1099-MISC for moonllighting

[dreambig2night]

Hi,

I'm a resident earning a salary in the mid $50's. Recently I started moonlighting and will be making an additional $50K a year.

My goal is to pay of my student loans which currently total $250K asap.

What is the best way to pay of my loans considering I will be making an additional $50K?

It sucks that a huge chunk of the 1099 income goes off in taxes!

If they had a scheme where I could put all my 1099 income into my student loans and they told me it would'nt be taxed, I would be thrilled.

what about the ~$25K loan interest that accumulates every year. Can I not itemize deduct all of the loan interest?

-Thanks!

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[nephappl]

Unfortunately the extra 50K are considerd wages and are taxable at a regular rate of 25% federal if I am not mistaken, on top of it you have to pay Medicare taxes, social cecurity tax , state tax if your state taxes income, citi tax if you live in NYC etc. A rough rule is that for every dollar you get 40% goes on taxes.
Have never heard you can pay student loans with pre-tax money.
You can hear many advices mine would be to put the money into the principal of your smaller loan as this will reduce interest in the future; other option is to put it on the principal of the higher interest loan you have.
Interest are tax deductible from your taxable income but you do better paying principal first
Just an opinion

 

[krl7044]

Hi,

I'm a resident earning a salary in the mid $50's. Recently I started moonlighting and will be making an additional $50K a year.

My goal is to pay of my student loans which currently total $250K asap.

What is the best way to pay of my loans considering I will be making an additional $50K?

It sucks that a huge chunk of the 1099 income goes off in taxes!

If they had a scheme where I could put all my 1099 income into my student loans and they told me it would'nt be taxed, I would be thrilled.

what about the ~$25K loan interest that accumulates every year. Can I not itemize deduct all of the loan interest?

-Thanks!

"You may be able to deduct up to $2,500 of the interest you paid on student loans on your federal individual income tax return. The amount of your student loan interest deduction will be phased out if your modified adjusted gross income is between $55,000 and $70,000 ($110,000 and $140,000 if you file a joint return). You will not be able to take a student loan interest deduction if your modified adjusted gross income is $70,000 or more ($140,000 or more if you file a joint return)."

So you have two solutions as far as I know:
1) As an independent contractor, you need to write off as many business expenses as you can (including car, travel, materials or a home office if applicable). You might want to consult with a CPA who can tell you exactly what you can write off.
2) As an independent contractor you can open a retirement plan (such as Individual 401k plan offered by Vanguard) to decrease your taxes (and your take home).

Since your goal is to repay your loan, I would think that only #1 will work for you, since presumably your interest is around 7.9%, so you really would want to pay down that loan as quickly as you can. I would start paying the high interest one first. Yes, you will pay higher taxes, but if you can knock off your loan in 5 years, you'll be way ahead of most of your peers.

 

[TexasPhysician]

"You may be able to deduct up to $2,500 of the interest you paid on student loans on your federal individual income tax return. The amount of your student loan interest deduction will be phased out if your modified adjusted gross income is between $55,000 and $70,000 ($110,000 and $140,000 if you file a joint return). You will not be able to take a student loan interest deduction if your modified adjusted gross income is $70,000 or more ($140,000 or more if you file a joint return)."

So you have two solutions as far as I know:
1) As an independent contractor, you need to write off as many business expenses as you can (including car, travel, materials or a home office if applicable). You might want to consult with a CPA who can tell you exactly what you can write off.
2) As an independent contractor you can open a retirement plan (such as Individual 401k plan offered by Vanguard) to decrease your taxes (and your take home).

Since your goal is to repay your loan, I would think that only #1 will work for you, since presumably your interest is around 7.9%, so you really would want to pay down that loan as quickly as you can. I would start paying the high interest one first. Yes, you will pay higher taxes, but if you can knock off your loan in 5 years, you'll be way ahead of most of your peers.

This is a great post, but to maximize your tax deductions, I highly recommend you learn about them yourself. No CPA can maximize your deductions if you don't understand when to take them and how to document them properly.

I'd recommend a few sources:
1. Start with a book by Sandy Botkin called "lower your taxes big time". Last I checked it was cheapest on amazon. There is a brand new edition

2. Get the Sandy Botkin CD's called Tax Strategies For Business Professionals. It is cheapest on eBay. The newest edition is on CD's and is a little dated. It is still very useful as he explains how to document deductions properly and how the IRS goes after you. Without documenting properly, the IRS can disallow many otherwise legitimate deductions.

3. http://www.mdtaxes.com/mdbusexp.html
This is a simplified version of what may be deductible. Use this as a checklist as you understand deductions through the Botkin resources.

I have no relationship with Sandy Botkin other than admiring his work. He is a tax attorney who previously worked for the IRS. Using amazon/eBay for the book/CD's will cost less than $150, and they save me thousands in taxes every year. Seriously the best money I've ever spent.

 

[dreambig2night]

Thank you! All your posts have been helpful.

So I was looking into potential business expense deductions and being a resident, I take hospital call and home call. When I take home call I put a lot of orders through my computer instead of going in. So does my home office space qualify not just as work space but a location where I am doing direct hospital related work?
If so I was looking at work travel miles I could deduct. Can I deduct travel from my home office space to another hospital as travel from one location of work to another location of work?

I understand I can also deduct any car expenses such as maintenance from my taxes.

TexasPhysician, the web link was very helpful.
Thanks again!

 

[ferning]

Take a loan from the pretax 401k and pay the higher interest loan

But i say screw it, buy a corevette instead

 

[The White Coat Investor]

Hi,

I'm a resident earning a salary in the mid $50's. Recently I started moonlighting and will be making an additional $50K a year.

My goal is to pay of my student loans which currently total $250K asap.

What is the best way to pay of my loans considering I will be making an additional $50K?

It sucks that a huge chunk of the 1099 income goes off in taxes!

If they had a scheme where I could put all my 1099 income into my student loans and they told me it would'nt be taxed, I would be thrilled.

what about the ~$25K loan interest that accumulates every year. Can I not itemize deduct all of the loan interest?

-Thanks!

The first thing to do when coming up with a financial plan is to set goals. Your stated goal is not specific enough and once you've thought about it, may not even really be your goal. If I were a moonlighting resident, I'd put as much of my income into Roth accounts as possible, including a Roth IRA and a Roth Solo 401K set up through Vanguard. That would be more important to me than paying down my student loans as after residency completion you'll be in a much higher tax bracket. So the first extra $17,500 (Roth Solo 401K) + $5500 (Roth IRA)+ $5500 (spousal Roth IRA if married) would go toward retirement. Then everything after that would go toward my highest interest loans. With $250K of loans, you're almost surely not going to be able to pay them all off during residency. That's okay. If you keep living like a resident you can have them paid off within a year or two of residency graduation.

The really painful part about being an independent contractor with an income like yours is that marginal tax rate will be painful, mostly because of payroll taxes. You may be in the 25% federal, plus 5% state, plus 15% payroll taxes for a total of 45%! You could lower your tax bill by using a tax-deferred retirement account, but I wouldn't since you wouldn't get out of the payroll taxes anyway.

Since your gross income isn't too high, you should be able to deduct up to $2500 in interest a year on your student loans, but with $250K at 7-8%, that isn't even a quarter of the interest that accumulates each year. I'd probably do IBR payments, max out Roth accounts, and put everything else toward loans realizing that I'm still going to have most of the loans at the time of residency graduation.

Read up carefully about tax deductions. You're probably not going to get any huge deductions from your car. Commuting is not deductible. So if you went to your residency job, then drove to the moonlighting location, then drove home, the only deductible portion would be the part between job 1 and job 2. You can look into the whole home office thing, but it gets pretty tricky at times. Good luck. Be sure to concentrate on residency and not moonlighting. If you control your expenses, there will be plenty of time after residency to make gobs of money, save for retirement, and pay off those loans. The key is to not grow into your income all at once.

 

[tallash]

The first thing to do when coming up with a financial plan is to set goals. Your stated goal is not specific enough and once you've thought about it, may not even really be your goal. If I were a moonlighting resident, I'd put as much of my income into Roth accounts as possible, including a Roth IRA and a Roth Solo 401K set up through Vanguard. That would be more important to me than paying down my student loans as after residency completion you'll be in a much higher tax bracket. So the first extra $17,500 (Roth Solo 401K) + $5500 (Roth IRA)+ $5500 (spousal Roth IRA if married) would go toward retirement. Then everything after that would go toward my highest interest loans. With $250K of loans, you're almost surely not going to be able to pay them all off during residency. That's okay. If you keep living like a resident you can have them paid off within a year or two of residency graduation.

White Coat Investor - first, love your blog and frequent it often. I have a similar question related to moonlighting - I am similar to the OP in the sense that I moonlight a lot and am currently on track to double my salary to the high 90s/low 100s. I will not likely moonlight this much during my fellowship. Repaying my [below average] debt burden [low 100s] via IBR with plan to enter the PFSL after 120 payments. I currently have maxed out my Roth IRA for this year.

My question is: my hospital offers a 403b, no matching. Would it be smarter to utilize this first, or should I open a Roth Solo 401K through Vanguard? Unlikely to use the max 17,500 contribution this year, although that is a possibility next year. I am inclined to keep maxing the Roth IRA, then use the 403b but wanted to run it by someone more knowledgeable than myself.

 

[The JockDoc]

Re WCI's post - it looks like there is a chance you can deduct commuting expenses in the case where one commutes from home to a temporary work location:

http://www.irs.gov/publications/p463/ch03.html#en_US_2013_publink1000136362

In my moonlighting, I did independent contractor work performing disability evaluations using offices in many different cities that were rented for one day a month. There was no primary location. That seems to meet the IRS's deduction criteria.

 

[TexasPhysician]

Thank you! All your posts have been helpful.

So I was looking into potential business expense deductions and being a resident, I take hospital call and home call. When I take home call I put a lot of orders through my computer instead of going in. So does my home office space qualify not just as work space but a location where I am doing direct hospital related work?
If so I was looking at work travel miles I could deduct. Can I deduct travel from my home office space to another hospital as travel from one location of work to another location of work?

I understand I can also deduct any car expenses such as maintenance from my taxes.

TexasPhysician, the web link was very helpful.
Thanks again!

Yes, but you would need to establish a home office including the deduction.

Otherwise mileage commuting is not deductible unless from one job to another.

 

[wjs010]

you can make an extra 50k moonlighting? holy crap, thats awesome. For some reason I always thought of moonlighting as chunk change .

 

[krl7044]

White Coat Investor - first, love your blog and frequent it often. I have a similar question related to moonlighting - I am similar to the OP in the sense that I moonlight a lot and am currently on track to double my salary to the high 90s/low 100s. I will not likely moonlight this much during my fellowship. Repaying my [below average] debt burden [low 100s] via IBR with plan to enter the PFSL after 120 payments. I currently have maxed out my Roth IRA for this year.

My question is: my hospital offers a 403b, no matching. Would it be smarter to utilize this first, or should I open a Roth Solo 401K through Vanguard? Unlikely to use the max 17,500 contribution this year, although that is a possibility next year. I am inclined to keep maxing the Roth IRA, then use the 403b but wanted to run it by someone more knowledgeable than myself.

If you are paid with a W2, you can not open a Solo 401k. If you are paid with a 1099, a Roth Solo 401k at Vanguard might be a great idea. It is impossible to say whether you need to contribute to a 403b that doesn't have a match without knowing what types of investments are available there. If the cost is high, then I'd say forget it, and invest in a Roth and after-tax (I like individual municipal bonds). If the cost is low and good investment choices are available, you might want to see if there are enough funds to make a diversified/balanced portfolio.

 

[tallash]

The 403(b) has all Vanguard funds, including VTSMX which I am a big fan of. I think I'll go ahead and open it up and continue to max out the Roth.

 

[krl7044]

The 403(b) has all Vanguard funds, including VTSMX which I am a big fan of. I think I'll go ahead and open it up and continue to max out the Roth.

If you have a spouse, you can also contribute to their Roth IRA. Does your 403(b) have a Roth option? Some do, but you might want to read the plan documents just in case.

They only have investor shares? I work with corporate retirement plans (improving low quality plans is part of what we do), and this tells me only one thing: whoever selected investments for your plan has no idea what they are doing. In a company plan they should have Signal/Admiral shares! You might want to talk to your plan administrator. This is an extra 0.12% in fees, and it does accumulate over time. No reason that a company plan should have investor shares, since Signal shares are ALWAYS available inside retirement plans on any platform.