Here's a guide to tax strategies for the self-employed:
What follows is a short guidebook to tax rules for self-employed workers and moonlighters, with a particular emphasis on ways to stash profits away for use in retirement.
The net profit from the business is $100,000. Mildred multiplies this by 0.9235 to arrive at $92,350. On this, she pays 15.3%, or $14,130, as payroll tax . There are more ways to shrink the taxable income. Mildred sets up a “solo 401,” allowed to self-employed people who have no employees other than a spouse. As an oldster Mildred can put away $25,500 in a tax-deductible “deferral contribution” to a 401 in 2020.
There’s one more nifty write-off. Take 20% of this $30,848 off per the Trump tax cut provision for “pass-through” income. So Mildred gets a $6,170 deduction here, leaving her with a taxable income of $24,678 from her business. Next subtlety is that the pass-through deduction has some complicated limitations. We’ll avoid the details and just note that Mildred will be on safe ground this year if she files a joint return that shows less than $326,600 of taxable income before subtracting the pass-through.
Some brokers have a Roth option on their solo 401s, some don’t. If yours doesn’t, and you want to squeeze the last dollar out of the pass-through deduction, you have to move the whole plan to a new broker.A. Yes, so long as the total from all jobs this year is not higher thanA. Because they are as simple to administer as IRAs. Retirement plans for firms with multiple employees, in contrast, are messy.
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