I’ve recently started a job where I am paid on a 1099 instead of a W2. For those who don’t know, that means that no taxes are taken out of the check, thus I will be responsible for all taxes come next April. Therefore I want to put my excess money into some type of investment, which I will be able to withdraw in April 2008 with no penalty. Please let me know if there is anything else I should let you know, and thanks very much for any and all help!
I think your only options are CDs and/or money market funds (I suppose you could do T-Bills but there’s really no need). Your investment time horizon is too short to do anything else.
Go talk to a tax advisor right now. Depending on why you’re getting a 1099, you may very well need to file quarterly (not yearly) tax returns, and if you’ve really got a “job” where they’re paying you by 1099, you need to be sure you meet the definition of a contractor (it’s more than just saying you are), or there will be trouble downstream.
To actually answer your question, though: I’m not a financial adviser, but you sound like a perfect candidate for certificates of deposit (CD’s) – they carry no real risk, have a guaranteed (albeit low) rate of return, and have fixed intervals for access. All these are what you’re looking for: you know exactly when you’ll need the money, you can’t tolerate any risk of it not being there, and you want to get at least some return off of it.
Otherwise, you might look at some of the money market accounts, although the return might be slightly lower, and the return will be less predictable.
I would look at ING Orange savings accounts or HSBC. They are online banks and your deposits are FDIC insured. The rates are considerably better than your local bank because they have no brick and mortar presence. A CD is also fine, but it has limited time horizons for withdrawal and in the current marketplace you are likely to get a comparable interest rate from one of the online bank savings accounts without the restrictions of a CD.
Your time horizon is too short for stock based investments, or even relatively safe investments like municipal bonds. These types of accounts are a good place to keep your everyday savings as well.
You are almost certainly responsible for making quarterly tax payments. According to the IRS, you have to pay estimated tax payments if you will owe taxes and your default withholding is less than 90% of your total tax obligation for the current year. (Which I would think covers just about anybody with a full-time job that pays above minimum wage.) They have a worksheet on their site to determine if you need to make payments or not.
As for safe, short-term investments, I’m a fan of the Vanguard money market funds (e.g. VMFXX, VMMXX). A bit over 5% return right now and full liquidity.
My wife is a free lance writer, and you definitely have pay estimated taxes.
While I agree that a money market fund with check writing privileges is the best place to park the money, you should also develop a budget to see if anything is going to be left over after taxes and expenses. If there is, you might think about moving the money into higher risk but better paying investment vehicles like index funds. You should also consider saving some of the money out for a SEP or IRA, which can reduce your taxes by a lot. (My wife only qualifies for a SEP, so I’m not up on other retirement vehicles.)
You should also look at Schedule C to help in record keeping for expenses you might be able to deduct.
Just seconding the advice on checking to see whether you’re an employee or an independent contractor. The IRS takes a dim view of companies that misrepresent employees as contractors to avoid the tax implications.
I believe that if you’re self-employed, you have to pick up 100% of your Worker’s Comp and Medicare, too. If you were employed your employer would pick up 50%. So make sure you’re billing yourself out at a rate that is appropriate.
Please take a look at FatWallet Forums. This link is to the list of savings account that pay upwards of 5.3% – which is generally better than most CD’s right now – and your money isn’t tied up for months at a time.
There are many, many other fora ranging from the best CD yields, the best CC interest rates, free stuff, travel deals…oh, look for yourself.