Tax time can fill anyone with trepidation, but the apprehension of looming tax liability can be especially worrisome for independent contractors, freelancers and gig workers who generate the bulk of their annual income through self-employment.
Note: In response to the COVID-19 pandemic, the IRS has extended the federal income tax filing due date from April 15, 2020 to July 15, 2020. If you have not yet contributed to your IRA for 2019, you have until the tax filing due date to make a contribution, or fund a new account via contribution. (Visit our Knowledge Base for more information.)
The current self-employment tax rate is 15.3%, which includes 12.4% for social security and 2.9% for Medicare. That’s stiff, but unfortunately, that’s not all the tax burden facing independent contractors. They also must pay an additional income tax on their earnings that place their final tax liability at 30% or more of gross income. So if you made $50,000 driving for Uber, renting your house out on Airbnb, or working as a freelance web designer, you’ll owe about $15,000 in taxes.
Paying nearly one-third of your annual income to the IRS is a deep financial cut. Freelancers who rely on the bulk of the income they generate to pay living and other expenses could be forced out of their coveted lifestyle and back into “regular” jobs just to alleviate their tax concerns.
There are other ways independent contractors can avoid paying that much in tax, however—and they also can use the money they saved to invest in real estate, cryptocurrency, peer-to-peer loans or other alternative assets.
Contributions to a Self-Directed Solo 401(k) Reduce Tax Burden
Independent contractors who open a Rocket Dollar Self-Directed Solo 401(k) and make contributions can significantly reduce their tax liability for the year. Rocket Dollar also makes it easy for independent contractors and freelancers to manage their tax liability and even substantially reduce the amount they’ll owe in self-employment tax.
Account holders can currently directly contribute up to $19,500 as a deduction of compensation, which immediately knocks off $19,500 of taxable income. The total contribution limit from investment income generated is $57,000 per year. That number increases to $63,500 for account holders over the age of 50.
Clearly, direct contributions and total contributions can have a significant outcome on your tax bill. That’s one of the reasons why the Self-Directed Solo 401(k) is such an outstanding product for people with self-employment income taxes. Generating substantial 1099 income is not favorable, and it can really take away a lot of the incentive to do it
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Unlock the Power of a Self-Directed Solo 401(k)
Reducing your taxable income by at least $18,500 has a significant outcome on your tax bill. You can combine those savings by unlocking the true power of a Self-Directed Solo 401(k)—the ability to invest in real estate or other alternative assets. You can make sizable investments because you can make sizable contributions to a Self-Directed Solo 401(k) The combination of high contribution limits, tax deductions, and the ability to invest in high-performing asset classes can really change your retirement outcome.
Rocket Dollar Makes It Easy
Rocket Dollar is a completely online platform—there’s no paperwork to fill out after you open an account. Our engineering team built a feature-rich custom platform that allows us to compile the demographic information needed to set up your account, as well provide detailed account management options through our custom dashboard. You can easily track investments, contributions and returns all in an easily navigated completely online experience.
We’ve built an entire ecosystem that allows you to actively use and manage this account for every stage of your journey into and through retirement, from annual contributions to distributions when you are at that point in your life.
This ongoing work better positions trustees of Self-Directed Solo 401(k)s for success. It also removes much of the guesswork about account administration and compliance. Since trustees are the sole beneficiary of the Self-Directed Solo 401(k), they also assume sole responsibility for ensuring investments made from the account are fiscally sound decisions—and IRS compliant. That can be intimidating, especially from the legal side of ensuring what investments are allowed, whether someone is a prohibited party or anything else that could potentially threaten the good standing of the plan.
Rocket Dollar’s account management features remove those barriers—and we also have a service team that’s always available to answer questions about a specific investment and gives you peace of mind to know if an investment is within IRS guidelines. We provide all you’ll you need for management and reporting, and reporting are available quickly and securely.
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Contribute For 2019 until April
Self-employed workers have until Dec. 31, 2019, to open a Self-Directed Solo 401(k) and make contributions that count against 2019 income. Although taxes don’t come due until April, accounts must be set up by December 31.
Ask yourself: “Do I want to pay my future self, or do I want to pay the federal government?” A Self-Directed Solo 401(k) allows you to keep more of your hard-earned money, as well as invest in many different potentially high-yield alternative assets.