Money Meets Medicine Podcast
MMM 86: Solo 401Ks and Saving Taxes on 1099 Income
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Taxes are a boring topic to talk about so this won’t be fun. Taxes, 401Ks, and 1099 are the least favorite topics but they need to be discussed. As a physician you are probably asking how you can save more money on your taxes. The most popular answer is…earn less income! More jokes to come today so we can try to make this topic fun! Let’s go ahead and start with 1099 income and how you can save on your taxes with this.
Saving Taxes on 1099 Income
When you have a W2 it doesn’t mean you don’t also have a 1099. As a physician 1099 income can come from emergency medical services or other miscellaneous things. Just because you are a physician, it doesn’t mean you only have physician income. You may be a real estate agent, or do chart reviews, or maybe you have a blog or a podcast. There are so many things that could qualify as 1099 income.
What comes up most when talking about 1099 income is the self-employment tax. This exists solely to fund Social Security and Medicare programs. When you are self-employed you need to add this in yourself. At some point the IRS may have you make payments throughout the year to reach the amount you need. The FICA tax stops at $142,800. If you make over that, you aren’t taxed the 6% on any additional income. Halfway through the year you may notice that your paycheck is suddenly 6% higher. This is because you are no longer paying this tax. With that being said, anything over that amount that you make, even if it is outside of your regular job, you do not have to pay the 6% tax.
There are a lot of potential write-offs in a business. One thing is your vehicle. If your vehicle is used for business, you can deduct car payments, appreciations, repairs, and more if you keep very good records of everything. If you don’t want to keep those records you can do a standard deduction. This is a price per mile. There are strict rules about which miles count and which ones do not. You need to talk to your CPA to see if your mileage qualifies. “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” (IRS Source) Some other things that could be deducted are your office, phone, and internet.
You can deduct for your home office if you have a dedicated place in your home. You take that square footage and subtract it from your home’s total square footage to get the % of your home that the office uses. Then deduct that percentage of your household expenses such as electric, if the roof over your office needs fixed, etc. If your office is 10×10 and your whole home is 1000 square feet, then 10% of basic expenses can be deducted. Sometimes if your office space is smaller, you may want to do the standard deduction of $5 for every square foot of office space.
Other deductions you can include are things like computers, tools, cameras, TVs, and office equipment. Things like computers and other items get worn down (as the IRS says) so it is written off over multiple years. If you have a computer that you are writing off, but you use it for other things outside of your business, you can only write off a percentage of it. Same for your cellphone. Unless it is strictly used for business, you can’t write off the entire bill. Some people will write the whole thing off either way, and it probably won’t catch the attention of the IRS, but to do it right you would divide it up between business and personal.
A way to reduce your income is to hire your spouse or kids! Your spouse can be working for your business, and you can be paying them a fair wage. They can do appointment setting, following up, office cleaning, and anything else that the back end of your business may need. You can also pay age-appropriate children to do shredding, stamping, etc. This will reduce your business income and keep it in the family.
Just remember that everybody has different income and different situations, and this is just general information. This is just tax advice to get the wheels spinning about things that could save you quite a bit of money.
Solo 401K, Sep IRA, and Backdoor Roth IRA for Physicians
Saving on your taxes isn’t all about deductions, it is about investing too. Any time you can pay yourself you should. Talk to your CPA about what you can and cannot do. Most CPAs are reactive so there isn’t any planning involved, but if you are working with somebody throughout the year they will be more proactive in the planning and they can suggest things and guide you through it.
As a business owner you wear two hats in a 401K plan. You are the employee and the employer, and you can make contributions in both capacities. The owner can contribute both elective deferrals and employer nonelective contributions. Elective deferrals are up to 100% of compensation or earned income in the case of somebody self-employed up to the annual contribution limit, which is $19,500 in 2020 and 2021 or $26,000 in 2020 and 2021 if age 50 or over. You can also do employer nonelective contributions up to 25% of your compensation as defined by the plan. If you are self-employed, you must make a special computation to figure out the max amount for both elective deferrals and nonelective contributions. For more information on both self-employed and employer 401K guidelines, here is the link to the IRS.
Think about taking a portion of your income and increase your savings rate in a pre-taxed fashion through a Solo 401K. If you are doing a Backdoor Roth IRA, it is in your best interest to also have a Solo 401K. Here is some information about a Solo 401K, limitations, and different types. The 8606 tax form is used for what kind of IRA money you have. If the number isn’t zero, there is a problem. You want all your other IRA money to be zero if you are doing a Backdoor IRA. The Solo 401K is not asked about on the 8606 form. A Solo 401K is more paperwork than a SEP-IRA, but it is worth it.
Once you start getting more deductions and more income it is time to stop using Turbo Tax and get a CPA who knows what they are doing! We know this isn’t a fun topic, but this information is helpful and can save taxes on your 1099. It is definitely worth remembering. Click here for information directly from the IRS on deducting business expenses and remember, get a CPA who will help you be proactive instead of reactive!
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