Self-employment tax tips.
Who is self-employed?
The IRS, of course, has the answer:
Generally, you are self-employed if any of the following apply to you.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business).
- Do you get a Form 1099 or a W-2?
Can you be considered self-employed even if you have a normal job?
Yes, as the IRS notes, you can run a business on a part-time business.
Beware of the hobby loss rule.
If you’re going treat your blog like a business for tax purposes, then be prepared to prove to the IRS you are running the blog as a business rather than a hobby.
Business expenses are tax deductible. What’s a business expense?
Per the IRS:
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.”
Example of business expenses (generally):
- Car (mileage v. depreciation),
- Rent/home office,
- Meals and entertainment,
- Clothing/make-up (the Jenna Marbles example).
Examples of business expenses for professional writers/podcasters:
- Trip to Vegas with Chris/Good Looking Loser,
- MacBook Pro (Amazon),
- Microphone for podcasts (Amazon),
- SoundCloud subscriptions,
- iPhone bill,
- Hosting/server/Host Gator/Cloudflare fees,
- Web design/logo design,
- Email newsletter service/MailChimp/aWeber,
- Themes for blog,
- Books that I review on Danger & Play,
- Camera for D&P pictures and YouTube (Amazon),
- Sex pillow I bought to review.
As you can see, there are many tax benefits to running your own blog. Yes you can earn a living (as I do) or earn some spare cash (as others do) while blogging. You can also save on your tax bill.
Retirement Planning for the Self-Employed.
“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
You can pay taxes today or you can pay taxes tomorrow, but you will pay taxes. You can pay taxes before making a contribution to a retirement account, 401(k), or IRA, or you can pay taxes tomorrow when you withdraw the money.
Is it better to pay your taxes before making a contribution to your IRA, or after?
Generally speaking, it’s better to defer your tax payments, so that your contributions to your retirement account can benefit from the law of compounding interest.
SEP 401(k)/Self-Employed 401(k)/Uni-(k).
A SEP 401(k) is a retirement account available to self-employed people. Again, we look to the IRS for guidance:
Simplified Employee Pension (SEP)
- Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $52,000 for 2014 ($53,000 for 2015).
With a SEP 401(k), you stash away pre-tax income to benefit from the law of compounding interest. You don’t pay taxes until you withdraw your money, decades later.
In other words, your money grows tax free. The $10,000 you put in a SEP will be worth considerably more than it would have been if you had contributed $7,500 in after-tax income.
Should you open a Roth 401(k) or a SEP 401(k)?
With a Roth 401(k), you pay your income taxes today. You do not pay taxes when you make withdrawals from your IRA, sometime in the future.
Wait, won’t you miss out on the law of compound interest by funding a Roth IRA? If you will earn more in the future (and thus be taxed at a higher rate) than you earn today, it may make more sense to pay your taxes today.
- Talk to your tax adviser.
- If you think you’ll pay more in taxes in the future than you pay today, then a Roth IRA or Roth 401(k) may be right for you.
How can you open a self-employed 401(k)?
- Go to Fidelity, Schwab, Vanguard, or any other low-cost brokerage firm.
What are the best funds to invest in?
- Mutual funds v. ETFs. For tax purposes, ETFs are superior. But do your own research.
- Invest in low-fee ETFs like VTI.
- Dollar-cost average into the market at regular intervals.
- Track the overall market rather than try to trade.
- Be an investor, not a trader.
- International banking/ATMs/no fees.
- Fidelity and Schwab both offer great cash management accounts.
- Foreign Earned Income Exclusion: If you live outside of the U.S. for 330 full days in a 12 month period, you won’t have to pay taxes on your first $99,200 in 2014.
Wealth management: Is it worth it or is it scam?
Should you hire someone to manage your money? Generally private wealth management firms/banks charge a percentage of your assets under management as a flat fee for all trading and investment services.
You don’t need to be a wealth management client and can mange your own investments via Fidelity, Vanguard, or other brokerage.
Consider the pros and cons of wealth management:
- The days of being scammed by your financial adviser are largely over.
- A good adviser will steer you into a diversified, global portfolio.
- Wealth management fees are tax deductible.
- You get access to private banking, as most wealth management firms have sister banks.
- Example: Merrill Lynch wealth management clients get access to Bank of American private banking.
- When you need something, you make a call to your adviser. It makes banking easy.
Tax resources for the self-employed:
- Self-Employed Individuals Tax Center (IRS),
- Retirement Plans for Self-Employed People (IRS),
- Deducting Business Expenses (IRS),
- Is Your Hobby a For-Profit Endeavor? (IRS),
- 10 Tax Benefits for the Self-Employed (Forbes),
- Fidelity Self-Employe 401K (Fidelity),
- Vanguard 401K (Vanguard),
- ETFs v. Mutual Funds (Forbes),
- Retirement/401k/investment calculators (Bankrate),
- Foreign Earned Income Exclusion (IRS),
- Money: Master the Game (Cernovich book review).