Build Your Nest Egg

1. Why a SEP IRA Might Be an Important Retirement Strategy

As independent consultants, you no longer have a corporate 401(k) saving for your retirement.

But that’s okay.

This is where IRAs, or Individual Retirement Accounts, come into play.

If you set up your business as an S-Corp, both the Solo 401(k)s and SEP IRAs are viable options.

I made the choice to use a SEP IRA. In this setup, my S-Corp funds my retirement up to 25% of my “reasonable salary”. I set this to contribute the IRS max of $66,000 per year (in 2023).

Because SEP IRA contributions are considered a business expense, this retirement option reduces net income and therefore, your federal income tax liability.

Let’s see the benefits of retirement savings with an S-Corp:

An indie consultant with an S-Corp pays herself a salary of $264,000 and contributes the maximum 25% to her SEP IRA. Through this, she took home an extra $17,818 and avoided another $17,821 in income taxes in a single year.

Repeated annually and invested over 20 years, that yields an incremental $1.8M.

Here’s the math, making some assumptions to simplify:

Do you like money? Because I do. This is where it gets good. 

Let’s assume she invested all the tax savings and contributed the same amount to her SEP each year, for her 20-year tenure as an independent consultant. She’s smart, so it grew at 8%. 

With compound growth, she ended up with $1,787,022. That’s an extra $1.8 million she wouldn’t have had. 

[The Fine Print: Alternatively, the Solo 401(k) offers nearly the same financial benefits and allows additional catch-up contributions of $7,500 a year. However, it’s only available to companies without employees. Remember that your personal business structure and needs will influence the choice between a SEP IRA or a Solo 401(k). So, it’s best to consult your tax advisor when deciding on a strategy.]

Looking for more great tips to optimize your business? Check out our full guide on business startup and tax planning here.

2. The Nuances of Time-Based vs. Project-Based Agreements

Let’s talk shop: Most independent consultants either charge their clients using an hourly rate or a project basis.

Which one should you choose?

Let’s break them down:

• Time-Based Fee: A time-based contract allows the most flexibility. It gives both you and your client the freedom to make changes to the project as you go. It also ensures that you get fair compensation for the hours you put in.

• Project Fee: With a project-based contract, it’s incumbent on both you and the client to ensure you have clear boundaries on the project from the get-go. It’s great for projects with set objectives. I choose this method because it encourages me to work efficiently. 

Regardless of which method you choose, ensure you have a solid contract to protect yourself.

Check out our time-based and project-based templates to help you get started.

3. Cracking the Code for Tax Write-Offs

America loves small businesses.

In fact, the tax code is written to help small businesses grow. 

As an independent consultant, you are a small business owner. And because of that, you should be using the tax code to your advantage to find expenses and increase your net income.

The more expenses you have, the lower your taxable income.

Uncle Sam wants this for you.

Let’s take a look at some of the common allowable expenses:

1. Home Office: You can claim a part of your home (and home expenses, such as utilities and property taxes) as a deduction, as long as it’s regularly used for business purposes and serves as your principal place of business. 

2. Furnishings and Equipment: Aside from the space in your home itself, consider your essential expenses for productivity like computers, desks, chairs, etc.

3. Office Lease: If you’re renting an office space for your business, it’s deductible as long as it follows IRS requirements.

4. Transportation Expenses: Car-related expenses and commutes are deductible if you’re using them to visit and interact with clients and customers.

5. Miscellaneous Deductions: Independent consultants can also take advantage of other deductions to reduce their taxable income, including expenses for professional services, meals, delegating the vendors, and more.

For a more comprehensive list of deductions and expenses you can slash from your tax bill, download our handy Business Guide and Tax Planner.

Remember, the path to success is paved with continuous learning and embracing fresh perspectives.

Let's stay connected, share ideas, and elevate your consulting business.

Stay curious, friends.

The 2x2 and TheConsult.co are brought to you by Keenan Reid Strategies

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