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Save paying tax on consultant income

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joseph2
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Save paying tax on consultant income  Reply with quote  

I just finished a consulting job. My first one. The client paid me in full--they did not deduct any taxes but did complete the required forms. I have been advised to save a least half of what I earned because I will have to pay it to the IRS come April.

Is there a way to limit my tax liability on this money? Is a SEP IRA the way to go?

I have full-time employment and an employer sponsored 401k. If I increase my retirement contribution by about $400 a pay period from now until the end of the year, and use what I earned consulting to cover that loss in take-home pay, will I reduce my taxable income enough to avoid having to pay the IRS (I usually get a refund).

I would really like to keep/invest more than half. It just does not make the job worth while if I only can keep half of what I was paid.
Post Mon Aug 18, 2014 12:14 am
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blixet
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You should consider professional advice. Income taxes are pay as you go, not wait until April to settle up. Also there are the self-employment taxes due in addition to income tax.

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Post Mon Aug 18, 2014 3:17 am
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Wino
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You should look into Health Savings Accounts, Educational Savings Accounts, and IRA's (Roth or traditional). There are severe penalties on each of those if not used for the intended purpose: medical, school, and retirement, respectively.
Post Mon Aug 18, 2014 6:10 am
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joseph2
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I will look into the IRA option.

The financial advisor at the bank recommend a SEP IRA, but they charge a fee--I think he said it was a front load fee. On the one hand, I understand that I am asking someone to invest my money for me--and I have the most basic financial knowledge--so they should be paid for their work; on the other hand, I immediately lose on the investment if I pay someone to manage it.
Post Mon Aug 18, 2014 5:02 pm
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blixet
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Is the consulting gig going to be an ongoing venture or was this a one-off? Depending on how much income from self-employment, how much additional room you have to contribute to your 401k and a host of other issues we might be able to help you a bit with some alternatives.

A SEP is one possibility, depending on circumstances, but of course there are expenses involved. A bank may or may not be the best choice of a custodian in this regard. There are other alternatives available.

The tax question really depends on all the numbers along with a set of projections into your near term future. With the limited info provided, there is no way to offer constructive advice. Confused

Just my view, but I prefer never to receive a refund from the IRS if possible. I'd rather have them giving me a no interest loan than the other way around. Smile

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Post Mon Aug 18, 2014 5:46 pm
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joseph2
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Thank you for the reply.

The consulting gig was a one-time thing. I was paid $20,000. I spent $5,000 on a home repair project and the remaining is in my MM account.

I don't know if I will get any more work like this; it was a fall-into-your-lap kind of thing. That is why I am hesitant to open the SEP IRA. If that is for self-employment income, then I may not have any more income to put in that account. The money would better serve me where it raises the investment and thus the return.

It may be that this just isn't enough money to worry over regarding taxes. I want to be smart with the money, though. Ideally, I would put it toward my student loan, but if the IRS is going to want $8,000 back, I don't want to spend it and then have to figure out how to pay the IRS. I want to give them as little of this money as possible.

If it helps, my annual income is $62,000. I file single. My refunds are usually small; I take the student loan and home mortgage deductions.

I appreciate your advice.
Post Mon Aug 18, 2014 6:17 pm
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blixet
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OK, I see now. Well that $8K figure is not far off. You'll owe $3060 in SE tax, half of which you can deduct from your income taxes. You're probably in the 25% marginal tax bracket for 2014 so you'd be looking at $4617 in income tax on the net taxable SE income. Totals out to just under $7700.

If you have the room left for contributions to your 401k for the $15000, you could defer $3750 of that tax burden. This is probably the simplest, most efficient option. You should look into making estimated tax payments so you don't get hit with a penalty for under-withholding. The IRS.gov website can walk you through it or you can have your tax professional give you the assistance that you need.

As for a SEP, unless you are planning on needing to shelter income from ongoing self-employment, it makes no sense.

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Post Mon Aug 18, 2014 7:12 pm
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oldguy
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quote:
If it helps, my annual income is $62,000. I file single. My refunds are usually small; I take the student loan and home mortgage deductions.



An aside: Be careful not to get wrapped up in 'refund size', instead fixate on your total tax bill. Eg, say your fed tax is $15,000 - whether you have $16,000 withheld and have $1000 refunded @ yr-end - or whether you have $14,000 withheld and owe $1000 at yr-end - it's still $15k. (Personally I try to owe a couple thousand in April - and leave my own money invested at 11% for an extra 12 to 16 months).

Actually, it's odd about the public and refunds. 'Withholding' was invented during WW2 to pay for the War - people didn't like prepaying their taxes but they bought into it for the 'War Effort" and because they thought it was temporary. But somewhere along the way, public sentiment reversed - now, instead of resisting the prepaying of taxes, people embrace overpaying taxes and getting some of their money refunded - some even do things to make their refunds bigger. And then (get this) they pay their tax preparers extra to get an 'instant' refund. Very Happy
Post Tue Aug 19, 2014 3:32 am
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joseph2
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I actually like the idea of holding onto my money longer. I have the least amount deducted from my paycheck, but my itemized deductions usually result in getting money back. I do my own taxes because I refuse to pay someone our of my refund.

I don't know how to adjust this to ensure the IRS isn't getting a loan, unless it is as simple as increasing my pre-tax 401k contribution? I checked and I do have room to contribute more.

I am going to visit the IRS website you suggested. I actually had no idea that over withholding was a thing or that one could be fined for it, so thanks for the head's up. I guess it might be worth paying a tax attorney for at least one visit.

Thanks!
Post Wed Aug 20, 2014 12:52 am
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oldguy
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quote:
I don't know how to adjust this to ensure the IRS isn't getting a loan


Go to your employer's HR Office and fill out a new Form W4. (You filled one out when you started years ago - but most of us forget it). The W4 is simple, about a half-page form - and the second half of the sheet is guidelines on how to adjust your withholding.
Post Wed Aug 20, 2014 3:03 am
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blixet
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quote:
Originally posted by joseph2
...I actually had no idea that under withholding was a thing or that one could be fined for it...


FIFY

There are safe harbors that may allow you to avoid paying estimated taxes. Your assignment now is to find out what they are and if you qualify (sorry, retired teacher here Wink).

Information is more valuable sold than used – Fischer Black
Post Wed Aug 20, 2014 2:01 pm
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prioritytaxgroup
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I was laid off about a month ago. They began paying me the hourly equivalent of my yearly salary. A week ago I was asked to come back, as a consultant/contractor and my work duties were significantly increased. I found this an IRS tax calculator, but it has a separate place to enter "other taxable earned income" that isn't salary... Is that what this is, or is this considered wages/salary?
Post Wed Sep 03, 2014 5:42 am
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