Can I contribute to a SEP IRA if I have W2 income and 1099 income from separate employers?

Wait I'm confused. If OP's husband has an S-Corp, isn't the 1099 income considered self-employment income? So could she still do the SEP IRA with the 1099 option? And if she goes with option 2, could the S-Corp do a SIMPLE IRA instead or something?

Yes, the 1099 income is indeed considered self-employment income, which is why she can establish a SEP IRA under Option 1. The 1099 income is separate from her W2 job, allowing her to make SEP IRA contributions up to 25% of her net self-employment earnings. For Option 2, you're right that the S-Corp could potentially establish a SIMPLE IRA or even a Solo 401(k) where the S-Corp makes employer contributions. The S-Corp (as the employer) could contribute up to 25% of her W2 compensation from the S-Corp, up to the total annual limits. This would be completely separate from her personal 401(k) contribution limits at her other job.

This sounds interesting but did it actually save you money? Like did it find deductions you wouldn't have known about otherwise? I'm also juggling W2 and 1099 income and the retirement account rules are so confusing.

I'm skeptical about these tax tools. Wouldn't an accountant be a better choice for this kind of situation? There's a lot of nuance with S-Corps and SEP IRAs. How accurate was the advice compared to what a CPA would tell you?

It absolutely saved me money! The tool identified that I was calculating my SEP IRA contribution wrong - I was using gross income instead of net income after SE tax, which would have caused me to over-contribute and possibly face penalties. It found about $3,800 in additional deductions I could take for my business that I hadn't considered. Regarding using an accountant, I actually showed the results to my CPA afterward, and she was impressed with the accuracy. The difference is that I could run different scenarios instantly (W2 vs 1099, different income levels, etc.) without paying my CPA's hourly rate for each calculation. I still used my accountant for filing, but the tool helped me make informed decisions beforehand and come prepared with questions.

How does that even work? Is this legit? I thought the IRS phone system was completely broken. Are they just constantly calling until they get through?

Yeah right. No way this works. I've literally never gotten through to a real person at the IRS no matter how many times I've tried or how long I've waited. Sounds like a scam to me.

It works by using a system that navigates the IRS phone tree and waits on hold for you. Once they reach a representative, you get a call to connect with the agent. It's not constantly calling - they just have technology that holds your place in line so you don't have to. Regarding whether it's legit - I was skeptical too! But it absolutely worked for me. They don't ask for any sensitive information - you just give them your phone number so they can call you when they reach an agent. The service handles the painful waiting process, and you only get charged if they actually connect you. I was planning to wait on hold myself for hours again, but this saved me a huge headache.

But can't you deduct half of the self-employment tax on your personal return? Also with an S-Corp, don't you have to pay yourself a reasonable salary anyway? I thought you couldn't just take everything as distributions to avoid employment taxes.

You're right that you can deduct half of the self-employment tax on your personal return, which does offset some of the tax impact. Regarding S-Corps, yes, if you're an owner, you need to pay yourself a "reasonable salary" before taking distributions. But in this case, OP isn't the owner - her husband is. So if she's legitimately performing services for the S-Corp, they have flexibility in how they compensate her. They could choose either W2 or 1099 depending on the nature of the work and their tax planning needs. Each approach has different implications for retirement planning, taxes, and administrative requirements.

I thought you couldn't do employee contributions to a Solo 401k if you've already maxed out at another employer? The $22,500 limit (for 2025) is per person across all 401k plans, not per employer, right?

You're absolutely correct! The $22,500 employee contribution limit for 2025 is per person across ALL 401(k) plans, not per employer. So if OP has already maxed out employee contributions at her W2 job, she cannot make additional employee contributions to a Solo 401(k) for her self-employment income. However, she could still make employer contributions to a Solo 401(k) based on her self-employment income (up to 25% of net self-employment earnings). But at that point, there's really no advantage over a SEP IRA since both would allow the same employer contribution limits. The SEP IRA is actually simpler to set up and maintain, so it would probably be the better choice in this situation.

This is such a comprehensive breakdown - thank you! I hadn't even thought about the QBI deduction aspect. That 20% deduction could really make a difference in the overall tax picture. One question though - with the quarterly estimated taxes for Option 1, how do you handle that when you're also getting W2 income? Do you need to adjust your withholding at your main job or just make separate quarterly payments for the 1099 income? I'm worried about getting hit with underpayment penalties if I don't get the timing right. Also, regarding the state tax considerations you mentioned - are there any states where this decision would be particularly clear-cut one way or the other?

@Fatima Al-Rashid Great questions! For quarterly estimated taxes with mixed income sources, you have a few options: **Option 1**: Increase your W2 withholding to cover the additional tax from your 1099 income. You can submit a new W-4 to your employer requesting additional withholding per paycheck. This is often easier than making quarterly payments. **Option 2**: Make quarterly estimated payments specifically for the 1099 income. You d'calculate the tax on just that income and pay 25% each quarter. **Option 3**: A combination - adjust W2 withholding for part of it and make quarterly payments for the rest. The key is making sure your total payments withholding (+ estimated equal) at least 90% of current year tax or 100% of last year s'tax 110% (if your prior year AGI was over $150k to) avoid penalties. Regarding state considerations, states like Texas, Florida, and Nevada with no income tax make the decision purely about federal implications. States with high income tax rates but favorable treatment of retirement contributions like (California might) favor the SEP IRA route. States with lower self-employment tax treatment or different QBI rules could swing the calculation either way. I d'definitely recommend running the numbers in a tax software or with a CPA for your specific state situation!

Great point about the SEP IRA setup timing! I didn't know about the December 31st establishment deadline - that's definitely something to keep in mind for planning. Regarding variable 1099 income, I think setting up the SEP IRA infrastructure makes total sense even in lower income years. Most providers (Fidelity, Vanguard, etc.) don't charge account maintenance fees for SEP IRAs, so there's really no downside to having it ready. Plus, you're right that the contribution limits scale with income - in a low income year you might only contribute a few hundred dollars, but in a high income year you could max out at much higher amounts. One additional consideration for variable income: if you have a really good 1099 year, you might also want to look into whether you can make a Solo 401k election instead of or in addition to the SEP IRA, since Solo 401ks allow for higher total contributions when you have significant self-employment income (even though the employee contribution portion would still be limited if you've maxed out elsewhere). This thread has been incredibly educational - I feel like I actually understand these rules now instead of just being confused by IRS publications!

Thank you for those important clarifications! As someone new to navigating retirement accounts with multiple income sources, this is exactly the kind of professional insight I needed. The correction about SEP IRA establishment timing is huge - I was worried I'd already missed the window for this year since we're getting close to year-end. Knowing I have until the filing deadline gives me much more time to make an informed decision. The employment classification point is really important too. I hadn't fully considered whether my work for my husband's S-Corp would truly qualify as independent contractor work versus employee work. We definitely need to review those IRS guidelines carefully to make sure we're not setting ourselves up for problems down the road. One follow-up question: when you mention the payroll tax savings with Option 2 (W2 from S-Corp), are there any minimum salary requirements we need to be aware of? I've heard that S-Corp owners need to pay themselves "reasonable compensation" as W2 employees before taking distributions, but does that apply to non-owner employees like me as well? This thread has been more educational than any tax publication I've tried to read!

@Katherine Shultz Great question about minimum salary requirements! For non-owner employees of an S-Corp, there typically aren t'the same reasonable "compensation requirements" that apply to owner-employees. The IRS is mainly concerned about S-Corp owners who try to avoid payroll taxes by taking everything as distributions instead of salary. However, there are still some considerations: the compensation should be reasonable for the actual work being performed you (can t'pay someone $100k for filing papers once a week ,)and all compensation for services rendered should generally go through payroll rather than being disguised as distributions or other payments. One additional thing to consider with the W2 option: you d'be eligible for unemployment benefits if the work arrangement ends, whereas 1099 contractors typically aren t.'This might not be a major factor in your decision, but it s'worth noting. Also, @Miguel Silva raised an excellent point about the backdoor Roth complications with SEP IRAs. If you re doing'backdoor Roth conversions now or might need to in the future due to (income limits on direct Roth contributions , having)a SEP IRA balance makes that strategy much more complex and potentially less beneficial due to pro-rata rules. This really highlights why it s worth'running the complete analysis - retirement contributions, current taxes, future tax planning strategies, and administrative complexity all factor into the optimal choice.

This is such excellent additional advice! The point about state-specific retirement account protections is something I never would have thought to consider. I'm definitely going to research how my state handles SEP IRA vs employer plan protections before making my decision. The documentation tip is really valuable too. I can see how family business arrangements would get extra scrutiny from the IRS, especially when there are significant tax benefits at stake. Better to be over-prepared with documentation than to have to scramble if there are ever questions. The separate business checking account suggestion makes a lot of sense for the 1099 route. It would definitely help with bookkeeping and make it clear that this is legitimate business income rather than just moving money around for tax purposes. One question that occurred to me reading through all these great responses: if I go with Option 1 and set up a SEP IRA, should I be concerned about having "too many" retirement accounts? I already have a 401k at my main job, a traditional IRA from an old employer rollover, and a Roth IRA. Would adding a SEP IRA make things overly complicated for management and rebalancing purposes, or is that not really a concern? Thank you to everyone who has contributed to this discussion - I feel so much more informed about my options now!