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Declassified SCAD Survival Guide

For Freelancers


Solo 401(k) vs SEP IRA

Both are for self-employed income. The decision hinges on how much you earn and whether you want to maximize contributions.
Get a Solo 401(k) if:
You want the highest possible contribution ceiling — contribute as both employee ($23,500) and employer (up to 25% of net profit), total cap ~$70,000
Your net self-employment income is moderate — employee contribution side means you hit higher totals even at lower income levels
You want a Roth option (Solo 401k can have a Roth component; SEP IRA cannot)
You want to do backdoor Roth conversions without pro-rata complications (SEP IRA balances mess this up)
You have no employees (Solo 401k is disqualified the moment you hire W2 staff)
Get a SEP IRA if:
You want dead simple setup — open at Fidelity in 10 minutes, no annual filing required until assets exceed $250k
Your net self-employment income is high — at ~$200k+ net, the 25% employer-only formula starts catching up
You already have a day job with a 401k — your employee contribution limit is shared across all 401ks, so the Solo 401k employee side gets eaten up; SEP IRA contributions are separate
You might hire employees in the future — SEP IRA scales to employees; Solo 401k doesn’t
The practical math:
Net SE Income
Solo 401(k) Max
SEP IRA Max
$50,000
~$34,000
~$9,300
$100,000
~$43,000
~$18,600
$200,000
~$63,000
~$37,200
$345,000+
$70,000 (cap)
$70,000 (cap)
There are no rows in this table
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Solo 401(k) wins at virtually every income level below ~$345k. SEP IRA only catches up at very high income.
💡 Bottom line: Solo 401(k) is the right call for most freelancers — moderate income, no employees, Roth option, and keeps your backdoor Roth clean. Open it before Dec 31 of the tax year you want contributions to count.

Essential Finance for Freelancers

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1. Tax Structure 🧳

Pay quarterly estimated taxes (Apr, Jun, Sep, Jan) — IRS Form 1040-ES. Missing these = underpayment penalty
Self-employment tax is 15.3% on top of income tax — budget ~30-35% of every invoice
Track every business expense — software, gear, home office, travel, health insurance premiums are all deductions
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2. Separate Your Money 🏦

Business checking (separate from personal) — makes bookkeeping and taxes clean
Pay yourself a “salary” transfer into personal on a schedule
Never commingle
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3. Health Insurance 🏥

As a freelancer you pay 100% — but self-employed health insurance premiums are 100% deductible above the line (reduces AGI, not just taxable income)
Look at high-deductible plans so you can pair with an HSA (triple tax advantage)
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4. Emergency Fund 🛡️

Freelance income is lumpy — standard advice is 3-6 months, but for self-employed 6-12 months is more realistic
Keep it in HYSA (4%+), not checking
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5. Retirement Stack 🏗️

Solo 401(k) → Roth IRA → Brokerage
Priority
Account
2025 Limit
1
Solo 401(k) employee contribution
$23,500
2
Roth IRA
$7,500
3
Solo 401(k) employer contribution
Up to 25% net profit
4
Taxable brokerage
No limit
There are no rows in this table
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6. Augusta Rule (Section 280A) 🏠

Rent your home to your business for up to 14 days/year tax-free
You receive the rent as personal income with zero tax; business deducts it
Needs documentation (meeting minutes, fair market rate receipt)
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7. Backdoor Roth 🚪

If income exceeds Roth IRA limits (~$165k single), contribute to traditional IRA then convert
Only works cleanly if you have no pre-tax IRA balances (pro-rata rule) — another reason to keep SEP IRA out of the picture
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8. Income Smoothing 📈

Open a business HYSA — when a big invoice lands, park the tax portion immediately in a separate bucket
Rule of thumb: invoice hits → move 35% to tax bucket, 15% to retirement, rest to operating
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9. Bookkeeping 📊

Use Wave (free) or QuickBooks Self-Employed — reconcile monthly, not at tax time
Export a P&L quarterly so you can make informed estimated tax payments
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10. Entity Structure 🏢

Sole proprietor is fine to start
Once net profit consistently exceeds ~$80-100k, look at S-Corp election — you pay yourself a reasonable salary, remaining profit passes through without SE tax = meaningful savings
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FAQs

Q: What if I have a low income quarter — do I still pay quarterly tax?

Yes, but based on your annual estimate, not per-quarter actual. The IRS doesn’t care that Q2 was slow — they want roughly equal payments across all 4 quarters.
Practical approach: estimate your full year income, divide by 4, pay that. The safe harbor rule is pay either 90% of this year’s tax or 100% of last year’s tax (whichever is smaller). Hit either and no penalty, even if you underpay.
Slow quarter = don’t skip, just pay based on your annual projection.
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Q: Augusta Rule — simple examples

Your business pays you rent to use your home for legitimate business purposes. Up to 14 days/year. You don’t report that rental income. Business deducts it.
Examples:
Host a client strategy meeting at your home — charge your LLC $500/day × 2 days = $1,000 deducted by business, tax-free to you
Run a team planning retreat at your place — 3 days × $800 = $2,400
Hold a recorded workshop or shoot at your home studio — document it, charge market rate
What you need:
A written rental agreement (business → you)
Meeting agenda or notes proving it happened
A market rate reference (check Peerspace or Airbnb for comparable spaces in your area)
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Q: When to do S-Corp, and when not to

Do it when net profit is ~$80-100k+ consistently.
S-Corp lets you split income into salary + distributions. You only pay SE tax (15.3%) on the salary, not the distributions.
Net Profit
Sole Prop SE Tax
S-Corp SE Tax
Savings
$80,000
~$11,300
~$5,600
~$5,700
$120,000
~$16,900
~$7,000
~$9,900
$200,000
~$18,700
~$8,500
~$10,200
There are no rows in this table
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Benefits:
SE tax savings on distributions
Looks more legitimate to clients/banks
Retirement contribution options expand
When NOT to do it:
Net profit under $80k — S-Corp costs real money (payroll service ~$500-1,500/yr, separate tax return ~$1,000-2,500/yr, state fees)
Income is inconsistent year to year — you’re locked into paying yourself a “reasonable salary” regardless
You’re still figuring out your freelance baseline — adds admin overhead you don’t need yet
Rough rule: S-Corp saves you money when tax savings exceed ~$3-5k in overhead costs. That crossover is typically ~$80-100k net profit.
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Pro Moves 🎮

Bunch deductions in one year — stack big purchases (gear, software, courses) into one tax year to itemize, take standard deduction the next
Hire your spouse — pay them a real salary for real work, they contribute to their own Roth IRA, you deduct their salary as a business expense
Max HSA before anything else — only triple tax-advantaged account. In pre-tax, grows tax-free, out tax-free for medical
Deduct your home office — dedicated space only, but unlocks deducting % of rent/utilities/internet proportional to square footage
Travel with business purpose — if a trip is primarily business (client meeting, conference), flights and hotel are deductible. Add personal days around it
Section 179 — deduct full cost of equipment (computer, camera, printer) in year of purchase instead of depreciating over years
Keep income below Roth IRA limits — if you’re close to the threshold, maxing retirement accounts reduces your MAGI and keeps you Roth-eligible
Qualified Business Income (QBI) deduction — sole props and S-Corps can deduct up to 20% of net business income. Completely passive, make sure your accountant claims it
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