Author Trudy Howard.
Did you know that self-employed people can have a 1 person 401(k) plan for retirement savings? Yes it’s true! Self employed business owners can save for retirement with a 401(k) plan the same as they did when they were employed by someone else. By setting up a one-participant 401(k) plan small business owners such as insurance agents, truck drivers, contractors, hair stylist, barbers, consultants, and UBER/LYFT drivers can also receive a tax credit of up to $500 while reducing their taxable income! Let’s look at an example of how setting up a solo 401(k) would benefit the self employed person.
Little Sally Walker decided that she had enough of sitting in a saucer and rising, so she quit her job, and started a choreography business. By offering travelling choreography lessons little Sally Walker generated roughly $18,000 in revenue. To earn this $18,000 Sally drove 20,000 miles (which gave her a $10,900 tax deduction), and she spent $3,000 on business expenses such as loan/bank fees, music downloads, utilities, facility rentals, etc. During the tax year little Sally Walker also contributed $2,500 of her earnings to her solo 401(k) which allowed her to exclude the $2,500 from her taxable income, and receive an additional $500 tax credit from the IRS.
Also, because of the new 2018 TCJA laws, Sally was able to deduct an additional 20% QBI (qualified business income) deduction which knocked off another $320 from her taxable income. In the end, Little Sally Walker was only liable for self employment taxes on $1,280 (less than $100) and $0 income taxes.
As you can see, setting up a solo 401(k) can not only help you save for retirement, but it can also drastically lower your tax liability. If you are an UBER/LYFT driver or a self employed insurance agent, truck driver, contractor, hair stylist, barber, or consultant, call us today so that we can help you create a solo 401(k). Additionally, should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.at 855-743-5765.