Have a Tax Question? Ask a Tax Expert
Hello...my name is XXXXX XXXXX I am a Certified Public Accountant. I look forward to assisting you with your questions.
As an independent contractor, I am assuming you have no employees. The reason I ask is because some retirement plan choices must take employees into account.
yes I donot have any employees
SEP IRAs work in almost the exact same way as a traditional IRA. The only really important difference is the contribution limit. For 2012, if you have a SEP, you are allowed to contribute the lesser of:
what should I do inorder to pay less taxes or NO taxes?
One important thing to note is that, for purposes of calculating your maximum contribution, “net earnings from self-employment” is perhaps not quite what you’d expect. Basically, it’s all your revenues, minus your expenses but also minus two other items:
I'm comparing the plans to see what will provide you the greatest benefit...
An individual 401(k) plan functions very much like a 401(k) plan with a person’s employer. The difference is that you are allowed to make a contribution in the role of employee and a contribution in the role of employer. You are allowed to make:
Note that this employer contribution is the same as the contribution you can make to a SEP IRA. As with a SEP IRA, 25% of net earnings from self-employment works out to 20% of your net earnings from self-employment before considering your deduction for retirement plan contributions.
Also, the total contribution is limited to the lesser of your net earnings from self-employment or (for 2012) $50,000.
i am sorry i didnot understand what you said about deductions
The deduction part is a little tricky...this helps you determine the maximum you can contribute to either account. It basically works out to being 20% of your net earnings from self-employment before considering your deduction for retirement plan contributions.
kindly talk to me as you are talking to a 6yr/10yr old
where would you put your money?
of course...sorry for any confusion...the tax code can sometimes word things in a difficult manner...
where would you put your money so that you don't have to pay taxes or may be get some back from IRS?
sorry from my side too..
The Individual 401(k) might be a better option because you could most likely contribute more to it than a SEP IRA (although it might be close). For 2012 you can contribute $17,000 plus (20% of the $100,000 or $120,000 self-employment income). This would be roughly $37,000.
The SEP IRA in this instance would be limited to a contribution of roughly $20,000 to $24,000 (20% of $100,000 vs. 20% of $120,000)
However, this will only help minimize your tax liability. You will still owe taxes based upon self-employment tax as an independent contractor and federal taxes.
Have you made estimated tax payments for 2012?
I am not a tax person but it will be based on 100k to 120k
sorry for delay the internet slowed down
i have 3 dependents ...my wife and 2 children
no problem...okay...i would recommend making an estimated tax payment to the IRS before year-end.
As an independent contractor, none of the income you are receiving has had tax paid on it.
is there anything other than SEP or 401k where I can put my money?
yes i have not paid any taxes yet
Well there are other options, but most of them will not provide you with a tax deduction, if that is what your goal is
Do you have business expenses?
yes I use my cell, buy clothes, have one room which i use as an office
i am not sure about anything else as it is not coming to my mind
okay...that will help but it won't substantially reduce the $100k - $120k of self-employment income
Self-employment tax alone on $100,000 is roughly $13,300 for 2012.
so if put 20,000 in SEP or 401k how much taxes will i have to pay?
lets say if I want to contribute 20,000 for next 3 years after which i start contributing 40,000...which one should i pick SEP or 401k?
Well you may not be able to contribute $40,000. It would depend upon the income limitations. However, based on the scenario you have provided, I think the Individual 401k would allow you to contribute more each year than the SEP IRA.
For example, the maximum you could contribute in 2012 under the 401k is $37,000 if your self-employment income is $100,000 for the year.
$17,000 as an employee and $20,000 (20% of $100,000)
You may be able to contribute more for a catch-up contribution if you are over the age of 50
i am 37
okay....then the catch-up contribution would not apply
thanks for your patience, if you could tell me if i put 37k in 401k then how much taxes will i have to pay or on what amount i will have to pay taxes?
sure...I will help you calculate this...
if i make 120k and put 37k in 401 then I will be paying taxes on what amount
Since the $37k will come from pre-tax dollars, you would pay tax on $83,000 ($120,000 - $37,000)
or will i be paying taxes on 120k -37k ie 83
however, you will also receive additional deductions against the $83k for federal tax purposes
such as the standard deduction (or itemized deductions) and personal exemptions for you, your spouse and dependents
to conclude this is there anything else you suggest anything else?
you will also receive a deduction for 1/2 of your self-employment tax
Since many CPA Firms provide free consultations, you may want to schedule an appointment so they can help you determine estimated tax payments and to provide your the benefits of the SEP IRA vs. the Traditional 401(k) so you can see it in person.
For 2013 you will want to get in the habit of making quarterly estimated tax payments
thanks for your excellent service!
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