Author Topic: I'm officially self-employed and now super skeered!!  (Read 3618 times)

Giro

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I'm officially self-employed and now super skeered!!
« on: September 09, 2016, 08:18:18 AM »
So, I made a decision regarding my job and went with the 1099 status offer.  I negotiated as hard as I could but the rate is only $85 an hour.  I was asking 145k as an employee.  On the surface, it looks solid and gives me quite a raise, but crunching the numbers starts to scare me.  I know it's just the idea that I have to pay my own taxes now and keep my records organized and straight.  I'll be looking at solo 401k options today.

I need two solid years of income before I can retire. 

I'm so thankful that I don't need benefits and I live in dirt cheap Ohio.  We just paid our annual health insurance bill for the entire family $555.  And I now will deduct that as an expense!  woo  I'm also getting some hardwood installed in my new home office and will deduct that also. 

I'm tossing around the idea of borrowing money from the home again since I can expense a portion of the new mortgage to the home office expense....but not sure that is worth it.  It adds a little to my previous calculations.  I just see us missing out on that expense since we have no mortgage right now. 

Does anyone claim a home office expense?  What all do you deduct? 





Tetsuya Hondo

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Re: I'm officially self-employed and now super skeered!!
« Reply #1 on: September 09, 2016, 08:35:39 AM »
Find a good accountant and talk these things through with them. I've found there's a lot of little wrinkles and trade-offs to what you expense with the house. Some stuff, like the phone, computer, internet, supplies, etc. is easy. But I recall that expensing some things (for me it was converting an unfinished space to a home office) can create issues. Can't remember what it was, but we didn't deduct the office renovation so that we could deduct...a portion of the mortgage and home expenses?...was that it? My memory is hazy, but I remember that it wasn't a cut and dry issue with those type of expenses. Anyway, talking to an accountant is well worth it.

Given your income it may make sense to establish an S-Corp if your company can send a 1099 and checks to a Giro LLC. This allows you to take a good portion (50% seems to be a common rule of thumb) in dividends versus salary, which is subject to payroll taxes. That will probably have a bigger impact on your taxes than anything else.
« Last Edit: September 09, 2016, 08:38:20 AM by Tetsuya Hondo »

Miss Piggy

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Re: I'm officially self-employed and now super skeered!!
« Reply #2 on: September 09, 2016, 08:40:43 AM »
Regarding re-mortgaging your house for the home office deduction: We paid off our house about 5 years ago, and to me, that peace of mind is worth more than the small deduction we would get from the home office. In our case, the home office is 1 room out of an 8-room house, so it boils down to a 1/8th deduction times our tax rate (let's ballpark 25%). It ends up being a fairly insignificant amount of money for us, and quite frankly, I'd rather have a paid-off house.  That said, we do share all of our house-related expenses with our accountant, and she calculates the appropriate deductions for those for the home office. (I know I'm talking out of both sides of my mouth here, but really, we appreciate the peace of mind of having a paid-off house.)

You say you only plan to work for a couple more years...is that how long you'd hold onto the mortgage? Again, not worth it for that short amount of time, in my opinion. YMMV.

pbkmaine

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Re: I'm officially self-employed and now super skeered!!
« Reply #3 on: September 09, 2016, 08:41:09 AM »
Agree. You want to find an accountant whose specialty is small business.

Giro

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Re: I'm officially self-employed and now super skeered!!
« Reply #4 on: September 09, 2016, 08:56:03 AM »
I'm going to find an accountant.  Seems absolutely ludicrous since I have a CPA license but I'm inactive status and I've NEVER practiced income tax accounting. We have a bunch of W2 income (husband still works full time), pension income, my normal income, etc.  It's getting complicated for sure. 

 looking forward to getting the most out of the tax shelters. 

I just need to find a balance between trying to get the most hours possible (which will be my inclination) and taking some breaks.  I was just writing down all of the remaining holidays and which weeks I'll have to bank hours to get the most billable time.  ugh.   I need to chill wrt that. 


Giro

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Re: I'm officially self-employed and now super skeered!!
« Reply #5 on: September 09, 2016, 08:57:49 AM »
And also, yea having no mortgage is really nice.  But I have no problem having a mortgage just for the leverage and cheap cash.  I don't see the real peace of mind if you have the money to pay off the mortgage anyway. 

I'll check out the tax implications. 

Cpa Cat

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Re: I'm officially self-employed and now super skeered!!
« Reply #6 on: September 09, 2016, 10:04:40 AM »
Bear in mind that you can take the simplified home office deduction ($5/sq ft, up to 300 sq ft) and still deduct home mortgage interest and property taxes on Schedule A as itemized deductions.

I tend to prefer it because it's a safe harbor (not likely to be audited) and because it's simpler for the client to deal with from a record-keeping perspective. It also avoids complications from depreciation when the home is sold. However, my more aggressive clients usually prefer deducting a percentage of actual home expenses.

Iplawyer

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Re: I'm officially self-employed and now super skeered!!
« Reply #7 on: September 11, 2016, 12:32:41 PM »
Our accountant told us to rent our home office to our S-Corp instead of depreciating or anything else.  We've done it for years.  It is one way to move S-Corp cash to you without paying SSN and Medicare on the proceeds too.  Of course you personally have to take the rent as rent on your personal tax returns.

Giro

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Re: I'm officially self-employed and now super skeered!!
« Reply #8 on: September 12, 2016, 07:58:57 AM »
So, if I use an LLC for both of our "businesses" and net those on my taxes to offset my business income with husband's business losses, do I need to calculate my solo 401K amount on the net of both businesses?

e.g.    My income - $178,000  My business expenses $10,000.  I thought I would be able to contribute $168,000 * 20% + $18,000 = $51,600.     But, if I use the net of the businesses that number is much less.  My income - $178,000, My business expenses $10,000, my husband's business loss $15,000.  So, I could only contribute $48,600 to my 401k.

I know I need to ask an accountant, but just curious if anyone does this.

BTDretire

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Re: I'm officially self-employed and now super skeered!!
« Reply #9 on: September 12, 2016, 09:19:28 AM »
We have been self employed for 16 years, my wife is the drive one, I'm just the horse to move things.
 Our keys have been keeping overhead low, and putting in a lot of hours.
I would not suggest spending money to save tax dollars, that's usually spending $1 to save 40 cents, not a good idea, especially if you only expect two more years or even 4 more years. Longer term some tax saving spending makes more sense.
 Just use the skeered as energy to get more done.
Our earnings are not even close to $85 an hour, but I know expenses come out of that.
So keep those minimal.
Also, I don't mean to limit tax savings investments, IRA, 401K, etc. I just meant don't
spend a lot revamping an office that will not be important two years from now.

BlueHouse

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Re: I'm officially self-employed and now super skeered!!
« Reply #10 on: September 12, 2016, 10:27:18 AM »
Our accountant told us to rent our home office to our S-Corp instead of depreciating or anything else.  We've done it for years.  It is one way to move S-Corp cash to you without paying SSN and Medicare on the proceeds too.  Of course you personally have to take the rent as rent on your personal tax returns.
I have an S-Corp too, and mine told me the opposite.  All I do now is take a pro-rated portion (percentage of my home used exclusively for my business) of all of my utilities.  Might also include HOA because that's not deductible on Sched A. 

This link gives a decent description of the whys and why nots.  I think most of my expenses would be phased out /reduced due to having to pay AMT.
http://www.watsoncpagroup.com/kb/Paying-Rent-Home-Office_170.html

Giro

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Re: I'm officially self-employed and now super skeered!!
« Reply #11 on: September 12, 2016, 11:46:44 AM »
We have been self employed for 16 years, my wife is the drive one, I'm just the horse to move things.
 Our keys have been keeping overhead low, and putting in a lot of hours.
I would not suggest spending money to save tax dollars, that's usually spending $1 to save 40 cents, not a good idea, especially if you only expect two more years or even 4 more years. Longer term some tax saving spending makes more sense.
 Just use the skeered as energy to get more done.
Our earnings are not even close to $85 an hour, but I know expenses come out of that.
So keep those minimal.
Also, I don't mean to limit tax savings investments, IRA, 401K, etc. I just meant don't
spend a lot revamping an office that will not be important two years from now.

all good thoughts.  I don't have any business expenses.  I'm using my current home office space.  The mortgage was going to be used to pay off an auto loan, but I calculated the savings to be barely anything at all.  totally not worth even doing the paperwork.

Axecleaver

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Re: I'm officially self-employed and now super skeered!!
« Reply #12 on: September 12, 2016, 01:47:58 PM »
Congrats! One nice thing about your new setup is that you'll never have to work extra hours without getting paid for them. Makes the 60-80 hour weeks a lot more pleasant, in my experience.

I take the safe harbor home office exemption, too. Simple, and what I perceive to be lower risk.

Your 401K contribution is calculated only on the basis of your particular business's earnings. So you're OK.

Quote
I think most of my expenses would be phased out /reduced due to having to pay AMT.
Bluehouse, business expenses are calculated on Schedule C, until a net profit (or loss) is determined. That figure comes over to your 1040 on line 12. So the AMT doesn't affect business expenses, they're netted out on Sch C.

Proud Foot

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Re: I'm officially self-employed and now super skeered!!
« Reply #13 on: September 12, 2016, 01:55:13 PM »
Congrats on your new setup!  Definitely talk with an accountant about the S-Corp thing.  They will be able to give you a good idea of what salary would be acceptable to pay yourself and then take the rest as dividends.  Also weigh your salary with the ability to completely max out your solo 401k.

Giro

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Re: I'm officially self-employed and now super skeered!!
« Reply #14 on: September 12, 2016, 02:14:19 PM »
Congrats on your new setup!  Definitely talk with an accountant about the S-Corp thing.  They will be able to give you a good idea of what salary would be acceptable to pay yourself and then take the rest as dividends.  Also weigh your salary with the ability to completely max out your solo 401k.

I would love to do that but I don't think it applies to me.  I will be working a contract and I don't see any justification that my salary should be less than what the company is paying me. 

My husband's side business always loses money and this year I was going to have to file it as a hobby instead.  now, I'm going to lump my business with his and use his losses to offset my income.  SAWEET!! 

I get my 1099 contract this week, so I'll read thru it with a fine-tooth comb. 

Pretty excited about the opportunities.

Axecleaver

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Re: I'm officially self-employed and now super skeered!!
« Reply #15 on: September 13, 2016, 07:31:52 AM »
Whether or not you earn income from a business, doesn't change how the IRS characterizes his business. Unless what you're saying is that it'll all be a single business, with some activities that make a profit and others that don't. I _think_ that would work.

"Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit." Here's the rules the IRS uses to determine if it's a hobby or not. You're free to call it a business until you get audited. The rule about "makes a profit 3 years out of 5" is a free pass, but you can lose money for 20 years in a row if you can pass the other nine hobby rules.

https://www.irs.gov/uac/business-or-hobby-answer-has-implications-for-deductions
https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/small-business-self-employed-other-business/income-expenses/income-expenses

Tetsuya Hondo

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Re: I'm officially self-employed and now super skeered!!
« Reply #16 on: September 13, 2016, 07:36:00 AM »
Congrats on your new setup!  Definitely talk with an accountant about the S-Corp thing.  They will be able to give you a good idea of what salary would be acceptable to pay yourself and then take the rest as dividends.  Also weigh your salary with the ability to completely max out your solo 401k.

I would love to do that but I don't think it applies to me.  I will be working a contract and I don't see any justification that my salary should be less than what the company is paying me. 

My husband's side business always loses money and this year I was going to have to file it as a hobby instead.  now, I'm going to lump my business with his and use his losses to offset my income.  SAWEET!! 

I get my 1099 contract this week, so I'll read thru it with a fine-tooth comb. 

Pretty excited about the opportunities.

Eh. I would still talk the S-Corp setup with an accountant. It certainly can't hurt. And it could help a lot.