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Every January/ February we wait to receive our tax documents that are used to submit our taxes by April 15th. Most workers receive something called a W-2 that shows how much money was earned through their employer for the year. But a subsect of workers considered “independent contractors” don’t receive a W-2 – instead they receive something called a 1099.

Some common professions this occurs with are:

  • Business Owners
  • Real Estate Brokers
  • Insurance Brokers
  • Consultants
  • Certain lawyers, doctors, architects

If you receive a 1099, that means that in the eyes of the IRS you are considered your own business; that also means you can participate in some very creative retirement solutions that can help you shelter large amounts of your income from taxes.



The simplest and one of the most common options is called a SEP IRA. SEPs are made through the profits of the business with contributions being limited to 25% of your net earnings from self-employment (not including contributions for yourself) up to $57,000 for 2020.

The most advantageous part of a SEP IRA is the ease of use; SEPs have been around forever and are usually the first thing suggested by your CPA. While an independent contractor is considered a business, it’s important to appreciate that you are both the employee and the employer as the sole owner of the business.

SEP contributions are made as the employer for the benefit of the employee. The fact that only the employer contributes can be restricting – and should you ever hire another employee the same level of contribution would have to be contributed to your new employee. The reason employer only contributions are restricting is because they’re only based off 25% of net profits, rather than employee contributions which can be dollar-for-dollar on what you earned. (Keep reading the article to see a breakdown of how adding employee contributions can help you contribute at a higher rate, helping you shelter more from taxes.)

Another frustrating part of SEP IRAs is that there are no catch-up contributions over the age of 50. 401(k)s allow an additional $6,500 contribution if you are above age 50 because this is considered a benefit to the employee. Because SEPs are a contribution of the employer this is not available. All SEP contributions are pre-tax; Roth contributions (post-tax) are not available.


Safe Harbor 401(k)

Safe Harbor 401(k)s, also known as Individual 401(k)s, are the best kept secret of 1099 workers and a strategy we implement a lot at DPWM. Safe Harbor 401(k)s have the same maximum contribution limits as SEPs ($57,000 for 2020) but allow for an additional $6,500 catch-up contribution for those over age 50.

But wait, there’s more.

While SEP IRAs are funded only by the employer, Safe Harbor 401(k)s are a mixture of employee and employer contributions. From a planning perspective, this means you can fill the contribution bucket up at a faster pace than you would with a SEP IRA.

Here’s an example

Remember, SEP contributions are based off 25% of net income; this means that if you netted $100,000 for the year you can contribute a max of $25,000. Safe Harbor 401(k)s allow a dollar-for-dollar contribution as the employee, meaning if you netted $19,500 for the year you could contribute the full amount into your 401(k) and an additional 25% of net compensation for the employer profit share. Using the same $100,000 of net income, a Safe Harbor 401(k) would allow you to contribute a total of $39,625 to your plan compared to $25,000 for a SEP IRA.

While this is a huge benefit over a SEP it’s not the only component of a Safe Harbor 401(k) that makes them so attractive.


The Roth 401(k)

The higher level of flexibility and additional $6,500 contribution for those over age 50 is great, but the most unique planning opportunity comes from the ability to have the employee contribute their $19,500 portion as a Roth (post-tax) contribution. Most of the people we construct these for make too much income to contribute to a Roth IRA leaving them envious of the post-tax opportunities they can’t participate in. A Safe Harbor 401(k) solves this problem for them, letting their $19,500 employee contribution be a Roth contribution and the employer contribution of $37,500 be on a pre-tax basis.

Additionally, some independent contractors have their spouse help them with their books/ recordkeeping or other tasks for the business. If that’s the case, those contractors can contribute this same amount to the spouse assuming certain regulations and rules are met. So, instead of a max of $57,000 annually we’re now able to contribute a combined $114,000 of Roth/ pre-tax money to the household under age 50 and $127,000 for those over age 50. It’s an absolute slam dunk.

In future articles, we’ll speak about some other creative strategies to help closely held businesses maximize for retirement while sheltering income for taxes. Some of these options include defined benefit plans, deferred compensation arrangements, and many more we’ll talk about on the Denver Private Wealth Management blog.


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