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Top 5 tax deductions for a 1099 contractor?

I've been an independent for four years; did W-2 for 6 months, formed a s-corp and billed through it for a year. My last several projects have been w-2, so I closed the corp a few months ago. I'm starting a new gig in a few weeks that is 1099.  I'm only getting $6/hr more on 1099 than W-2, but since I'm done with FICA for the year, I figure it will work out better.

What are the top 5 deductions I should use? I'm thinking DSL, phone, exams/books, computer equipment and parking/light rail. These are all pretty small. What am I missing?

What about retirement savings? I'd like to shelter as much money as possible from taxes, what approach should I use? I'm thinking a SEP is my best bet for simplicity.

TIA,
Ted

Ted Graham
Wednesday, October 15, 2003

Ask an accountant..?

(You know;  like when you need legal advice, you ask a lawyer..)

Bleh
Wednesday, October 15, 2003

Discalaimer: IANAA (I am not an accountant).

> I'd like to shelter as much money as possible from taxes, what approach should I use?

Open a Profit Sharing Plan... you can contribute up to 25% (of salary/wages).  I believe a SEP is limited to 13%.

As far as deductions go.... get a company credit card or debit card. Everything you buy for the company goes on the card, and you deduct it all.

Portabella
Wednesday, October 15, 2003

I don't have an accountant I trust on these things. When I incorporated I asked around for reccomendations and went with a guy who was reccomended twice. For my first tax year, he messed up my 179 election paperwork and then told me we couldn't ammend the return to change it. With help from the board at realrates.com I found I could ammend the return and got it all fixed, but I'm not eager to pay him another $900 to screw up again.

Ted Graham
Wednesday, October 15, 2003

Portabella:

http://www.investsafe.com/smallbusiness.html says that we can contribute 25% to a SEP in 2003.

Ted Graham
Wednesday, October 15, 2003

For retirement plans, look at the IRS Web site. As I recall, they have a pretty good document on retirement plans, and they may even have one that is specifically directed at small businesses. I remember that I found their information significantly better than just about anything else I read. And, of course, the information comes from the source.

If you've dealt with Section 179 deductions, you probably already know almost everything you need to about taxes.

I've had the same experience with accountants. Accountants seem to specialize more than they like to admit (like computer programmers.) They may think they know everything, but they are most familiar with issues that affect specific types of businesses. It is easy to find an accountant around here who knows commercial fishing, but one who really knows software consulting businesses is harder to find.

There is an advantage in using an accountant: a friend of mine recently was audited, and the IRS found a huge error. The accountant made a mistake classifying the timing of certain income. This was quite obvious once it was pointed out. I was amazed, but the IRS waived the penalty and negotiated down. I think the fact that my friend relied on a reputable accountant (who simply fouled up) made the difference. As a note, the IRS didn't negotiate until my friend hired a tax attorney who specialized in such problems.

Dan Brown
Wednesday, October 15, 2003

Ted - I too think an accountant is the way to go. You simply need to shop around more. Perhaps you line in a more rural area which can make it harder, but hiring a specialist to take care of these speciality things makes better use of your time.

m
Wednesday, October 15, 2003

> we can contribute 25% to a SEP in 2003.

Thanks. Shows the dangers of using outdated info, eh?

I switched from a SEP to a 401k, and haven't looked at SEPs since.

I note that the page still shows that 401k are more powerful. My experience was that the SEP is truly a no-brainer to do, a 1 or 2 page form to fill out.

However, the 401k, although harder, is not *that* hard to do either, and if you choose a company like Fidelity or Vanguard, they have kits and email and phone support. In short, it's quite doable, should you choose to go that route.

Portabella
Thursday, October 16, 2003

Always running to accountants & lawyers is a good way to eat up profits.  When you're starting out, you really must learn to be a paralegal & bookkeeper.

 
Thursday, October 16, 2003

Vanguard has kits for 401(k)s?  My experience was that they only held the funds for you.  You still have to find someone to be plan administrator for you (unless you're also an accountant).

Be very careful with running your own pension plan.  If you screw it up, you can lose the tax deduction retroactively for several years.

My experience was that to do a 401(k) plan, you had to pay at least $2000 to get someone to set up the plan for you.  Companies that offer to set up the plan for free make up for it by giving very lousy fund choices with high fees.

Anonymous
Thursday, October 16, 2003


Thanks for the informative responses.  I have all my money at Vanguard, so I started there.  But Fidelty has better information online and specifically addresses the sole-prop who wants to use the self employed 401k. 

From Fidelity's info, it appears that a solo 401k maxes at 25% from the employer, plus 12k from the employee.  The SEP maxes at 25%.  It also appears that I don't need to incorporate to take full advantage of the solo 401k.  The 401k has a required annual filing, but not until the plan has more than 100k in assets. 

Since my goal is to maximize the amount I can shelter from taxes, I'm planning on opening a Fidelity solo 401k.  I'll be calling Fidelity tonight to discuss and to get the paperwork started.  It appears that Fidelty offers a wide array of funds with minimal expenses.

Ted

Ted Graham
Thursday, October 16, 2003

You need a good accountant.  Interview as many people as it takes, for as long as it takes, until you have one.  I went through three over a a two-year period, myself.  The one I ended up with is great, and saves me thousands of dollars every year, in ways I would have never thought of on my own.  He's worth (literally) 10 times every penny I pay him.

Grumpy Old-Timer
Thursday, October 16, 2003

PAY for an accountant who is experienced with s-corp, or even ideally, tekkie contractors.

Here are some off the top of my head.....Note:  You dont even need a reciept for any meal under $75.  Well, you can draw your own conclusions on that whopper of a deduction.  Perhaps you eat dinnner out with clients EVERY day?  Remember, EVERYONE is a prospective client, right?

Look into deducting your auto, gas, insurance, repairs, etc.

Look into deducting travel (Like your recent trip to Austrailia) , b/c perhaps you were looking to hire someone to subcontract to, or to land new business in a new city, eh?

Look into deducting "gifts"....1 per person per year.  you may know hundreds of people to give gifts to.  I bought my brother several pairs of pants the other day.  He, of course, is another prospective client.

All PC equipment, phone(s), books, dues, subscriptions.

Client entertainment....ie:  concert tickets, etc.


Only you can determine your comfort level on how aggressive you want to be.  My accountant nets to zero every year.  ie:  his annual expenses always exceed his income. 

Bella
Thursday, October 16, 2003

I am a tech-competent accountant and I thought I might be able to add something.  Accountants are like any other professional; some are better than others and some have more experience in some industries or types of tax returns than they do other areas.  With the complexity of tax law, I think every business person is better served by having a very competent tax advisor.  It is a matter of finding someone who shares your risk tolerance or risk aversion.  Accountants, like taxpayers, come in all flavors.  Some accountants are ultra aggressive and others are very conservative.  Most are really someplace in the middle.  The best way to find a match is to ask friends and business associates for referrals and then interview the accountants.  Based upon the comments here I will write an article for my website ( http://www.weavertax.com/ ) on how to select a tax professional.  Thanks for the ideas.

No one wants to miss deductions.  And the list of possible expenses was very good.  We prefer a variation on that theme.  Instead of what can I deduct, we like to ask ourselves each time we are going to spend money, is there a way I can purchase this item (or spend this money) and make it a legitimate deductible expense.  I never want to spend money I don’t have to whether it’s deductible or not.  The only possible exception is money I spend on myself (such as a new car or, in my case, airplane, retirement accounts, medical costs, nice dinners, etc).  For people who operate as sole proprietorships we always encourage hiring their minor children (since they were going to have to give the kids money anyway).  Combined with an IRA, we can start a college savings plan with pre-tax dollars.

The solo 401(k) is a great retirement plan option for many business people.  Many of the investment firms will offer free or discounted plans and administration in exchange for the investments.  The SEP with the new 25% limit is an easy, less costly alternative for many others.  Choosing the right plan is part of what you should expect your tax advisor to help you with, whether they administer the plan or not.  The same is true with all other fringe benefit plans.  If your tax advisor isn’t experienced with such plan options, then yes you need to continue shopping around. 

Some of this information I’ve published on http://www.weavertax.com/ and my related websites.  If you have questions about some of the specifics I’d be happy to try and reply, workload permitting.

Ken Weaver
Thursday, October 16, 2003

To paraphase Weaver's long-winded reply, as my accountant told me, "EVERY time the wallet or checkbook comes how, think HOW can this be tied into an expense of running your business"

Bella
Saturday, October 18, 2003

There is 1 tradeoff with funding the SEP.  Think about how much you W2 yourself, if you are an S-corp (Wait, I think he was a 1099).  If you minimize your W2, you will minimze your FICA costs.  Tradeoff, is that you can't fund as much in the SEP, b/c it's based on W2.  If you W2 your entire annual S-corp income, you will pay full FICA, but can take a MONSTER SEP deduction also.  I opted to take bird in hand, and minimize both my W2 (saving FICA) and doing a small token SEP contrib.

Bella
Saturday, October 18, 2003

A good alternative to going to a cpa is to go to a person who is qualified as an "enrolled agent", or EA.

EAs are allowed to represent you to the IRS on the same basis as a lawyer or CPA. 

They must pass a very difficult test given once a year by the IRS and are generally experts in taxation.

EAs often charge a bit less than CPAs, and are equally qualified to advise you on matters of taxation. 

Jim Howard
Monday, October 20, 2003

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