Author: Natalie Pine
As a professor, you’ve got opportunities to share your expertise as a consultant, author, or expert witness. While the additional income is always a plus, it can create unexpected pain at tax time if you don’t plan ahead. As financial planners for many professors, we find ourselves often answering questions about how to keep more of that consulting income in your own pocket.
How to Avoid Unpleasant Tax Surprises
When you work as a consultant, you’ll receive what is known as “1099 income”. Because there is no tax withheld, you are responsible for all taxes. This additional income may push you into a higher tax bracket, meaning your additional earnings might be subject to a higher tax rate.
Unfortunately, the pain doesn’t necessarily stop there. You might also be at risk for penalties if you didn’t make estimated tax payments to account for this additional income.
Fortunately, there are ways to reduce the tax hit with a bit of preparation.
Defer More of Your University Salary
One easy way to help prevent these problems is to defer more of your university salary to compensate for the 1099 income you’ll be earning. This involves adjusting the amount you contribute to your 403(b) or 457 plans through your university. Then you can use the extra income you generate from consulting to make up for the lost revenue from your paycheck.
But what if you’re already maxing out your contributions in those accounts? In that case, you have the opportunity to set up a new retirement plan to help shelter some of that consulting income from taxes.
Establish a New Retirement Plan
When you have business income from another source, you can shelter some of that income by establishing a retirement plan outside of the university.
You have a few choices of retirement vehicles:
- Traditional IRA
- Simple IRA
- Solo 401(k)
- SEP IRA
Each account type has specific benefits and limitations; see our previous article for a more detailed discussion.
One benefit of all these non-employer plans is investment flexibility. You’ll be able to establish a self-directed account, so you’ll have access to a wide array of investment options.
Whatever direction you go, remember to consult your financial planner or tax advisor to make sure you follow all regulations. That way, you can be sure you can enjoy the tax-advantaged benefits of your strategy.