Self-Employed Dilemma

Self-employed people often have a dilemma as far as estimating taxes are concerned. Most of the time, their income is not predictable and they are unsure of what their final income will be at the end of the year. This can present a challenge without professional help and advice.

Let us suppose we have a self-employed advertising executive that is hired by other firms to produce marketing plans. She expects her gross income to be $160,000. For the 2018 tax year, this puts her potentially in the 32% tax bracket before deductions. Some CPA's will say to just set aside 32% in a separate bank account and pay estimated taxes quarterly.

We can look at another alternative for argument sakes. Assume that our heroine is living in a state like Florida with no state income tax. She is using QuickBooks or Zoho Books and instead of paying herself a regular salary, she chooses to pay herself commission only. This would fit more with how her money comes in. It is unpredictable as to timing and amount, so the commission model would be best. We want her commission salary to be no more than the Social Security limit of $128,400. Otherwise, she would be paying extra and unnecessary FICA taxes. So, when her commission hits $128,400 she stops paying herself any more salary. You follow?

However, we want to add an Individual 401k to the mix, since she expects to gross $160,000 and easily meet her salary of $128,400. Based on this figure, she can contribute $32,100 to her i401k. $18,500 of it would be salary deduction and the balance, $13,600 would be a company match.

She has control over how to deposit these funds. For example, when she gets paid $6,000 in January for a project, then enter it in QuickBooks or Zoho Books as a commission. $18,500 divided by 12 equals $1,541.67. She puts $1,541.67 towards her i401k, then adds to that the company match which is $1,133.33 ($13,600 / 12). So, of that $6,000 commission, $2,675.00 went to her i401k and the balance was subject to taxes, FICA and Federal. Now, there is some additional cost to her which is the FICA paid by the employer. However, because she has this i401k, her Federal withholding will be significantly lower. FICA still gets paid regardless of the 401k, but you save in Federal withholding taxes.

Now let's review. She grossed $160,000, her commission salary was $128,400, but she was able to reduce that for Federal withholding down to a $97,300 taxable income. She has socked away $31,100 in her i401k. She has the difference between her gross commission of $160,000 minus the $128,400 commission salary to use for paying expenses and taxes.

Her tax bracket moves down from 32% to 24% assuming she is single saving her 8% as opposed to just paying estimated taxes based on the $160,000. Plus, she has a i401k with $32,100 in it after just one year! Imagine how this will quickly build a nice i401k.

If you need help with this kind of strategy, then let me know. You can reach me via email at rick@firstcoastplanning.com.

2nd Edition of Meet Wally Street. The Reason You're Stupid

These days, when you write an eBook, then you can pretty much update it anytime. The people who bought it will automatically get the updates. This is what I did with the eBook. It has been updated with pictures and more stories. If you have already purchased a copy, then you will enjoy this update.

In the printed book publishing world, things work a little differently. If you want to do an update, then you have to for all practical purposes write a new book with a different ISBN number. After lots and lots of work, I have finished my 2nd Edition of Meet Wally Street. The Reason You're Stupid. It is very similar to the eBook, except the pictures are not in color. Amazon wanted me to sell it for almost $60 if I wanted it to be in color and I said no to that. Instead I went with the black and white version and listed it for $19.99. It is worth every penny, especially when you consider that it will make you a very smart investor and save you from the likes of Wally Street. That is priceless in my mind.

I hope you enjoy.

Buy it at Smashwords. Amazon is rich enough.

Mid Year Update

There has been a tug of war going on in the markets lately. The free traders are worried about a trade war and average people are not too worried. The market is normally pretty flat during the summer months, sometimes called the summer doldrums. If you were to look back historically at how the market does in the summer, then you will find that it is pretty flat and goes through a lot of up and down volatility. This is a textbook example of what is happening this summer. Mostly sideways movement with volatile ups and downs.

Here we are again at the end of another quarter and I expect the next couple of days to be down, then buyers will come into the market on Monday of next week. Money managers do their window dressing near the end of a quarter, because of two reasons. One is that they want to lock in any gains and the other reason is to hide their portfolios from freeloaders who like to copy what they are doing.

I think what we will see is a good second half of the year as far as the economy is concerned and more of a bounce to the upside in the market in the 4th quarter as has been typical historically.

Stay focused, stay invested and you will be rewarded for it later in the year.

Alfred E. Newman Stock Market

Those of you who remember the cartoon character from Mad Magazine, Alfred E. Newman, will recall that there was usually a caption saying, "What? Me Worry?" This market reminds me of that line. Nothing to worry about with this market. If you have been sitting on the sidelines, you are missing out on one of the strongest bull markets in American history.

The best place to be as an investor is fully invested. It is even better if you can regularly add to your accounts every month. However, there are pockets where you may want to re-position some funds.

There has been some quick and major changes in some sectors of the market. Some sectors such as real estate and utilities are showing some weakness. If you look at these two sectors on a chart, then you will see that there is no bottom in sight right now. A good reason to get out for now and take a wait and see approach as to when to get back in.

This is VNQ - Vanguard Real Estate ETF

This is VPU - Vanguard Utilities ETF

As you can see from both charts, they appear headed lower. A good reason to get out for now. This is a direct result of the new tax law that did no favors for the REIT and Utilities industries.

Thanks.