Keeping Freelance Income separate from regular salary?

[BroolynEMDoc]

Just curious how those of you who do freelance work separate their salaried pay from their untaxed income. I'm curious if I should set up a second business checking account or is there some other better way of organizing your finances.

---

Members don't see this ad.

 

[Arch Guillotti]

Just curious how those of you who do freelance work separate their salaried pay from their untaxed income. I'm curious if I should set up a second business checking account or is there some other better way of organizing your finances.

You should get a 1099 at the end of the year.

 

[The White Coat Investor]

Why would you need it separate? I mean, I guess if you put it into a different checking account it will help you keep the business expenses and revenue separate when it comes time to file a Schedule C, but that's about the only reason I can think of to do it.

Now if you have some big huge other enterprise, yes, separate it out. WCI, LLC has its own checking account and credit card and all of its income and expenses are clearly separated from my personal finances. But I didn't do that when I was just doing a little moonlighting on the side as a sole proprietorship whose name was my name.

 

[BroolynEMDoc]

Why would you need it separate? I mean, I guess if you put it into a different checking account it will help you keep the business expenses and revenue separate when it comes time to file a Schedule C, but that's about the only reason I can think of to do it.

Now if you have some big huge other enterprise, yes, separate it out. WCI, LLC has its own checking account and credit card and all of its income and expenses are clearly separated from my personal finances. But I didn't do that when I was just doing a little moonlighting on the side as a sole proprietorship whose name was my name.

Mostly I just want to keep it separate so I know how much to keep aside for tax purposes. I'll be doing 10-12 hours a week, so not exactly a small amount.

 

[Arch Guillotti]

Mostly I just want to keep it separate so I know how much to keep aside for tax purposes. I'll be doing 10-12 hours a week, so not exactly a small amount.

You need an accountant or learn how to do taxes yourself. It doesn't matter which account the money is in.

 

[The White Coat Investor]

You need an accountant or learn how to do taxes yourself. It doesn't matter which account the money is in.

Easy to keep it separate. Just open another checking account, deposit any income the business receives there and use that account to pay for any expenses the business has.

 

[Arch Guillotti]

Easy to keep it separate. Just open another checking account, deposit any income the business receives there and use that account to pay for any expenses the business has.

That's certainly an easy way to do it to ensure you have enough to pay your taxes. I think it's sort of silly though.

 

[DeadCactus]

For what it's worth, I plan to do the same. Depending on how much you are making off of moonlighting, some people would advocate for forming an LLC under the S Corp rules. Curious what WCI thinks of it, probably on his website.

 

[The White Coat Investor]

For what it's worth, I plan to do the same. Depending on how much you are making off of moonlighting, some people would advocate for forming an LLC under the S Corp rules. Curious what WCI thinks of it, probably on his website.

If the saved Medicare taxes outweigh the hassle and expense of doing so, then sure. WCI, LLC is filing as an S Corp this year for the first time and I estimate it'll save us > $20K in Medicare tax. But if you're making $350K and claiming a salary of $290K, I'm not so sure it's worth the hassle to save just $2K a year in Medicare taxes.

 

[GeneralVeers]

If the saved Medicare taxes outweigh the hassle and expense of doing so, then sure. WCI, LLC is filing as an S Corp this year for the first time and I estimate it'll save us > $20K in Medicare tax. But if you're making $350K and claiming a salary of $290K, I'm not so sure it's worth the hassle to save just $2K a year in Medicare taxes.

There are more benefits than just payroll tax savings. I have 1099 income which I am putting into my S-corp and then paying myself out as W2. I also have W2 income paid directly by the CMG to me. The medicare tax savings will be about 10K. If you have a corporation you can also pay a spouse as well. Payroll companies can set up a 401K for you as well as health insurance. If your spouse can now put 10K away into a 401K which saves you another 4K net. The health insurance is key as in my state Obamacare is down to one insurer, and a medicaid replacement plan. Goi9ng through a payroll company is the only way to escape the horrors of an Obamacare plan if you are self-employed.

 

[bravotwozero]

Wait, are you saying a payroll company can get you an employer sponsored type ppo plan?


Sent from my iPhone using Tapatalk

 

[GeneralVeers]

Wait, are you saying a payroll company can get you an employer sponsored type ppo plan?


Sent from my iPhone using Tapatalk

Yes. paychex.com. They will do your payroll, set up 401K and "small group" health insurance. They gave me choice between Aetna HMO and PPO. PPO costs about $310/month in my state. Because they do payroll for a lot of small companies, they can technically offer the "small group health plan" to individual businesses which allows you to be exempted from Obamacare. If you put your spouse/significant other/family on payroll through the company they can get 401K and health insurance too. I wish I had found this years ago......

 

[The White Coat Investor]

There are more benefits than just payroll tax savings. I have 1099 income which I am putting into my S-corp and then paying myself out as W2. I also have W2 income paid directly by the CMG to me. The medicare tax savings will be about 10K. If you have a corporation you can also pay a spouse as well. Payroll companies can set up a 401K for you as well as health insurance. If your spouse can now put 10K away into a 401K which saves you another 4K net. The health insurance is key as in my state Obamacare is down to one insurer, and a medicaid replacement plan. Goi9ng through a payroll company is the only way to escape the horrors of an Obamacare plan if you are self-employed.

Yes, you can pay your spouse a reasonable rate for legitimate work. You can't just "throw your spouse on there." And adding a spouse might add additional social security taxes. You have to weigh that against the additional 401(k) contributions. You don't have to go through an Obamacare exchange to buy health insurance on the open market. If you're not going to get a subsidy, no sense in buying it on the exchange.

 

[GeneralVeers]

Yes, you can pay your spouse a reasonable rate for legitimate work. You can't just "throw your spouse on there." And adding a spouse might add additional social security taxes. You have to weigh that against the additional 401(k) contributions. You don't have to go through an Obamacare exchange to buy health insurance on the open market. If you're not going to get a subsidy, no sense in buying it on the exchange.

Actually you are not correct on the health insurance part. The answer is: It depends. In my state (NV) it is impossible to buy a private health insurance plan outside of the Obamacare exchanges. I have looked. The companies simply don't offer those products, and refer you to the exchange to buy plans. Many other states are similar. I am certain there may be some states where you can buy a private health insurance plan.

As far as putting your spouse on the payroll, it will be a net savings. The employer 401K match can be 25% of the employee's salary. So if you pay them $36,000 per year, your payroll tax on that will be about $4320 in payroll tax. You can contributes $9,000 out of the S-corp gross receipts to that employee's 401K, which if otherwise paid as salary (or distribution) you would pay $40% or $3600. When you add in the employee contribution, which can be as much as $18,000 which can save you $7200 on net taxes. So paying your spouse could potentially save you ~$3,000 in net income, but only if you use the 401k contribution rules.

 

[The White Coat Investor]

Actually you are not correct on the health insurance part. The answer is: It depends. In my state (NV) it is impossible to buy a private health insurance plan outside of the Obamacare exchanges. I have looked. The companies simply don't offer those products, and refer you to the exchange to buy plans. Many other states are similar. I am certain there may be some states where you can buy a private health insurance plan.

As far as putting your spouse on the payroll, it will be a net savings. The employer 401K match can be 25% of the employee's salary. So if you pay them $36,000 per year, your payroll tax on that will be about $4320 in payroll tax. You can contributes $9,000 out of the S-corp gross receipts to that employee's 401K, which if otherwise paid as salary (or distribution) you would pay $40% or $3600. When you add in the employee contribution, which can be as much as $18,000 which can save you $7200 on net taxes. So paying your spouse could potentially save you ~$3,000 in net income, but only if you use the 401k contribution rules.

Interesting. Most available plans in my state ARE NOT on the exchange. We also didn't expand Medicaid, so my practice has seen basically nothing good out of Obamacare. 17% uninsured before. 17% uninsured after.

Your math is incomplete. You are only looking at one year of taxes. Those taxes will eventually be paid, admittedly likely at a lower rate, but they will be paid. So you're deliberately overpaying $4320 in taxes in hopes that the tax benefits of the 401(k) will outweigh them. It very well might (and we're betting that way with my wife), but I just want to point out it isn't a no-brainer. It works out much better if your spouse has already maxed out the SS taxes for the year BTW.

 

[GeneralVeers]

Interesting. Most available plans in my state ARE NOT on the exchange. We also didn't expand Medicaid, so my practice has seen basically nothing good out of Obamacare. 17% uninsured before. 17% uninsured after.

Your math is incomplete. You are only looking at one year of taxes. Those taxes will eventually be paid, admittedly likely at a lower rate, but they will be paid. So you're deliberately overpaying $4320 in taxes in hopes that the tax benefits of the 401(k) will outweigh them. It very well might (and we're betting that way with my wife), but I just want to point out it isn't a no-brainer. It works out much better if your spouse has already maxed out the SS taxes for the year BTW.

Also of interest, is that if corporate tax rates get reduced even to a 25% rate, it will mean huge savings, as the amount in the S-corp not passed through as W2 income will not get taxed at 40%. That could mean a $25K - $50K tax savings per year depending on how much you leave in the corp.

 

[The White Coat Investor]

If that 25% rate gets applied to S Corps, we'll all be incorporating. I think it's a pipe dream though.

 

[GeneralVeers]

If that 25% rate gets applied to S Corps, we'll all be incorporating. I think it's a pipe dream though.

I agree. I doubt members of either party will put aside their allegiances to special interests enough to bring a truly competitive corporate rate to the U.S.

 

[Old_Mil]

Just open a second account and put it in there. It costs you nothing and helps keeps things tidy.

 

[The White Coat Investor]

I agree. I doubt members of either party will put aside their allegiances to special interests enough to bring a truly competitive corporate rate to the U.S.

Not sure it's fair either. Pretty soon there wouldn't be any employees at all. Everyone would be an independent contractor and incorporate. Not sure what the best solution is there if the goal is to lower corporate tax rates while keeping individuals paying under the regular brackets.

 

[GeneralVeers]

Not sure it's fair either. Pretty soon there wouldn't be any employees at all. Everyone would be an independent contractor and incorporate. Not sure what the best solution is there if the goal is to lower corporate tax rates while keeping individuals paying under the regular brackets.

Simple. Get rid of personal income tax and put in a VAT. No I'm not smoking crack.

 

[The White Coat Investor]

Simple. Get rid of personal income tax and put in a VAT. No I'm not smoking crack.

Oh sure, with comprehensive reform there are ways to fix it. I could go for a VAT, but fat chance of that happening. I think it's a much better idea to tax consumption than income, but economists might disagree, I don't know.

 

[Raryn]

Simple. Get rid of personal income tax and put in a VAT. No I'm not smoking crack.

Suddenly all our Roth accounts are worth 25% less than what we thought they were.

On the plus side, our traditional 401(k)s have made out like bandits.

 

[GeneralVeers]

Most of us probably don't have a traditional Roth. We make too much money.

 

[goodoldalky]

Most of us probably don't have a traditional Roth. We make too much money.

Backdoor

 

[Raryn]

Most of us probably don't have a traditional Roth. We make too much money.

Every single one of us without significant balances in a traditional or SEP IRA should be doing a yearly back door Roth for ourselves (and our spouses if applicable). There's basically no downside.

Backdoor Roth IRA Tutorial