot more time put in for the 'start up' than 'down the road'.
I should also say that I'm not an accountant or lawyer.
I agree with your central thesis, but in my case the time allocated to much of what you've described is minimal, and time spent on one other thing related to tradelines is something I think you didn't mention.
Probably several hours reading the two main threads and this one, including the time to respond to others who have questions that I could answer.
Zero other articles read about tradelines.
Zero time spent researching the companies. About 15 minutes spent figuring out which cards would work.
Zero time telling friends.
Zero time researching cards for future use. I just apply for cards with good bonuses and if they can be used for this also, then great; otherwise I cancel them.
Zero time asking for CL increases or calling recon lines.
Stuff you didn't list:
Time spent getting set up with the companies. Submitting canceled checks, submitting W-4's, reading their FAQ's, getting a login, etc. Easily several hours with both companies.
Ongoing maintenance. Noting when cards pass a milestone and submitting requests for adjusted commissions.
Strategy. Figuring out in the beginning how this activity would interrelate with my other credit card activities. Figuring out which cards should go with which companies. Deciding if and how to do private sales.
Taxes. Understanding the relevant tax laws and dealing with the 1099s every year.
A lot of the time sink is in the beginning as I went through a learning curve. Now that I've been doing this for a while, I am really in maintenance mode and it does just take 30 minutes or so per AU to do the add, make a charge, wait, remove the AU, and shred the card.
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I was trying to figure out what my taxes will be for this year, and wanted to see if I understood the new 20% pass-through deduction correctly.
I will probably make around $5,000 in self-employment income this year (tradelines and a few other things).
Would my available deductions looks like this:
$5,000 total income
20% pass through deduction = $1,000 deducted
20% contributed to SEP IRA = $1,000 deducted
Half of self-employment tax = $382.50 deducted
So I only have to pay tax on 52.35% of the income. Does this look right?
Others who are more qualified will comment, I am sure.
But three things:
1. The 20% pass through is only for qualifying pass through entities. In looking at it I think tradeline sales qualifies, but doublecheck that you do in fact qualify.
2. The 20% pass through might be after the SEP deduction, so it might only be 20% of $4,000, so $800.
3. You may only be paying income tax on the remainder, but you're still also paying the 15.3% SE tax on the $5K, so $765. This offset by the SE tax deduction by about half, of course.
Newbie question: what are some examples of qualifying pass through entities for selling tradelines?