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Old 02-26-2007, 10:13 PM   #1
Golf4food
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Use 1099 Misc income to fund IRA instead of paying taxes?

Assuming I accept an offer that would provide us with an extra $100 a week in non-wage income (would be treated as self-employed, no taxes witheld), I had been planning on just saving 30% of all of it in our Emigrant online savings account to have to pay the taxes on it come next April. The thought occurred to me today, however, that if IRA contributions are tax deductable regardless of wether you take itemized or standard deductions, that if I put the same amount of money into an IRA this year, that we wouldn't have to pay taxes on that amount because the IRA contribution would offset the income tax amount that would need to be paid. Plus, it would keep the money in our pockets, saving for retirement. I would just need to find a good Roth to put it in.

Anyone tried this approach to offsetting taxes by investing in deductable programs instead of paying out taxes?
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Old 02-27-2007, 06:02 AM   #2
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What you'd save are the income taxes on that amount...

If the money is being paid to you as 'self-employment' income, you'd still be responsible for Social Security and Medicare taxes...and you'd pay both the employee and the employer pieces (most folks are only paying about 6.75% because their employer pays the other 6.75%...when self-employed, you pay ALL of it).

And also remember...Roth IRA contributions are NOT tax deductible...only regular IRA deductions are. The tax benefit of a Roth is that the withdrawals are not taxed, as long as the money is held there at least five years.
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Old 02-27-2007, 07:08 AM   #3
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You could also set up a retirement account for a small business. I don't know much about them, but you can set up a "Simple" or possibly a 401K for yourself. You'd have to check with an expert on this (maybe look it up at schwab.com or a similar site).
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Old 02-27-2007, 08:47 AM   #4
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Quote:
Originally Posted by msmayor View Post
What you'd save are the income taxes on that amount...

If the money is being paid to you as 'self-employment' income, you'd still be responsible for Social Security and Medicare taxes...and you'd pay both the employee and the employer pieces (most folks are only paying about 6.75% because their employer pays the other 6.75%...when self-employed, you pay ALL of it).

And also remember...Roth IRA contributions are NOT tax deductible...only regular IRA deductions are. The tax benefit of a Roth is that the withdrawals are not taxed, as long as the money is held there at least five years.
You are correct about the Roth - that's what I get for posting late at night. Medicare and SS taxes would amount to 13.5%, which would still be around $607.50 assuming a $4,500 total payment from the job. But as for the income tax amount I'd rather keep it - even in an IRA that we can't touch for a while - than give it to Uncle Sam if the option is available. So I can just save the SS and MC tax amount in a savings account for the year and put the income tax amount into an IRA and have the best of both worlds. I can have my cake and eat it, too - in 40 years when I retire, haha.
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Old 02-27-2007, 08:51 AM   #5
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DS had an internship last year and they didn't take out taxes and gave him a 1099 at the end of the year. My accountant figured out by putting $1400 into an IRA for him, it would reduce the amount owed, but he still has a hefty bill to pay. And of course, since he's a student, guess who pays the bill?
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Old 02-27-2007, 09:07 AM   #6
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If you ever get to the place where you think that the income from this business will exceed the amount you can put into an IRA for that year, then I 2nd what poster IMSayin suggested. Open up a SIMPLE retirement plan or Solo 401(k). You can put more into retirment plans thru these vehicles. From personal experience, I can vouch that a SIMPLE plan is very easy to set up.

Best of luck -- Suzanne
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