Perks & Pitfalls: 2010 Tax Tips for 1099 Workers
Tax season is in full swing. As 1099 self-employed individuals, locum tenens
physicians/CRNAs have distinct advantages and potential pitfalls to navigate
when it comes time to square up with Uncle Sam, not the least of which is that
the rules can change from year to year. Did you know that the newly-signed
healthcare reform act, officially known as the Patient Protection and
Affordable Care Act, changes the rules on income subject to self-employment
tax? Are you aware that high income earners are now able to convert to a Roth
IRA?
Keep reading below for our 5 tips for Self-Employed individuals.
Maximize those deductions
Unlike W-2 employees, self-employed individuals have fewer restrictions on
deducting unreimbursed business expenses. W-2 employees are subject to the 2%
of adjusted gross income (AGI) limit, for instance, whereas 1099 workers are
not. Self-employed individuals are also not subject to AMT limitations on
deductible business-related expenses. But beware, the IRS has very specific
rules for what expenses (and how much of those expenses) can be claimed as
deductions on your tax return. More information about tax-deductible business
expenses can be found here,
here, and here.
Kevin Hedrick, Tax Partner at Williams, Benator & Libby, in Atlanta, GA, says
that one of the biggest mistakes that self-employed people make is not
maximizing the tax benefits of a home office. The deductible expenses can
include: mortgage interest, property taxes, furniture, equipment, and more. A
tax advisor can help you make the most of these deductions without running
afoul of the IRS. For the do-it-yourselfer, the IRS regs on home offices can be
found here.
Sock away for retirement
W-2 employees are limited to one of two options - an employer-provided 401(k)
plan ($16,000 contribution limit in 2010) or an IRA ($5000 limit in 2010 for
individuals under 50-less for individuals in high earnings brackets).
In addition to an IRA, a self-employed individual can also set up a SEP plan, to
which they can contribute up to 25% of their income up to a maximum of $49,000.
There are no income limitations on SEP plans and the contributions are
deductible. You can make a contribution to a SEP plan by April 15 (or the
extended due date of your tax return if you file an extension) and have it
count toward the prior tax year. For more info on a SEP retirement plan, click
here.
Another retirement option for the self-employed is a solo 401(k), to which you
can contribute the employee maximum of $16,000 and the employer maximum of 25%
(up to $49,000). A word of caution: a solo 401(k) is a bit more complicated to
set up than a SEP, and you have to file a tax return for it every year.
Take Advantage of the new ROTH IRA rules!
This year ROTH IRA rules have changed beneficially for high-income earners. ROTH
IRAs are retirement accounts to which individuals can contribute up to $5,000
per year of post-tax dollars. The beauty of the ROTH IRA is that interest
earned on contributions is never taxed. Up until this year individuals
with an
AGI over $100,000 could not convert a traditional IRA to a ROTH IRA. While
individuals with income over $180,000 still cannot contribute to a
ROTH IRA,
the income threshold for IRA conversions no longer exists, so anyone,
regardless of income, can convert a traditional IRA to a ROTH IRA.
People who would especially benefit from an IRA conversion are people with a
non-deductible IRA (a traditional IRA to which post-tax dollars are contributed
because the individual who made the contributions exceeded the maximum income
for deductible contributions). Doctors who are working on a locum tenens basis
between full-time, salaried positions may currently find themselves in a lower
tax bracket than they have been in the past. For those individuals, now would
be a good time to make that conversion.
Also, in 2010 only, the taxable income derived from a ROTH conversion
can be
spread over two years So you can pay the taxes in 2011 and 2012.
Here's the kicker: if you have both a non-deductible and a deductible
IRA, the
new rules don't allow you to pick and choose which contributions to convert. If
you choose to convert 50% of your IRA, then half of your non-deductible and
half of your deductible contributions would be converted. You would be
responsible for paying taxes on the portion of the deductible IRA.
It is a good idea to give some thought to how to time the conversion and whether
you are prepared to incur the tax bill that will come with an IRA conversion. A
tax advisor can help you look at different scenarios and their tax
consequences.
Don't forget to make those quarterly estimated payments
Typically, individuals working on a 1099 basis do not have taxes withheld from
their pay. But the Tax Man still wants his cut up front-the IRS and most states
require quarterly payments. In order to make your estimated quarterly payment,
calculate your income for the current quarter and multiply by four for the
annualized income. Multiply your annual tax rate by your quarterly income to
come up with your quarterly estimated taxes. For most people, it is difficult
to know how much income will be derived from investments and interest, but, as
Mr. Hedrick explains, the IRS has not historically been overly critical of
underestimating the quarterly taxes derived from this type of income.
In order to avoid penalties, the rule of thumb is that you can pay 100% of your
prior year tax liability (or 110% if you are in a high income bracket) or 90%
of your current year liability. If your income is going up, you can follow the
prior year rule, or if your income is going down, you can follow the current
year rule. For more on paying estimated quarterly taxes, click
here.
To incorporate or not to incorporate?
Self-employed individuals can potentially limit their tax liability by setting
up an S corporation and paying themselves a W-2 salary and taking the rest as a
distribution, which is not subject to payroll taxes. However, you should know
that one of the provisions of the healthcare reform act makes all income above
$200,000 ($250,000 for a joint return) subject to Medicare tax. Another
advantage of forming an S corporation is that you can deduct certain fringe
benefit plans. But the main advantage of the S Corp, the ability to limit
payroll taxes, is reduced by the new healthcare act. This rule does not go into
effect until 2013, so there is still time to take advantage of the benefits of
an S-Corp. Self-employed individuals should prepare for these new rules and
plan their taxes accordingly. Find more information about S corporations
here.
Kevin Hedrick, CPA, Tax Partner at Williams, Benator & Libby in Atlanta, GA,
contributed to this article.
www.wblcpa.com
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Disclaimer: The contents of this article are not meant to provide individual tax advice.
The above tips are general in nature and subject to change over time.
Individuals should seek the advice of a tax professional for advice about their particular circumstances.
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