Your Life

Your Life

Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Valued Pioneer
Posts: 3
Registered: ‎03-22-2014

W2 from regular job + 1099 side job as a sports coach

I get a W2 from my regular job  (55K/yr & total household income) and at the end of the dear break even (0) with IRS after max deductions. I have a side job (work for a club) as a sports coach with kids and in a 9-month season make between 20K to 30K.  A friend told me NOT to mix incomes and setup a corporation for the side job, to maximize deductions.

 

My question is two-fold:

 

Is this a good idea? or should I setup an LLC or nothing at all and mix all income and why?

 

As a sports coach, can I deduct miles from/to work for practices, games, tournaments, etc; as well as gear I purchase, meals, tablet, phone, whatever else tool I may find it beneficial to my teaching/practice?

 

With my regular job I do not have enough money to put aside in a Traditional/Roth IRA. I am willing to max contribution to minimize taxes but not sure which way to go about it.

 

Thank you!!!!!!

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Council Member
Posts: 548
Registered: ‎04-06-2016

Re: W2 from regular job + 1099 side job as a sports coach

I'm going to reply in blue text below...

Karen 


@omarrodz wrote:

I get a W2 from my regular job  (55K/yr & total household income) and at the end of the dear break even (0) with IRS after max deductions. I have a side job (work for a club) as a sports coach with kids and in a 9-month season make between 20K to 30K.  A friend told me NOT to mix incomes and setup a corporation for the side job, to maximize deductions.

  

My question is two-fold:

 

Is this a good idea? or should I setup an LLC or nothing at all and mix all income and why? I don't think you need to set up a corporation for the side job and I'm not sure what you're friend is talking about with not mixing incomes.  If you receive a 1099-MISC for your side job as a sports coach, the easiest way to handle this is on your personal return on Schedule C.  You'll basically be considered a sole-proprietor, with the income from your 1099-MISC.  

 

As a sports coach, can I deduct miles from/to work for practices, games, tournaments, etc; as well as gear I purchase, meals, tablet, phone, whatever else tool I may find it beneficial to my teaching/practice? 

 

On Schedule C you can deduct any "ordinary, necessary, and reasonable" business expenses. 

 

Mileage: only mileage that wouldn't be considered "commuting miles" is deductible. This is a bit tricky.  The main location for your coaching job would be the Club where you coach. You can NOT deduct any mileage from your home to your place of work-- these are commuting miles. How does that apply in your situation? If you go to your main (W-2) job (leg A), from there directly to your coaching job (leg B), and from there home (leg C), legs A and C would be commuting miles and only leg B mileage would be deductible.  However, if you get up in the morning, drive to your main (W-2) job (leg A), back home (leg B), then head to your coaching job (leg C) and home (leg D), all of your mileage would be from your home to a main work location making it all commuting miles, and therefore none of it would be deductible. Mileage to and from your away games and tournaments not held at your Club would be deductible.  Mileage to purchase gear, etc, as well. Ref p. F-12 of Pub 4012 for a picture depiction of deductible miles: https://www.irs.gov/pub/irs-pdf/p4012.pdf .

 

Sports related gear for your job would definitely qualify. 

 

Meals: Maybe. If the meal has a business purpose, then yes--like a celebratory pizza party for the team. If it's a meal that you picked up on the way to practice, no, it wouldn't be.  If it's a meal while you're traveling out of your normal area for a tournament, then, yes, it would be.  Be aware that the IRS feels that you're going to have to eat regardless, so you only get deduct 50% of any eligible meals.

 

You need to be aware that the IRS will consider this self-employment income (1099-MISC with income reported in Box 7 Non-Employee Compensation) and you'll have to pay self-employment (SE) tax on your net income from your Schedule C business.  This is the tax that your W-2 employer would withhold from your paycheck for social security and medicare (7.65% total) and the amount that they would pay on your behalf (7.65%). As a self-employed person, since you'd be responsible for paying both the employee and employer parts, you'll end up paying the 15.3% with your individual tax return-- this is calculated on Schedule SE.  1/2 of it, the employer part, will be deducted from your AGI in the adjustments section of your 1040 so you don't end up having to pay income tax on it.  

 

Tablet/Phone-- these are questionable.  Were they purchased for the sole use of your job-- that is you don't use them for personal use at all?  Do you have another cell phone you use for personal calls? If they were solely used for business purposes and they'd be considered ordinary and necessary to your work, then yes.  However, if you use the tablet or phone for personal things as well, you'd want to keep detailed records of personal and business use and you'd only be able to claim the part used for business-related tasks. You'll want to keep these records with your tax return in case you're questioned by the IRS.

 

Other tools, items: Maybe, if they could be considered ordinary, necessary, and reasonable for your work.


Bottom line: Use the sniff test.  Does the expense seem reasonable in your job, or are you trying to deduct something that might smell "fishy"?  Any business expense you claim you should feel comfortable justifying, as a business and not a personal expense, to the IRS.

 

With my regular job I do not have enough money to put aside in a Traditional/Roth IRA. I am willing to max contribution to minimize taxes but not sure which way to go about it.

 

With the income you've given, you'd be eligible for either a Roth or Traditional-IRA contribution. With a Trad-IRA, you can make a deductible or non-deductible contribution. However, it's almost never better to contribute to a non-deductible Trad-IRA if you can contribute to a Roth-IRA. The deductibility of your Trad-IRA contributions are based on your income level: see Pub 590-A for more info: https://www.irs.gov/pub/irs-pdf/p590a.pdf .  While both are tax-advantaged, deciding between a deductible Trad-IRA and a Roth IRA isn't always easy.

 

If you're only looking for a reduction in your taxes this year then a contribution to a deductible Trad-IRA is probably your best choice. Your contribution will be subtracted from your AGI and you will not pay taxes on it that year. However, when you withdraw the money during retirement, you'll pay taxes on both the amount you contributed and the amount you earned.  So, let's assume you contributed $3000 to a deductible Trad-IRA that grew to be worth $9000 when you withdrew it in retirement. You would have deducted the $3000 in the year you made the contribution (reducing your taxes that year), but when you withdraw the money, you'll pay taxes on the full amount of the withdrawal- $9000.  This may work out OK for you if you were in a higher tax bracket when you made the contribution than you will be when you retire.  It can also be advantageous if you're nearing retirement and there isn't much time for your investment to grow before you'll be withdrawing it. 

 

Roth IRAs work differently. When you make a contribution to a Roth IRA, you don't get to deduct it from your taxes in the year the contribution is made, so it won't reduce the amount of taxes you owe that year.  However, the money will grow tax free.  That is, when you go to withdraw it at retirement, you won't pay taxes on any of your withdrawals (contributions or earnings) as long as the Roth IRA has been opened for at least 5 years.  Going back to the example earlier-- $3000 contributed, grew to $9000 at withdrawal.  If this was contributed to a Roth IRA, the $3000 would not have been deducted when it was made and you would pay taxes on that amount in the year of your contribution.  When you retire and withdraw the $9000, you won't owe taxes on any of it.  This is particularly advantageous if you have a long time before you'll need it for retirement since your money will have a long time to grow. 

 

One other big difference between Trad-IRAs and Roth-IRAs is that you can withdraw your Roth-IRA contributions from your IRA at any time without penalty, so it's VERY important to keep a record of your contributions (your basis) when you contribute to a Roth-IRA.  It's also important that you understand the difference between contributions and earnings.  Contributions are what you put in. Earnings are the increase in value of your IRA above what you contributed. With a Roth-IRA, you've already paid taxes on the contributions so the IRS is OK with you withdrawing them without a penalty.  The disadvantage to this is that you can't put them back in.  So, once you withdraw them, you lose the chance for further tax-free earnings. If you withdraw earnings before you're of retirement age, you will have to pay a penalty. Trad-IRAs do NOT give you this option.

 

You can open a Roth or Traditional-IRA at just about any bank (in a CD) or with a brokerage firm or mutual fund company.  I'd recommend looking for one of the low-fee mutual fund companies and no-load funds with low expense ratios (less than 0.5%- lower is better). If you don't know much about investing a good low-cost passive index fund or ETF is probably your best bet. You can find these with expense ratios under 0.1%.  Most mutual fund companies will offer these, but I know Charles Schwab, Fidelity, and Vanguard offer them with low costs.

 

Thank you!!!!!!