WCI #121: What You Need to Know About Self-Employment Taxes

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. This is White Coat Investor podcast number 121, what to do with taxes when self employed. First though, as we get started, I wanted to thank you for what you're doing out there. I know you're working hard, I know you've put in a lot of sacrifice and sometimes we forget just how big of a deal it is. And if nobody's saying thank you to you, I wanted to make sure I was the person today. You know, it's interesting. I had a really interesting case this week. I had a 13 year old who came in in cardiac arrest and it was obviously always a terrible moment when any child comes in in cardiac arrest. But this heart transplant patient, after we worked on her for an hour and a half, coded her for an hour and a half, got a pulse back and sent her on to a higher level of care. And I just wanted to thank all of you who have spent time and effort in your lives to be able to help somebody like that in their hour of greatest need. And it was really wonderful to be able to be a part of that. And I know each of you are parts of similar miracles that happen each day. So thank you for doing that. It's not easy, it's not necessarily the thing that pays the best in the world, but it is important. Hey, I wanted to ask you a favor as well. A little bit of a call to action, if you will. Most of the people that have heard about the White Coat Investor podcast do so through one of two ways. One, a friend tells them about it. So thank you so much to those of you who have been telling your friends and colleagues about the White Coat Investor podcast, especially people who love podcasts or have long commutes anyway, where it's just a no brainer as a medium to become financially literate. So thank you to those of you doing that. For those of you who are not, please suggest it to your friends. It's really helpful. The second thing you can do to help get this information into the hands of your friends and colleagues is to leave us a nice 5 star rating on itunes or on Apple podcasts rather. And what that does is it moves the podcast up in the rankings so people are more likely to see it when they search for other podcasts. And so that's very helpful and We've had a lot of great reviews. I think Cindy said we had 930 on there, but the more there are, the more people are likely to find out about the podcast and get this critical information. So thanks to those of you who have left podcasts. I see a few of them on here. This one from Laura I think it is. Got the book, loved it and listened to the podcast. I've been learning so much about finances and I started out with no knowledge at all. I'm about to start medical school and feel much more confident about loans, paying off loans and what to expect later down the road. This one from Keerlak went through all the podcasts over the last month and a half. That's quite a binge. Bought and read the book. I feel like I already know more about finances than many of my attendings. As a PGY2 highly recommend, yep, that's probably the case. First year medical student I can't get enough of Dr. Dali's podcast. Thanks for such an engaging, fun and easy to digest format. I don't think I've ever been called fun before, so that's great. This one from Pandorian Informative, well organized, good quality podcast. This one from Tiger Fan 151 Dr. Dali is the man. He's obviously very knowledgeable in all things finance and investing, but what sets him apart is down to earth approach. While there are more entertaining podcasts out there, this one is hard to top in terms of bang for your buck. I've learned a great deal about a wide range of investing principles through this podcast, so he obviously doesn't think I'm as fun as the last one, but if he's getting the important information, that's the important part. And finally, from tag 80 Dolly has a knack for explaining financial topics that are pretty dry in a concise manner. This is high yield information. If you're in his target niche, position or other high income young professional, he cuts out a lot of the extraneous financial topics that don't really apply to you. I learned a lot from his blog and book. Podcast is a great format for people who want to learn personal finance during their commute at the gym. So if you can leave us a great review, we'd appreciate it. That does help spread the word. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career because these policies can only be purchased through brokers. We put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help Hey, a couple other things I wanted to let you know about Peter Kim who is in the White Coat Investor Blogging network. He blogs his Passive Income MD is putting on this sweet conference. I'm going to go out in October to LA and speak at it. It is on a Saturday. It's a one day conference on Saturday, October 26th in LA. He's calling it the Financial Freedom Through Investing in Real Estate conference and he's got all kinds of great speakers there. I'm going to speak. Peter's going to speak. Parikh is going to speak. Letizia Alto, who will also be speaking at WCI Con 20 next year, will be speaking there. Kenji Asakura, Adapia de Erico, Trevor McGregor, Victor Mangona and Eric Tate are going to be there. You may know them from the Facebook groups. Toby Mathis and Aaron Kaplan also going to be there. And so lots of great people are going to be at the conference. If you are interested in learning more about real estate and you're a doc, even if you're not a doc, but especially if you're a doc, this is a great conference to go to, especially if you're already out in California. So it starts at 7:30 with registration and it ends at 4:30. But then there's a cocktail reception and networking and if you buy the VIP registration there's a dinner for you where you can meet all the speakers as well personally. So it just went on sale on Tuesday the 20th. I don't know what the VIP tickets which are going for 697 are still going to be available by the time you hear this podcast, but they may be. At any rate I don't know that it's going to be sold out for the regular general emission ones, but which are being sold at an early bird price of 397. So if you're interested in that be sure to check that out. You can do so@ passiveincomemd.com he's got a prominent link there and you can register for the conference and I hope to See you there. You know, I've got lots of other friends on the Internet, a lot of whom put on conferences, but this one looks particularly good. Just to mention another one though, a friend of mine from a mastermind they call themselves, Two Frugal Dudes are putting on a Financial Independence Summit. It's about the same time period, last week of October. It's a much less expensive conference. It's only going at $59, but if you want to check that out, you can see fisummit.2frugaldudes.com and meet some of the people that are big in the FI community, like J.L. collins and Ms. Frugal Woods. Let's do our quote of the day. I think we've missed a few of these in the last few episodes, so we'll try to remember to do them each time. This one comes from Morgan Houselike he said few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games. Totally agree with that and I'm excited to actually meet Morgan Housel in person. He's going to be speaking at WC Icon 2 as well. All right, I got to make a correction here. I made a mistake in a previous podcast and it's time to own up to it. So in podcast 116, which is about five podcasts ago, toward the beginning I was talking about ETFs and mutual funds and at E Trade I said it's cheaper to buy the ETF than the mutual fund because the commissions are higher. That's actually not true at E Trade. Vanguard mutual funds, at least the ones that you would use in a typical Boglehead type index fund portfolio, are part of their NTF or no load transaction fee category and so they only charge a redemption fee in the event of short term trading. They don't charge a typical fee for each time you buy and sell sell. So my bad there. Apologize for that. That's not the case at all brokerages as we'll discuss later in the podcast today though. Okay, a couple of things we have coming up this fall that I want you to know about as well. We are going to put on a Physician Millionaire episode and what I want for this is I want five or six people that we're going to bring on the podcast and talk about your financial success. So I'm looking for financially successful docs, minimum of a million dollar net worth who will come on and answer questions like what's your net worth? And what was your income over the course of your career and why do you think you became financially successful and when many of your peers did not? And we're going to put together a whole episode of that that'll run later this fall. So if you're interested in that, email cindyhitecoatinvestor.com and we'll arrange for a time to record that segment with you and put them all together into one podcast. We're going to do one other podcast aimed a little bit more at people earlier in their career and I want to bring on people that paid off their student loans, especially big, huge student loan burdens in less than five years out of their residency or fellowship. So if you are one of those people and you're willing to come on and Talk just for five or 10 minutes about your experience and how you did it, email cindyhitecoatinvestor.com and volunteer to come on that episode and we will record you for that. Cindy is my assistant with this podcast and she just got back from Podcast Movement, which is a big podcasting conference and we learned all kinds of great things about how we're supposed to be doing this. So hopefully you'll notice some improvements in the podcast as time goes on. I'm also going to be talking just for a few minutes toward the beginning of this podcast with Clint Gossage, who is one of our financial advisors. Let's bring him on now on this podcast we've got a special guest, one of our partners, a financial advisor partner of the White Coat Investor here, Clint Gossage, who is a cfa, CFP and a CPA and happens to be married to a surgical oncologist for the last 15 years. So he's experienced firsthand the ups and downs on the journey from undergrad to becoming an attending and realized after helping friends in medical school, residency and fellowship with their finances, he left a high paying job where he was managing investments at a multi billion dollar family office to basically start advising docs. And he's been helping docs and other medical professionals ever since to get out of student loan debt and save money and invest in tax efficient strategies and manage and protect their assets. What he really likes doing though is giving them back their time, which is really our most scarce resource in life. He's actually local to Scottsdale, Arizona, but like all of our recommended advisors that you can find at the White Coat Investor, he will work with you all over the country via phone, email or video conference. You can find him at cmgfin.com or just email him at cgossagemgfin.com or call him at 480-695-800 before Clint welcome to the White Coat Investor Podcast.

Well, thank you for having me. It's a pleasure to be here.

Yeah, it's great to have you on. We're going to do a few things. We're just going to talk for a minute about your practice and then we're going to take some reader questions together and just have this be a short segment as part of our podcast today. So what was it that drove you to become a financial advisor in the first place?

Okay, sure. So I was always the type of kid that liked numbers and was into math competitions and things like that and going to college, I was looking for a way to put those skills to use. So after I ruled out engineering, finance and accounting made a lot of sense to me. But it wasn't really interested in personal finance or financial planning at all until finance became personal to me, I guess. So I'll leave out some of the details of this story because I'm sure my mom will want to post a link to this episode on her Facebook page. But growing up, I never really felt the pressures of money within our family. Grew up in a small town in Kansas with two brothers and a sister on 10 acres of land. We always had plenty of food on the table, but it wasn't luxurious lifestyle by any means. We had a saying in our family, once a car hits 100,000 miles, it still has 2/3 of its life left. But it definitely wasn't a childhood where we ever worried about money. And then once I graduated college, though, I realized it was the big stressor in my parents lives and something that my parents fell asleep worrying about, woke up worrying about. And it was at that point I realized that finance wasn't just percentages and spreadshee, but it really impacts people's lives. And that's when I decided I could use this to make a difference. So in my early 20s, my parents kind of became my first planning clients.

That's pretty cool, you know, and it obviously means more when it's somebody that you obviously care very much about. Now you have some impressive financial designations. Not only a cfp, which lots of advisors have, but also a cfa, a Chartered Financial Analyst, and you're a certified public accountant. Do you think those were worth getting? Should people be using advisors that don't have all those credentials? I mean, what do you, what do you think the value of that's been to you in your practice?

Well, it's definitely been worth it to me as Far as having an education level there and an education base there. I mean, yeah, there's a lot of time that goes into studying for those, particularly the three CFA exams, but it's still nothing really compared to the time that goes into medical school or residency or something like that. So I don't want to sit here and pat myself on the back too much, but I'm the type of person that doesn't feel. Feel comfortable giving advice on a topic until I've researched it to death, which is good when I'm doing a deep dive into student loan analysis, but maybe not as great when my wife just wants me to pick out a washer and dryer. Should people use advisors that don't have these? I think you wrote a good article on this a few years ago about the big problem in our industry and that it's not very regulated as far as the barrier to entry. So you don't need a college education to get into being an advisor, and most can pass a series of seven exam within a week of studying. For that reason, I'd say it's a good rule of thumb that an advisor have at least one of the three, because ultimately the reason to use an advisor is for the advice. So while certifications alone don't guarantee a good advisor, if an advisor has one of the big three, at least you know, they put in some work to educate themselves first.

Yeah. Now, what do you see that's unique about your company, your practice?

So I've never been the type of person that could be a good salesman. I remember when I launched my firm, I tried the sales act with the potential prospect, and I came away from it hating the meeting and could tell the prospect was really turned off as well. And I decided at that time I would never try something like that again. And that was kind of a period of reflection when I looked back and realized the whole reason I started this firm was to as a favor, to help our friends out with student loan and tax issues while my wife was in residency. And so that's something I try to stay centered on and carry over in everything that we do. It's not really about selling. It's about starting from a place of adding value, making a difference, and truly doing what's in the best interest of our clients and help eliminate the issues that are causing them stress.

Now, what's your fee structure and how do you decide on that?

So that's a good question. I don't think there's a perfect fee structure out there, but ultimately I wanted our fees to be fair to clients and easy to understand. So that's why I ended up using a flat fee structure. It has three different tiers, which is probably a little more complex than I would like, but it's easy to understand because you're paying a flat monthly amount. It's transparent, so you're paying it using a credit card or a debit card. It's not just getting deducted from your account and you don't even know what kind of fee you're paying. And it doesn't keep increasing forever like a typical AUM fee would all right.

Well, let's take a few questions together from the listeners first. This one comes in by email from a physician assistant. He actually asked for this to be answered on the podcast, but didn't mention if he wanted to stay anonymous or not. So I'm just going to leave him anonymous. But it's actually one of the most common questions I ever get about paying off debt versus investing, he says. I'm a current emergency medicine pa, although I'm not an md, do I have gained a great perspective on managing my finances? So thank you. My wife and I are currently deciding what to do moving forward with our financial plans. We're both 27, have a combined annual income of around 160 and still owe 220 in student loans, which I recently refinanced with Laurel Road at 4.25% and then have my wife's loans about $50,000 of that at 3.2 fixed. We currently rent for $920,000 a month and keep our expenses fairly low at around $36,000. I contribute the max to my employer sponsored 401 plus profit sharing for nearly $35,000 a year into the 401. My wife contributes a max for her employer match of around $3,000 a year for her 401. I do have an HSA as well that only my employer is contributing to. I've not yet opened a Roth ira. My question is, do you think it would be worth it to max out my HSA and Roth IRA contributions and allow that money to grow or to take that same $9,500 a year and put it toward our student loans? It seems wiser to max out the retirement accounts, but I hate looking at the interest I'm paying my student loans. What do you think? What would you advise this page?

Yes, I know this is a common question for you and it's probably the most common question I see as well, which is essentially should I prioritize paying off debt or investing. In this case, they've already refined their student loans at low rates, which definitely gives them some more options. So I think our priority list looks like this. So taking advantage of any employer match on their 401, which they're already doing and is great. And then also prioritize any of their investment accounts that are getting tax benefits. So that's going to include their, their roth and their HSAs as well. And we're really trying to understand, okay, what's going to be the highest and best use of their money. And so with tax advantaged accounts, we're hoping over the long term those are going to be earning 7 to 8% and they're going to be growing tax free over that period. And compare that to a potential payback on a student loan which is earning, you know, three and a quarter, four and a quarter. I think that's a good trade off.

Yeah, I agree with you. I mean this is, this is something that, you know, I get this reputation as being totally anti debt and I'm not a big fan of debt by any means, but I'm also a huge fan of tax advantaged investing accounts. You know, it's one thing to be comparing paying off a 4% something debt in your versus your taxable account. It's entirely different in your Roth IRA or HSA. Something that's probably never going to be taxed again. So I think there's just a, you need a little bit higher barrier there that doesn't mean carry around debt at 10 or 15% in order to max out your Roth IRA. But at 3 or 4%, you know, that's, that's not a bad gamble there. All right, let's take a couple of questions off the Speak pipe. Remember, you can record questions for us on the speak pipe@www.speakpipe.com whitecoatinvestor. You can be as anonymous as you want on those. And this is our first question, this one coming from an anonymous listener.

Hey Jim, quick question for you regarding mutual fund versus ETF fees. I commonly use the TD Ameritrade website to compare prospective investments. I've noticed when comparing different share classes of the same investment, the hypothetical fees that TD Ameritrade quotes will vary substantially despite a nearly identical expense ratio. For example, take the comparison between VTSAX and vti, which as you know, our different share classes of the same Vanguard Total Market Index Fund, the VTSAX expense ratio is 0.04% and the VTI's is 0.03%. This difference would theoretically translate to a yearly fee difference of $1 per $10,000 invested. When you compare these funds on the TD Ameritrade website, however, they give a 5 year total fee estimate of 1.41% of the for VTSAX and 0.28% for VTI. They calculate these hypothetical fees using the same initial investment, yearly investments and rate of return over five years for both funds. Is there something I'm missing here? Are there hidden fees in the mutual fund share class that aren't reflected in the expense ratio? Is there an error on the TD Ameritrade website? Thanks so much for your input on this.

And they're basically asking why are the fees different for the mutual fund version of the Vanguard Total Stock Market Index Fund VTSAX versus the ETF version which is VTI at TD Ameritrade? And you want to. You want to take that one, Clint?

Sure.

So that's a good question. So on TD Ameritrade site they include commissions in the way they do their fee comparison. When you're comparing mutual funds and ETFs and TDs using their commission schedule to make that comparison. So how td charges their ETFs, they do 695 per trade and they charge 49.99 per trade on the mutual funds, which is quite a bit higher. So that's why you're seeing that big disparity there. So when looking at that and trying to really compare the fees, if you're not using TD as your brokerage and you're buying them at Vanguard or something like that, you can basically just look at the expense ratio on the two of them. If you are looking to buy them at td, obviously VTI or the ETF is going to make a lot more sense.

Yeah, and this has happened to me a lot actually in my career with various 401ks and whatever, like my 401ks at Schwab and I basically have brokerage window there and I buy the ETFs because the commissions are lower and that's the only reason. Whereas when I'm buying them at Vanguard, even in my taxable account, a lot of times I just use the mutual fund version because I happen to prefer mutual funds rather than dealing with having to put in the trade orders during the day. But when, if you're going to charge me 50 bucks every time I do a transaction, well, shoot, I'll deal with the hassle and I'll just buy the ETFs. And I think that's the difference that they're seeing here. You know what's interesting though is every brokerage is a little bit different in this respect. I was actually corrected recently on I had mentioned that there were higher transaction fees at E Trade as well for Vanguard mutual funds, and I was wrong about that. It wasn't true. They actually have the Vanguard mutual funds on their no transaction fee list and so you could have used either one there at E Trade, but at td, ama, Ameritrade, they're not super happy with Vanguard right now, or vice versa. I'm not sure exactly what's going on, but in 2017 they took the Vanguard ETFs off their commission free list and obviously they're charging the full price for the mutual funds as well. Probably because Vanguard won't pay to play with them. All right, our next question comes from Caleb, a military dentist who's got large unrealized gains in his individual stocks. Let's listen to that question.

Hello. I'm a military dentist who graduated dental school in 2006. I have about $1.6 million in a brokerage taxable account and another 300,000 or so in a Roth TSP account. Between my wife and I, the brokerage account is up approximately $600,000 in unrealized gains. Most of the holdings within the brokerage account are individual stocks. Many of these were purchased well before I started listening to your podcast. I'm wondering if there's a tax efficient way to transfer some of the individual stocks into index funds, bonds, ETFs, other various less risky investments. Thank you and have a great day.

So he's basically asking how to move from all these individual stocks to index funds in a tax efficient way. What would you advise him in that sort of a scenario?

He's done a great job saving up a good chunk of money in individual stocks at this point, and it's really a question of looking to reduce risk. And there's several different options to look at when trying to diversify away. And it's somewhat going to depend on the specifics, probably on the number of individual stocks. If he has 40 or 50, it's going to be a little different than if he has five or six. Okay, but the more holdings he has, the closer he is to a well diversified portfolio. But first thing I do is turn off any automatic dividend reinvestments, so that way he's not adding to his individual stock portfolio each month or each quarter. Secondly, harvest any losses. So that's going to involve selling any of the stocks that have losses and he probably wants to look even at the individual lot level, meaning if he had bought some Apple stock every year, some of it might have a loss wipe, others, you know, shares of it might have a long term gain. But by doing that then he'll generate some losses that he could potentially use to offset some of the long term capital gains that he's built up and also want to sell any holdings that have smaller gains and start building up a cash pile that he can start using to start the process of diversifying away from his current individual stocks. The other thing to consider is if he's charitably inclined, he may want to give away some of the appreciated stock so he can deduct that at full market value and doesn't have to pay any of the gains. So that's a great option. Or if he has an estate plan and wants to leave potentially an amount to an error or heirs, then he can get a step up a basis on his taxes once he finally decides to go through that process. Really if we're looking at all those options have been exhausted. As a military dentist, I don't exactly know what he makes, but I'm guessing he's in the 15% long term capital gain tax bracket. So it wouldn't be the biggest deal to sell. At least up to the point that he's not going to trigger going up and paying 18.8 after the Medicare surtax. As long as he's still within that 15% AGI threshold. I would look at starting to sell off a portion and generating some of those long term capital gains as part of his year end tax planning. But he probably want to coordinate that with the cpa.

I think that's great advice. You know, when I began helping my parents with their portfolio, they had a whole bunch of individual stocks that somebody had been picking for them. They were terribly underperforming an index fund. And most important thing for their portfolio was to get into good investments as soon as possible. But they were lucky. All their money was in an ira so I could just sell them all. I just put in all the sell orders and then by the end of the day I bought index funds with them. It was very, very straightforward because there were no tax consequences. But that's not the case for Caleb, is it? It's, you know, a lot more complicated. It's easy for, you know, to turn off the dividends, it's easy to sell all the losers, it's easy to sell everything with minimal gains and then you're stuck looking at it going do I build my portfolio around this thing with a large capital gain or do I bite the bullet and pay the taxes now instead of paying more, even more taxes later? And so I think it's a difficult dilemma for people that have done this.

I think it is too. And I think it's, you know, you don't want to just let the taxes drive the whole decision there just because there's so much risk in individual stocks. I mean, a stock can lose all of its value within a given year, so it's pretty easy to make up for a 15 to 20% tax loss in one bad earnings month for an individual stock.

Yeah, that's a good point for sure that the risk is significant and you can't let the tax tail wag the investment dog for sure. Well, thank you so much Clint for being on the podcast. If you have further questions for him, you can find him at and he can answer further questions there. Or if you're looking for a good financial advisor, he can certainly provide you good advice at a fair price. Thanks again Clint.

Thanks and thanks for having me on the podcast.

Okay. That was great having Clint on here. He's one of the good guys in financial services. Let's take some more questions here off the speak pike. The next next one comes from Audrey about her 1099 gig.

Hi Dr. Dali, I started a locum 1099 side gig this year and I have a couple of questions I'm hoping you could answer for me. I already max out a 401k at my W2, so I'm currently setting aside 20% of my 1099 profits in a high yield savings account as my accountant suggested since I won't know the exact number to take 20% off until I file my 2019 taxes. Is this a good strategy or should I invest monthly as I go and make any necessary adjustments when I file my 2019 taxes? Second question is I know the general advice is to open a solo 401k because it enables you to do a backdoor Roth IRA, but what if I have a bit too much in my IRA to afford the tax hit? I currently own real estate in my self directed IRA and I'm wondering if a SEP IRA would be an acceptable if not a better option since it's a bit cheaper and slightly less complex to administer than the Solo 401K. Thanks so much for all you do.

Okay, so she's mostly asking about taxes when you're self employed and should you invest those taxes as you go along? Well, let me tell you what I do with my taxes. I'm completely self employed now. I don't have any employee income, no W2 income at all, other than what I'm paying myself from a business I own. And so what I do is I pay my taxes in two ways. One, and the main way is quarterly estimated payments. And These are due April 15th, June 15th, September 15th and January 15th. It's kind of interesting, but that's the way the IRS does it. You only get two months for a second quarter and you get four months for the last quarter. But that's the way they do it. And the idea there is you have to pay enough in taxes that you don't get any penalties as the year goes on. Now, Audrey mentioned that she was putting away 20%. Maybe that's enough for Audrey. It's not enough for me. I'm paying right now about 34% of my income in taxes. So every time I make money each month I take 34% of it and I put it into a savings account, just an online savings account or a money market fund. And I keep piling that up month after month. And when I go to write a check in April or June or whatever, I write it out of that account. So that's my tax account. And if I'm a little bit behind come next April, I make up the difference out of that account because the money is there, because I took it out each time I made the money. The worst thing you can do is spend the money and not pay the quarterly estimated taxes if you need to. So that's the most important thing to do if you're self employed. Now if you also have an employee gig, there is an opportunity to maybe minimize or even eliminate having to write those checks. What you can do is just have more money withheld from your employee paychecks. You can basically set your exemptions there on your W4 down to zero and just have a whole bunch of money withheld from that gig. And if you don't make too much in your side gig, in your 1099 employment, in your self employment, then that will cover the tax bill. But between the two of those, between what is withheld by the employer and what you pay in quarterly estimated payments, you need to make sure you get into the safe harbor. That means either paying for high income folks like us, either paying 100% of what you owe or more, or 110% of what you owed last year. And that's what I do each year because my income has been rising over the years. And so I just take what I owed last year, multiply it by 110% divided by 4, and that is the check I write every quarter as my quarterly estimated payments. Now in addition, we're an S Corp now, white coat investors, been nescorp the last couple of years. And so I actually have to pull income and payroll taxes out every time we pay ourselves. We do that about once a quarter. I mean, technically you can probably do it once a year, but you're going to have to fill out the federal and probably state forms once a quarter whether you pay yourself or not. So we just thought we'd make it easy and pay ourselves each quarter. But the goal here with these methods of paying tax as a self employed person is to make sure you have the money to pay the taxes. Number one, you want to make sure you're not spending that money or you're really going to be hosed come next April.April. and two, to avoid any penalties. So to get into the safe harbor. But bear in mind, what you pay in advance or what is withheld may have little to no relationship to how much tax you actually owe. In the past, I have written a check for $200,000 come April because I did not have to have that much withheld. I did not have to pay that much in quarterly estimated taxes to stay in the safe harbor. But I still owe the taxes in the end. So you want to make sure that you're keeping that money around and using it to pay those taxes. So if you're going to need this money in three months to make a quarterly estimated payment, or you're going to need it in six months in April to finish paying your taxes for the year. This is not money that should be invested in stocks or real estate or maybe even bonds. This is money to keep in cash. You know. Yes, try to get a yield out of it. Try to make 2% out of it or something by going to a high yield savings account like Ally bank or by going to a Vanguard Money Market mutual Fund and make 2% on it instead of 0.1% in your checking account. But really this isn't money you're trying to make money off of. You're trying to just preserve the principal so it's there to pay the tax man. You really don't want to owe money to the irs. They have a lot of rights that most lenders do not have, like being able to garnish your paychecks and take money out of your bank account and send you to jail. Those kinds of things. Okay, let's take our next question. What should I do for retirement plan given that I have a self directed ira and there's really only two good options here because it's self directed, it's presumably invested in something that you can't invest in in your 401k. Maybe it's Bitcoin or maybe it's a real estate property, I don't know. But you probably can't invest in it in your 401k. So you can't just roll this thing into your 401k and clear up the pro rata issue with the backdoor Roth ira. What you'll need to do is one of two things. The first one is not do a backdoor Roth ira. You know, there are some people that it just doesn't make sense for, like people that have a simple IRA at work that they're continually contributing to. A backdoor Roth IRA just isn't going to work great for that person. Or what I'd probably do in this case is try to pay for a Roth conversion of that entire self directed IRA and make it a self directed Roth IRA and then you're clear from the pro rata rule and you can continue doing backdoor Roth IRAs going forward. So that's what I would do.

I guess.

There's one other option. You could open a self directed individual 401k. I have one of those now that would allow you to invest in whatever alternative investment you want to invest in and you could roll the self directed IRA in there. But in order to open an individual 401k, of course you need self employment income to do that. Next question comes from Matthew Dr. Dali.

Thanks for your hard work and the helpful information from that white coat investor. I've learned lots of helpful and practical information. I'm in fellowship training for an internal medicine subspecialty in Michigan. I have a question about 1099 income from moonlighting. Specifically, can you please discuss deductions on tax return for 1099 income? Is there a limit? Let's say I make $1,000 in 1099 income from moonlighting. Can I deduct $3,000 of expenses such as DEA, license, board examination fee, home office, etc. Also, I know colleagues that have established a business for their 1099 moonlighting work. Instead of the 1099 paycheck being addressed to John Smith, it is addressed to John Smith Incorporated. What's the benefit of creating a business for 1099 income? Does this help with additional retirement account options? Thanks for your help.

Okay. Matthew's talking about deductions on the tax return for 1099 income. So we're staying with our theme here. He's asking, can I deduct more than I made? Well, you actually can. When you're running a business, you're filling out. You know, if you're a sole proprietor and you are filling out schedule C, you can have a loss in your business. In fact, I think you can have a loss for two of the previous five years and the IRS still believes you're actually trying to make a profit. But if you claim a loss year after year after year, the IRS is going to say, that's not a business, that's a hobby. And you can't deduct your expenses from a hobby like you can from a business business. Matthew was also wondering if he should incorporate. And here's the deal with incorporation. A lot of docs think it's going to automatically save them all kinds of taxes and prevent them from being sued for malpractice and all of this stuff. Well, malpractice is always personal. Just incorporating as a physician is not going to save you from any malpractice risk. You've still got the malpractice risk. Maybe if you have employees or some other business associated risk, it could help you in that sort of an asset protection scenario, but not from malpractice, which is really the only risk most sole proprietor, independent contractor, doctors have. And so, you know, there's not really all these great retirement options that you can have when you're incorporated, but not when you're a sole proprietor. And so there's not really a huge point to incorporating for most people that are just doing a little bit of moonlighting. Now, if almost all of your income is self employment income, you might want to incorporate to save a little bit in payroll taxes. Because when you are filing your taxes as an S corp, you can declare part of your income as salary and part of your income as a distribution. And on the salary you pay the full payroll taxes, Social Security tax and Medicare tax. On the distribution, you still pay your full income taxes, but you don't pay any payroll taxes. What that means for most docs is that they save the Medicare tax, which is 2.9%. And so by incorporating, if you can declare a big chunk of your income as a distribution and still be paying yourself a reasonable salary according to the IRS, then you can save 2.9%. So if you declared $100,000 as distribution instead of salary, you'd save 2,900 bucks. In taxes. Now, part of that is deductible, and so it's actually a little bit less than that. But that's kind of my general guideline. If you're not going to save at least a couple thousand dollars in Medicare tax, it's probably not worth the hassle of a incorporating because either you or somebody you hire is going to have to file a whole bunch of extra tax forms each year if you want to file taxes as an S corp. All right, our next question comes from Tracy the veterinarian.

Hi, Dr. Dali. My name is Tracy and I'm a second year veterinary student. For my first year and for the other upcoming years of vet school, I plan to be very frugal. I've taken very minimal amount of loans and kept my cost of living low. However, once I graduate, my loans will be about 250,000. What could I do at this time while I'm at school to prepare for the future? Also, I've been hustling and having psychics accumulating about $6,000 during the summer and during the school year. What should I do with that lump of sum? Should I put it into my IRA Roth? Should I save it for a rainy day? Or should I slowly pay off my loans while I'm in school? Thanks.

Okay, so Tracy's basically a vet student asking, what can I do to prepare for the future? Well, most important thing when you're a student is to minimize your debt. That means going to schools that are as cheap as you can get into, trying to live very, very frugally and not rack up a bunch of expenses. In her case, she's actually working, and so she's got $6,000 because that's earned income. It can go into a Roth IRA and start compounding for retirement. But in general, when you're a student, I think your best investment is in yourself and just minimizing how much student loans you're taking out. And so that's probably what I'd do with it. If I could make $6,000 extra in medical school or in veterinary school or in dental school, I would probably just use that to take out less loans. So I owed less when I came out. And that's almost always a great investment. You know, I don't see a huge point to having a huge emergency fund when you are taking out all kinds of loans every year anyway. You know, I mean, just borrow more money if you have an emergency rather than having 5 or 10 or 15 or $20,000 sitting around as an emergency fund making nothing. When in reality, you're paying 6% to have that money sitting there on the side because you're taking out more loans at 6%. Okay, our next question comes in by email. It says one of my physician friends recently died in a road accident. He leaves behind a physician wife and a five year old son. His wife is about to receive about $1 million in insurance, $500,000 from his term insurance and $500,000 from his employer provided term insurance, which is twice his annual income. And his wife would like to know how to invest that money. Well, I'm certainly sorry to hear about this. I don't like hearing bad things happen to anybody, especially a physician. But physicians are not immortal. They die just like everybody else. And so I think the first lesson here is to realize that, and if you have people dependent on you, even if your spouse is a physician, you probably ought to have some term life insurance. This stuff is cheap, it does not cost a lot of money, and you can get a lot of benefit for very little cash, especially if you're young and healthy. Most docs probably ought to be carrying 2, 3, 4, $5 million, not a half million dollars. You know, this doc might have been lucky that the employer also chipped in quite a bit of life insurance. But you know, I would have liked to have this question being how should I invest 4 million, not how should I be investing 1 million? At any rate, 1 million is better than nothing. And the truth is, how do you invest that money? Well, you invest it just like the rest of your money. You know, you got an investing plan for the money you've been saving for retirement. Well, you just added a million dollars to it. Now it's a little bit more complicated than that, especially in a scenario where your income also went dramatically down because you just lost a high earning spouse. And so it might make sense to reduce risk a little bit, maybe invest a little less aggressively. If you were 75% stock before, maybe you're 50% stock now, maybe pay off some debt, you know, obviously not the student loans of the person who just died, but maybe pay off the mortgage and a car, if you have a car, any credit cards, you know, wipe out those kinds of debt and reduce that leverage risk from your life. In this case, the surviving wife is also physician, so hopefully still has a great income and will continue to earn and contribute toward retirement. And so basically she just got a million dollars closer to retirement. Obviously not a good swap for your working spouse either financially or emotionally and happiness wise, but that should help her reach financial independence a little bit earlier than she would have been able to if she did not have term life insurance. Hard to say a lot about how somebody should invest with only a couple of lines about them, though of course it's always helpful to know a little bit more in order to address those issues. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Code Investor can help. Be sure to check out the Passive Income MD Conference on Real Estate Investing. If you need an advisor, check out Clint Gossage that we had on earlier today. He's at cmgfin.com and be sure to give us a five star review on the podcast and tell all your friends about it. Head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor where I'll be interviewing Deesha Spath, M.D.

My dad, your host, Dr. Dal, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only and should not be considered official personalized financial advice.