Switching from W2 to 1099 contractor - Can I offset taxes with solo 401(k) contributions?

Wow thank you for this detailed response! I had no idea about the QBI deduction. So if I'm understanding correctly, I could potentially put away more in retirement than I could as a W2 employee? And it sounds like between the half self-employment tax deduction, the solo 401k, and the QBI deduction, I might actually be able to get close to breaking even? Do I need to set up an LLC or something to do the solo 401k, or can I just open one as a sole proprietor?

You absolutely can put away more for retirement as a 1099 contractor than you could as a W2 employee in many cases. Between the employee contribution ($23,000) and the employer contribution (up to 25% of net income), the solo 401(k) allows for significant tax-advantaged savings that could help offset the additional self-employment tax burden. You don't need to set up an LLC for a solo 401(k) - you can establish one as a sole proprietor with just your SSN. Many brokerages offer solo 401(k) plans with simple paperwork. Just make sure to set it up before December 31st of the tax year, though you can make "employer" contributions until your tax filing deadline (including extensions).

Does this actually work for people who just got switched to 1099 status? My company is doing the same thing to me next month and I'm freaking out about the taxes. Do I need to have been self-employed for a while for the tool to be helpful?

I'm skeptical about another "tax tool" - there are so many out there. How is this different from TurboTax's self-employed option? And does it actually file your taxes for you or just give advice?

It's actually perfect for people just transitioning to 1099 status because it specifically addresses the tax management strategies you need when making this switch. You don't need previous self-employment experience at all - that's exactly when it's most helpful. This is completely different from TurboTax's self-employed option. While TurboTax helps you file taxes based on information you already know, taxr.ai is more about creating a comprehensive tax strategy that minimizes your tax burden throughout the year. It doesn't file your taxes for you, but instead provides specific guidance on how to structure your finances, track expenses, plan contributions, and prepare for quarterly payments to optimize your tax situation. It's more like having ongoing tax planning rather than just tax filing help.

Wait, this seems too good to be true. You're saying this service somehow gets you through the IRS phone tree? How does that even work? The IRS hold times are legendary.

This sounds like a scam. Why would I pay for something to get through to the IRS when I can just call them myself? And how do I know they're getting me to a real IRS agent and not just some random person?

The service basically navigates the IRS phone system for you and waits on hold in your place. When they reach an actual IRS agent, they call you and connect you directly to that agent. It's not bypassing any systems, just handling the wait time for you. I was equally skeptical before trying it. But it's legitimate - when you're connected, you're speaking with an actual IRS employee who verifies your information and answers your questions officially. I verified this by checking the agent's ID number and calling the main IRS line afterward to confirm it was a legitimate connection. The difference is you don't waste hours on hold only to potentially get disconnected.

This is such an important point! My friend got switched from W2 to 1099 last year and after researching realized she was being misclassified. She filed Form SS-8 with the IRS to determine her correct status and Form 8919 to report the uncollected taxes her employer should have been paying. The IRS ruled in her favor and her company had to reclassify her AND pay back taxes.

I hadn't even considered this angle! My situation might actually fall into this gray area - I'm still expected to work set hours and use company equipment. Do you know what the specific tests are that the IRS uses? And if I pursue this, would I likely get fired or face other repercussions?

The IRS primarily looks at three categories: Behavioral Control (do they control how you work?), Financial Control (do they control the business aspects of your work?), and Relationship Type (written contracts, benefits, permanency of relationship). If they control when, where, and how you work, provide your equipment, don't let you work for others, pay you by time rather than project, and the relationship is ongoing rather than project-based, you're likely an employee regardless of what they call you. As for repercussions, legally they can't fire you for questioning your classification - that would be retaliation. But practically speaking, it could create tension. Some people start by having an informal conversation with HR or management before filing anything with the IRS. Documentation is key throughout this process.

Has anyone used Schwab for their solo 401(k)? Their regular investment accounts are great but wondering specifically about their solo 401(k) options compared to Fidelity.

I actually did research Schwab before settling on Fidelity. Their solo 401(k) is solid with no setup or maintenance fees similar to Fidelity. The main differences I found were that Schwab's plan doesn't allow for Roth contributions within the solo 401(k), while Fidelity does. Schwab also requires a bit more paperwork for the initial setup. Investment options are comparable between the two, with both offering good access to low-cost index funds. Schwab's customer service for small business retirement accounts was excellent in my experience during the research phase. If the Roth option isn't important to you, Schwab is definitely worth considering.