Hi all-In addition to my regular job, I sometimes submit to a continuing medical education publication a short article which reviews/summarizes a recent medical research paper.Prior to this year, I have done this about once a year. The publisher send me a check, and no tax related forms. The amount I earn for each review is $300, and I have claimed it as miscellaneous income.I now anticipate writing about 3-4 of these articles per year for an total income of about $1000. I was wondering whether I was obligated to file this as self-employment income. Or if not, whether there was any benefit to doing so anyway. The total income from my day job just barely exceeds the social security wage base. So as I understand it, I will not owe Social Security taxes on this income if I report it on Schedule-C (but will owe medicaid). I don't have any expenses to deduct.It would be much easier to file this as misc income of course, but that may not be the correct thing to do. Although, it doesn't seem that difficult to file schedule-CEZ.Also, IF there is some leeway on this, is there any potential benefit to having SE/business income? Perhaps this would allow me to find some addition tax-deferred investment space, such as a SEP/SIMPLE/solo 401k? Although, for $1000/year, the effort or costs of setting up such an account may negate any benefits.Thanks,FFL
In addition to my regular job, I sometimes submit to a continuing medical education publication a short article which reviews/summarizes a recent medical research paper.Prior to this year, I have done this about once a year. The publisher send me a check, and no tax related forms. The amount I earn for each review is $300, and I have claimed it as miscellaneous income.I now anticipate writing about 3-4 of these articles per year for an total income of about $1000. I was wondering whether I was obligated to file this as self-employment income.Our old friend Facts & Circumstances decides what type of income miscellaneous income is. You can get some guidance from Pub 535, but you're not going to find a bright line anywhere. As is usual, I'm most interested in the unstated: what's your day job? how did you come by these gigs? why the increase in workload?If it is self-employment income you can set up a SEP for free at any IRA custodian and contribute 20% of your net income from self-employment (term of art). That net income is your Schedule C bottom line minus the adjustment to income for 1/2 of your Self-Employment tax. Details about plans available to the self-employed are in Pub 560.PhilRule Your Retirement Home Fool
Isn't the limit for SEPs 25% -http://www.irs.gov/retirement/participant/article/0,,id=2113... ?
Isn't the limit for SEPs 25%The limit for SEPs is, indeed 25%. However, an additional calculation is required when a self-employed person calculates the max for her contribution, resulting in a max of 20%. The limit for employees of the proprietorship would be 25%. See a thorough reading of all of Chapter 2 of Pub 560.PhilRule Your Retirement Home Fool
I'll just revel in my ignorance and go with what TT said. ;)
Phil glossed over the math. If you read the Internal Revenue Code, you will find that SEP deductions are indeed limited 25% of your net self-employment income. But your net self employment income is not the bottom line of your schedule C. You start with that, then subtract off the deduction for 1/2 of your Self Employment tax, AND you also subtract off the deduction for your SEP contribution.That's a bit of a circular calculation. But if you dust off your high school algebra, you'll find that 25% of your SE income after deducting the SEP contribution is the same as 20% of your SE income before deducting the SEP contribution.Hence, the usual short cut of saying your SEP is limited to 20% of your SE income. --Peter
Our old friend Facts & Circumstances decides what type of income miscellaneous income is. You can get some guidance from Pub 535, but you're not going to find a bright line anywhere. As is usual, I'm most interested in the unstated: what's your day job? how did you come by these gigs? why the increase in workload?During the day and usually most nights, I'm a physician seeing patients, and also work in a laboratory.The income is an "honorarium" for writing summaries of research articles for a publisher which then bundles the summaries and sells them to physicians who just want to read the cliff's notes version. I was approached by the publisher, who asked if I would be willing to write of few of them this year.From my readings, it seems that I most likely will not get into any trouble with IRS regulations for declaring my freelance income as generated from my new sole proprietorship whose business is to write these articles periodically as a sub-contractor. Now, as to whether I could just declare this miscellaneous income and avoid FICA and it still be kosher, I'm not so sure.However, it seems that even with only $1000 in schedule C income, I would be eligible for an individual 401k, and would be allowed to make employee and employer contributions. I already max out my employers 401k, but I could make an employer contribution, to myself, of 25%(?) of my schedule C profit.So I want to do this the right way, I it SEEMS that I should declare this as self employment income. However, even if an argument could be made that I this was a grey area and maybe could be miscellaneous income, that perhaps I may want to declare it as business income ANYWAY, if I get to add some more dollars to tax-advantaged accounts. Another benefit is that I have an orphan 401k that I MAY be able to rollover to this new solo 401k, and avoid some of the fees I'm currently paying.Just wondering if it's worth the hassle of doing this work because it takes me 10-12 hours for each article, and it come out of my limited free time. So that's why I'm wondering of course about the taxation and any secondary over-looked benefits.FFL
I have an orphan 401k that I MAY be able to rollover to this new solo 401k, and avoid some of the fees I'm currently paying.Why not roll it into a traditional IRA, which most custodians don't charge a fee for?PhilRule Your Retirement Home Fool
Why not roll it into a traditional IRA, which most custodians don't charge a fee for?Good question. Because this year I will be above the income limits for contributing directly to a ROTH IRA. Thus, I will make non-deductible TIRA contributions and then convert that immediately into a Roth, aka the backdoor Roth.If I have deductible IRA monies (from rolling over the 401k into an IRA), upon conversion I would have to pay taxes on a prorated share of the deductible portion of the IRA, which would negate a lot of the benefits of doing the Roth conversion. However, by keeping my existing orphan 401k (or in this case, rolling it over into the solo 401k) it is not considered IRA money for the purposes of paying conversion tax on the deductible portion of a TIRA.So one benefit of opening the solo 401k is that I'll be able to rollover my other, high-fee, 401k into it, while preserving my ability to make tax-free Roth conversions from non-deductible TIRA contributions.NSP.S. It seems that both Vanguard and Fidelity's solo 401k's are fee-free.
Publication 4445-E contains the definitions for employee, self-employed and independent contractor. http://www.irs.gov/pub/irs-pdf/p4445esp.pdfAccording to IRS 2011 1040 schedule SE Instructions:"You must pay SE tax if you had net earnings of $400 or more as a self-employed person. If you are in business (farm or non-farm) for yourself, you are self-employed."
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