1099 transition planning

Consulting after executive severance: the 1099 tax and financial planning guide.

Many executives receiving a severance package plan to consult, take advisory roles, or join boards during the transition. The income flexibility is appealing — and the timing often aligns naturally with the non-compete window. What catches most executives off guard is the tax structure that comes with 1099 income. As a W-2 employee, your employer absorbed half your payroll tax invisibly. As a consultant, you pay both halves. Combined with changes to retirement account access, health insurance cost, and cash flow timing, the 1099 transition requires specific financial modeling to avoid expensive surprises.

First: what your non-compete restricts — and what it doesn't

Before projecting consulting income, you need to know what your severance agreement actually permits. Most executive severance packages include a non-compete clause, but the restriction is usually narrower than executives assume. A typical provision restricts: employment with or consulting to named direct competitors, sometimes within a geographic scope, for 6–24 months post-termination. It typically does not restrict: consulting to clients in different industries, board advisory roles in unrelated sectors, speaking or teaching engagements, and in many cases functional work outside your prior role's scope.

Financial modeling for consulting should reflect the non-compete reality: if your most natural clients are in the restricted sector, build a ramp-up delay into the projections. If the clause is unenforceable in your state, model the full pipeline from day one.

The SE tax reality check

As a W-2 employee, FICA was split: you paid 7.65% (6.2% Social Security + 1.45% Medicare) and your employer paid the other 7.65%. You never saw the employer half. As a 1099 consultant, you pay both sides yourself — the full 15.3% — in addition to federal and state income tax.¹

The 2026 Social Security wage base is $184,500.¹ The 12.4% Social Security portion applies only to net SE income up to that amount. The 2.9% Medicare portion applies to all net SE income. High earners also owe the Additional Medicare Tax of 0.9% on SE income above $200,000 (single) or $250,000 (married filing jointly). SE tax is calculated on 92.35% of net consulting income — a built-in adjustment that effectively deducts half the SE tax before calculating it. You then deduct 50% of SE tax (excluding Additional Medicare Tax) from adjusted gross income.

An executive earning $250,000 as a W-2 employee saw $19,125 in FICA combined — but the employer's $12,750 share was invisible. The 1099 consultant version surfaces the full $29,851 before the AGI deduction. Plan for it in the quarterly estimated tax schedule.

S-corp election: the SE tax workaround

The standard structure for reducing SE tax above roughly $150,000 of annual consulting income is the S-corporation. An S-corp pays its owner-employee a "reasonable salary" subject to payroll taxes, then distributes remaining profit as a shareholder distribution — not subject to SE tax. The savings come from the gap between the reasonable salary and total consulting income.

S-corp election adds administrative cost: payroll service ($1,500–$3,000/year), Form 1120-S filing, state registration, and additional CPA time. Most practitioners see SE tax savings exceed S-corp overhead at around $60,000–$80,000 net annual consulting income. Below that threshold, a sole proprietor or single-member LLC taxed as a sole proprietor is usually simpler and cheaper on a net basis.

Solo 401(k): the largest tax shelter available to a 1099 consultant

Whether you operate as a sole proprietor or S-corp, the Solo 401(k) — also called the Individual 401(k) or self-employed 401(k) — is the most powerful income-deferral tool available for consultants. As both the employer and employee of your consulting practice, you make contributions in both capacities.²

On $250,000 consulting income, the math works out as follows:

• Net SE compensation ≈ $235,213 (after deducting half of SE tax)
• Employee deferral: $24,500
• Employer profit-sharing: 25% × $235,213 = $58,803
• Combined total: $83,303 → reduced to the §415 cap of $72,000 for 2026
• Effective employer contribution: $72,000 − $24,500 = $47,500

Contributing $72,000 to a Solo 401(k) reduces ordinary income by $72,000. At a 35% marginal federal rate, that's $25,200 in federal tax saved in one year — plus state income tax savings where applicable. At California's 13.3% rate, the same $72,000 contribution saves an additional $9,576, for a combined $34,776 annual benefit from a single account election.

The Solo 401(k) plan must be established by December 31 of the tax year. Employee deferral elections must also be made by December 31. Employer contributions can be deposited up to the tax filing deadline including extensions (typically October 15). Major brokerages — Fidelity, Schwab, Vanguard — offer no-fee Solo 401(k) plans with traditional and Roth options.

SEP-IRA: the simpler alternative

If the Solo 401(k) feels like too much administrative overhead for an early-stage consulting engagement, the SEP-IRA (Simplified Employee Pension) offers contributions of up to 25% of net SE compensation, subject to the same $72,000 annual ceiling.³ The SEP-IRA is easier to open and has no plan document or year-end election requirement — you can open and fund one up to the tax filing deadline, even for the prior year.

The tradeoff: because the SEP-IRA has no separate employee elective deferral component, the maximum contribution is driven entirely by the 25% profit-sharing formula. On $250,000 consulting income, that works out to approximately $58,803 — roughly $13,200 less than the Solo 401(k) maximum. The SEP-IRA also does not support Roth contributions. For executives expecting sustained consulting income above $100,000/year, the Solo 401(k) is usually worth the additional setup.

Health insurance deduction under §162(l)

Self-employed individuals can deduct 100% of health insurance premiums paid for themselves, their spouse, and dependents directly from adjusted gross income under IRC §162(l). This above-the-line deduction doesn't require itemizing and is not subject to the 7.5% AGI floor that applies to itemized medical expense deductions. The deduction is limited to net SE income — it cannot create a loss — but for a consulting executive generating meaningful income, the full annual premium is deductible.⁴

At $2,000/month in premiums ($24,000/year), the §162(l) deduction saves roughly $8,400 in federal income tax at the 35% bracket, plus state tax savings. That partially offsets the COBRA or marketplace costs discussed in the healthcare bridge planning guide. The interaction with ACA subsidy eligibility requires careful MAGI modeling — a point where advisor involvement is particularly valuable.

Quarterly estimated taxes

W-2 employees have taxes withheld automatically. Consultants don't, and the IRS expects quarterly estimated payments on income not subject to withholding. Missing payments of $1,000 or more can trigger underpayment penalties.

2026 quarterly estimated tax deadlines: April 15 (Q1 income), June 16 (Q2), September 15 (Q3), January 15, 2027 (Q4). The IRS underpayment penalty safe harbor is satisfied by paying either: (a) 100% of prior-year tax liability — 110% if prior-year AGI exceeded $150,000 — or (b) 90% of the current-year liability. For executives with variable consulting income, option (a) provides certainty: prior-year tax is known, so the safe harbor payment amount is exact.

Coordinating consulting income with the severance cash flow timeline

The financial planning challenge for most consulting executives isn't purely about minimizing tax — it's modeling when consulting income arrives relative to the severance timeline, the non-compete window, and the equity settlement calendar. A common pattern:

• Months 1–6: Salary-continuation severance is flowing; non-compete is active; consulting pipeline is being built but not yet billing
• Months 7–12: Severance ends or converts to lump sum; non-compete restriction expiring; first consulting engagements starting
• Months 13+: Consulting income meaningful but variable month-to-month; income variability becomes the primary cash flow risk

Each phase of this timeline produces different income in different tax years, and each carries different planning decisions: which tax year to execute a Roth conversion, when to fund the Solo 401(k), how to time an NQSO exercise relative to consulting income, whether a gap-year strategy applies. The decisions interact — a well-timed Roth conversion in month 8 can look different depending on whether Q3 consulting income landed in year 1 or year 2.

See the executive transition tax planning guide for the full Roth conversion and capital gains harvesting framework that applies during the lower-income window.

What an advisor helps model

A fee-only financial advisor with executive transition experience can model the consulting path in ways that generalist advisors often can't:

• Projecting taxable income year-by-year across the severance, consulting ramp, and re-employment overlap
• Running the S-corp election breakeven for your specific income level and state
• Comparing Solo 401(k) vs. SEP-IRA with Roth vs. pre-tax allocation scenarios
• Coordinating the §162(l) health insurance deduction with ACA subsidy eligibility based on projected MAGI
• Calculating quarterly estimated payments to satisfy safe harbors without over-withholding cash needed for operations
• Integrating consulting income into the broader plan alongside severance, equity settlements, retirement accounts, and the spending model