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Somewhat similar to topic raised here http://www.fatwallet.com/forums/finance/1269677/ but different as this business is my sole bread-winner.

Here's my situation:
I got a IT consulting contract 6 months back and after I left my full time job, I started as 1099 (I have done that before). The contract from the end client thru a staffing agency to me was initially for one quarter then extended to another (this is normal in my line of work) and now its extended by one year. Also the project that I am hired for is looking like long term project which will last 3 more years but I am not looking beyond 1 year's contract.

Now I have been requested by the staffing agency that I either join them as employee or incorporate as they will have some problem with me being on 1099 beyond 11 months. I don't want to join the staffing company as it doesnt make much economic sense. I can stretch the 1099 arrangement for some more months and other option that I have is that I can become employee of another company which will have its minimal share of the pie.

A little about this 'business':
The gross income on this would be 200K+ per year and to fulfill this contract I have to go to the same location everyday which is 10 miles away from my residence in California and there would be hardly any travel. It has very little expenses other than occasional meals. So basically it is like a full time job but as a 'contractor'. I don't have any hopes of growing this business as its totally dependent on how many hours I can work. We may have some income from my wife's future consulting when she comes out of her self enforced sabbatical which can last a year or two.

I have an appointment with CPA to go over this but wanted to ask advice from FWF as in your experience would it be a good idea to have my own corporation and how do I save on taxes?

Apologize if its too long but wanted to provide as much info upfront.
Thanks

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mailvips (Apr. 30, 2013 @ 12:34p) |


Your wife's self-enforced sabbatical, you talk like it is a regular occurrence, from what kind of work? A year or two? This is way more interesting than you making good money.

Since you have very little expenses to deduct, get a solo 401k and put the max in it, the lesser of 25% net compensation or $51K. See https://investor.vanguard.com/what-we-offer/small-business/indiv...

I was in a similar boat a few years ago, and formed a 'C' corporation. It involved some expenses -- I used Paychex to pay myself and file the quarterlies (~$45/month), and dealing with the state's requirements for excise tax and a filed annual report (about $500 for the year).

As the only employee, you should be able to fund a SEP account without discriminating against your other (nonexistent) employees of up to $50K/year. You can also be fairly liberal with the purchase of office and computer equipment. I also had my company lease a vehicle (and deduct the rental expense) to haul my sorry azz to the work location (and subsequently purchased the vehicle personally for a low residual at the end of the term).

In short, some of these tax perks and benefits outweigh the bit of administrative headache involved, IMO.

I would have thought you could form an LLC, my understanding is the net $$$ after various expenses the LLC has (like a C corp has) does flow through to you at year end. So basically the LLC could pay you but if it had $$ left over at the end of the year, that goes on your return like getting paid, so you pay tax on it.

One issue with C corps is that the money can get taxed twice, say corp has 30K left at end of year after paying expenses and you. It will pay tax on that 30k. Now the $$ is stuck in the corp in a sense, it can use it to pay expenses, but if it pays it to you, you will pay taxes on that 30K (taxed twice at that point).

This is an interesting topic, I hope some with experience and alternate views can express upon.

I am suprised at the staffing agency willing to let you take the contract away from them without a fight?

s-corp election is the way to avoid double taxation.
Also, I am personally not a avid fan of LLC. Incorporating takes some time and effort year round but the efforts worth the rewards in terms of tax benefits. Like differed taxes or growth or whatever. You can achoeve all that with corp.

BlueSeaLake said:   I would have thought you could form an LLC, my understanding is the net $$$ after various expenses the LLC has (like a C corp has) does flow through to you at year end. So basically the LLC could pay you but if it had $$ left over at the end of the year, that goes on your return like getting paid, so you pay tax on it.

One issue with C corps is that the money can get taxed twice, say corp has 30K left at end of year after paying expenses and you. It will pay tax on that 30k. Now the $$ is stuck in the corp in a sense, it can use it to pay expenses, but if it pays it to you, you will pay taxes on that 30K (taxed twice at that point).

This is an interesting topic, I hope some with experience and alternate views can express upon.

I am suprised at the staffing agency willing to let you take the contract away from them without a fight?

I'm in a very similar position... billing $250/hr for IT consulting.

- I just setup a corp and plan to elect as S-corp.
- I'm trying to get as many expenses as possible, (SSDs for faster work, Nexus 4 phones, cell minutes, test hardware, etc)
- Negotiating w/ myself to accept pay of $25/hr, with 15% FICA/Medicare tax.
- The remainder will be distributed as a dividend to shareholders (me).

As an S-Corp, you have to pay yourself a reasonable salary.
I'm thinking of grabbing a copy of QuickBooks, and finding a service that will cut a payroll check for one employee irregularly.
Chase says they do payroll for $10/month with direct deposit, and it can be turned off in the months I don't have hours.

Filetaxes.com seems to be cheap, sending 1099s/W-2s for $4/each, $5.50 for quarterly payroll taxes, and $11 for annual payroll tax reports.
Anyone have other tips?

You are better off not incorporating. Your client wants you to act like a business and not an employee. Incorporating is one of the signs you are a business. Your client would be happy to continue paying you on a 1099 if you acted like a business. Neither you nor your client will be very happy if the IRS rules that you are an employee and not a contractor.

You may want to consider you and your wife working for the same company. There are some notable advantages of having a two person versus a one person company.

ThomasPaine: you are doing it wrong. Have a meeting with a CPA.

I would incorporate as either an LLC or S-corp. Both are easy to do... LLC is easiest, IMHO.

Both file taxes as "pass thru", meaning its on a schedule C like a sole proprietorship. LLC's require less paperwork over the course of the year.

Generally, S-corps should be used if you plan to have the company expand, and plan to have it live beyond your lifetime.

Some people reccomend forming an s-corp to "cheat" on their taxes. As an LLC, you pay self employment taxes on everything you earn. As an S corp, you pay yourself a salary, and only pay taxes on the wages portion. Therest is a dividend, taxed at a lower rate.

So, if you make $250k in the year, which goes into the s-corps account, but regularly pay yourself only $2k/ month, at the end of the year you will give yourself a distribution of $226k, which is taxed at a different rate.

However, as both an S-corp and C-corp, you are required to pay yourself "fair market value" for your services. Paying yourself $25/hour will not fly, especially if you are the sole employee, billing $250/hr. If you do not get audited, you will at least be on the IRS "watch list".

C corps are generally required if you plan to sell stock in the company to the public (over 100 people, I think).

Either way, you should spend a few hours with an expert to figure out which to use.

Regards
SteveG

ThomasPaine said:   I'm in a very similar position... billing $250/hr for IT consulting.

- I just setup a corp and plan to elect as S-corp.
- I'm trying to get as many expenses as possible, (SSDs for faster work, Nexus 4 phones, cell minutes, test hardware, etc)
- Negotiating w/ myself to accept pay of $25/hr, with 15% FICA/Medicare tax.
- The remainder will be distributed as a dividend to shareholders (me).

As an S-Corp, you have to pay yourself a reasonable salary.
I'm thinking of grabbing a copy of QuickBooks, and finding a service that will cut a payroll check for one employee irregularly.
Chase says they do payroll for $10/month with direct deposit, and it can be turned off in the months I don't have hours.

Filetaxes.com seems to be cheap, sending 1099s/W-2s for $4/each, $5.50 for quarterly payroll taxes, and $11 for annual payroll tax reports.
Anyone have other tips?


You should see an expert and question this.

You really are required to pay yourself the rate you earn. It will be hard to explain to the IRS auditor how you were a tough negotiator with yourself

The fines for this are pretty stiff. I had a friend do this exact thing on the advice of his accountant, but it ended badly.

SteveG

mailvips said:   ... to fulfill this contract I have to go to the same location everyday which is 10 miles away from my residence in California and there would be hardly any travel. It has very little expenses other than occasional meals. So basically it is like a full time job but as a 'contractor'. ...

Also, ask the professional if you have any liability if the IRS comes back and classifies you as an employee of the company, regardless of your incorporation status.

I am pretty sure that all of the risk of this goes to the company, but you should ask. You are really going to be a company employee and they are just doing this to avoid paying empoloyment taxes on your work...

SteveG

ThomasPaine said:   I'm in a very similar position... billing $250/hr for IT consulting.

Curios is to what geographic area and IT skill set that commands this kind of compensation.

1 Setup an S Corp - you can do this yourself
2 Pay yourself a reasonable wage - just look up some job postings from non-profits(universities, governments, charities) in your area for similar skillsets. Print and save those in case the IRS later inquires.
3 Pay your wife some 1099 wages for secretarial work, so she can fund her own solo 401k.
4 Pay your kids so they can start their kiddie Roth IRAs.
5 Fund your own solo 401k-- only on wages paid to you-- plus your S-corp can kick in some matching amount.
6 There are some Section 179 accelerated depreciation on equipment you can look into
7 I would use a payroll service such as Paychex or similar, to handle employment taxes, and a CPA to prepare tax returns.

BTW, tell the woman to get off her sabbatical butt or you'll change to a new religion that doesn't observe a sabbath

sgogo said:   Also, ask the professional if you have any liability if the IRS comes back and classifies you as an employee of the company, regardless of your incorporation status.

I am pretty sure that all of the risk of this goes to the company, but you should ask. You are really going to be a company employee and they are just doing this to avoid paying empoloyment taxes on your work...

SteveG

All of the liability does not go to the client. And, it is a bad idea to ask your client for legal advice.

Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee
2) Steps I can take to make it seem like I'm more of a legitimate company instead of an employee masquerading as a company(possibility of other clients, hiring wife or kids to do work, maybe getting a some Indian personal assistant, etc.)
3) Corporate structure
4) Appropriate comp levels to yourself

But if it works it's a great idea(at least until Obamacare is implemented fully) in which case you just dissolve and have the client hire you on full time for corporate provided healthcare(unless of course you can somehow get your employee side pay under the Obamacare 400% poverty line limit and go into exchange for subsidy, but I find that unlikely with the income you're talking about).


Also how old are you OP?

Setup a Corp. Only few hundred bucks. when its long term 1099, IRS hates it. They prefer you to be a W2 employee. Go Corp, lots of benefits.

dshibb said:   Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee


That one's easy to answer.
It's not the employee they go after for that, it's the employer who pays, usually the FICA taxes they should have withheld from the "employee's paychecks", plus interest and penalties.

HumDoHamaraDo said:   ThomasPaine said:   I'm in a very similar position... billing $250/hr for IT consulting.

Curios is to what geographic area and IT skill set that commands this kind of compensation.

I've been working mostly on disaster recovery for CRM/ERP systems, where the client is losing $15k-$250k/hour for downtime.
Although the $250 is the "off hours emergency w/ no service plan" rate, I'm thinking of establishing more traditional services for $75 hr, and basing wages off that.

Clients have been in Europe, Israel, America. Sometimes, if the hours are large enough, the business is having to give discounts, which I can't reduce my employee's pay for and need to take into consideration.

Sorry for the threadjack.

BradMajors said:   sgogo said:   Also, ask the professional if you have any liability if the IRS comes back and classifies you as an employee of the company, regardless of your incorporation status.

I am pretty sure that all of the risk of this goes to the company, but you should ask. You are really going to be a company employee and they are just doing this to avoid paying empoloyment taxes on your work...

SteveG

All of the liability does not go to the client. And, it is a bad idea to ask your client for legal advice.


Sorry I was not clear... they should ask a professional, not their client.

SteveG

Here is my 2 cents as I've been running my own California LLC for years, but recently was tempted by a salaried position for the benefit of having someone else pay my portion of employment taxes. I still have my LLC as I have an employee that works for me and it provides me with the benefit of providing my family with group medical insurance. But when a company close to me needs my services and found me through a staffing agency they came up with a reasonable offer that made sense for me to come on board as an employee. As I mentioned the employer portion of the taxes are covered and I'm getting a rate that was comparable to my 1099 rate. Plus the company has other benefits including medical (which I declined), paid vacations and holidays (amounts to almost 5 weeks), medical savings account, and a few other employee benefits (credit union, etc). You may be able to negotiate some time off because I'm sure that the staffing agency wants to keep that markup on you (likely 20-30%).

Now for an LLC or even a corp these additional benefits can be cost prohibitive, so if the staffing agency offers some sort of benefits package it could easily make financial sense.

Also keep in mind that the fees for an LLC for are $800 per year, plus a revenue based fee ($900 under $500k). So if you don't really have expenses that would benefit you through the LLC or Corp it may not make sense to start an entity.

Fortunately for me I'm getting the best of both worlds right now, and the employment taxes are maxing out from the salary I have and reducing the liability I have through the LLC (where the profit passes through as a K1 to me and my wife personally). In prior years we were getting killed by paying both sides of the fica. So if I couldn't maximize my LLC write offs there was nothing we could do to eliminate the employment taxes. We'd typically reduce the federal and state taxes with our personal deductions, but the FICA is pretty much a flat 15% when it hits your 1040, up until your maximum which is doubled.

So if the pay rate between the corp-corp versus the employee is comparable, and you don't have much in terms of business writeoffs, I'd say it makes more sense to stick to the staffing company as your employer of record.

mailvips said:   I have an appointment with CPA to go over this but wanted to ask advice from FWF as in your experience would it be a good idea to have my own corporation and how do I save on taxes?

The staffing company recognizes that it could have a classification problem, so it is offering you the proper option: to become their employee. Why do you wish to decline? You can work strictly for the duration of the project, then leave afterwards.

It is strange that they are suggesting alternatively that you incorporate. This exposes them to risk of reclassification of your employment status in an audit, which would make both you and them liable for unpaid taxes and penalties. It doesn't make sense to offer employment and also suggest incorporation. The motivation for the latter is typically an attempt to avoid paying taxes related to the former. Granted, the risk of an audit is low, so many employees in this situation do in fact incorporate to try to "save on taxes."

An LLC is a state chartered business entity. It is NOT a tax structure.

The incorrect assumption is based on the fact that by default, a single member LLC is treated as a "disregarded entity" for tax purposes and is treated as a sole proprietorship, and is reported on a schedule C for federal tax purposes.

However, an LLC can just as easily be taxed like a S Corp by filing the proper election form with the IRS.

perc said:   The staffing company recognizes that it could have a classification problem, so it is offering you the proper option: to become their employee. Why do you wish to decline? You can work strictly for the duration of the project, then leave afterwards.

It is strange that they are suggesting alternatively that you incorporate. This exposes them to risk of reclassification of your employment status in an audit, which would make both you and them liable for unpaid taxes and penalties. It doesn't make sense to offer employment and also suggest incorporation. The motivation for the latter is typically an attempt to avoid paying taxes related to the former. Granted, the risk of an audit is low, so many employees in this situation do in fact incorporate to try to "save on taxes."
Being an incorporated entity is a significant consideration of the IRS in determining employee/contractor status. 1099 status is an automatic red flag and many companies will only hire W2 employees of staffing companies or corp-to-corp.

jigsaw1975 said:   ... when its long term 1099, IRS hates it. They prefer you to be a W2 employee.

Can you clarify what you are trying to say with this?

btuttle said:   perc said:   The staffing company recognizes that it could have a classification problem, so it is offering you the proper option: to become their employee. Why do you wish to decline? You can work strictly for the duration of the project, then leave afterwards.

It is strange that they are suggesting alternatively that you incorporate. This exposes them to risk of reclassification of your employment status in an audit, which would make both you and them liable for unpaid taxes and penalties. It doesn't make sense to offer employment and also suggest incorporation. The motivation for the latter is typically an attempt to avoid paying taxes related to the former. Granted, the risk of an audit is low, so many employees in this situation do in fact incorporate to try to "save on taxes."
Being an incorporated entity is a significant consideration of the IRS in determining employee/contractor status. 1099 status is an automatic red flag and many companies will only hire W2 employees of staffing companies or corp-to-corp.

I have never encountered any companies in Silicon Valley that are unwilling to directly hire contractors on 1099.

OP's problem is that in his current situation he is an employee, but his employer wants to treat him differently. Filing some legal papers will fundamentally change nothing.

dshibb said:   Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee
2) Steps I can take to make it seem like I'm more of a legitimate company instead of an employee masquerading as a company(possibility of other clients, hiring wife or kids to do work, maybe getting a some Indian personal assistant, etc.)
3) Corporate structure
4) Appropriate comp levels to yourself

But if it works it's a great idea(at least until Obamacare is implemented fully) in which case you just dissolve and have the client hire you on full time for corporate provided healthcare(unless of course you can somehow get your employee side pay under the Obamacare 400% poverty line limit and go into exchange for subsidy, but I find that unlikely with the income you're talking about).


Also how old are you OP?


^^By the way I doubt really anybody cares, but that looks like it was my 5000th post. Wow 5000 posts! That is a lot in a few years.

taxmantoo said:   dshibb said:   Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee


That one's easy to answer.
It's not the employee they go after for that, it's the employer who pays, usually the FICA taxes they should have withheld from the "employee's paychecks", plus interest and penalties.


That may not be completely true. What if you open a solo 401k and start contributing employer side contributions to yourself? Conceivably the IRS might go after the employer for treating you as a contractor instead of an employee and then potentially disallow the employer side advantages you bestowed on yourself as a corporate entity. I don't actually think that would happen, but I'm not an expert on the subject hence why the OP should go talk to someone who is an expert on employment law, and the potential tax implications to being forced out of a 1099 situation and onto W2.

fartfile said:   jigsaw1975 said:   ... when its long term 1099, IRS hates it. They prefer you to be a W2 employee.

Can you clarify what you are trying to say with this?
Not speaking for jigsaw1975. The IRS hates people who should properly be qualified as employees being paid as contractors on 1099s. The IRS considers that there really are only two ways that individuals may work for an original company. They are either employees of that company or they are employees of a separate company that contracts with that original company.

There is a twenty (20) question test that the IRS (and many company's compliance offices) use for determining if you should be classified as a contractor or an employee. Many companies will not hire anyone on a 1099 basis. You are either a W2 employee of a staffing company or it must be corp to corp with no 1099.

btuttle said:   fartfile said:   jigsaw1975 said:   ... when its long term 1099, IRS hates it. They prefer you to be a W2 employee.

Can you clarify what you are trying to say with this?
Not speaking for jigsaw1975. The IRS hates people who should properly be qualified as employees being paid as contractors on 1099s. The IRS considers that there really are only two ways that individuals may work for an original company. They are either employees of that company or they are employees of a separate company that contracts with that original company.

There is a twenty (20) question test that the IRS (and many company's compliance offices) use for determining if you should be classified as a contractor or an employee. Many companies will not hire anyone on a 1099 basis. You are either a W2 employee of a staffing company or it must be corp to corp with no 1099.


I got that part, but are you trying to say that that the IRS will look at how long you have been getting 1099s issued in determining whether you get audited?
I guess my question is "so what if they hate it, what would they do about it?"

fartfile said:   btuttle said:   fartfile said:   jigsaw1975 said:   ... when its long term 1099, IRS hates it. They prefer you to be a W2 employee.

Can you clarify what you are trying to say with this?
Not speaking for jigsaw1975. The IRS hates people who should properly be qualified as employees being paid as contractors on 1099s. The IRS considers that there really are only two ways that individuals may work for an original company. They are either employees of that company or they are employees of a separate company that contracts with that original company.

There is a twenty (20) question test that the IRS (and many company's compliance offices) use for determining if you should be classified as a contractor or an employee. Many companies will not hire anyone on a 1099 basis. You are either a W2 employee of a staffing company or it must be corp to corp with no 1099.


I got that part, but are you trying to say that that the IRS will look at how long you have been getting 1099s issued in determining whether you get audited?
I guess my question is "so what if they hate it, what would they do about it?"


They don't "hate" you like talk bad about you behind your back

This will spur consideration of an audit... especially if the company in question has more than one 1099 employee.

dshibb said:   ...

^^By the way I doubt really anybody cares, but that looks like it was my 5000th post. Wow 5000 posts! That is a lot in a few years.


Congratulations!

SteveG

dshibb said:   taxmantoo said:   dshibb said:   Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee


That one's easy to answer.
It's not the employee they go after for that, it's the employer who pays, usually the FICA taxes they should have withheld from the "employee's paychecks", plus interest and penalties.


That may not be completely true. What if you open a solo 401k and start contributing employer side contributions to yourself? Conceivably the IRS might go after the employer for treating you as a contractor instead of an employee and then potentially disallow the employer side advantages you bestowed on yourself as a corporate entity. I don't actually think that would happen, but I'm not an expert on the subject hence why the OP should go talk to someone who is an expert on employment law, and the potential tax implications to being forced out of a 1099 situation and onto W2.


This is a great point! When they reclassify you as an employee, which could come years later, everything gets affected.

sgogo said:   dshibb said:   taxmantoo said:   dshibb said:   Obviously listen to the people who are saying that you should have this all double checked with an accountant and *an attorney that specializes in employment law*. The main topics for discussion should be:
1) What is my liability if the IRS tries to come back and claim I'm actually an employee


That one's easy to answer.
It's not the employee they go after for that, it's the employer who pays, usually the FICA taxes they should have withheld from the "employee's paychecks", plus interest and penalties.


That may not be completely true. What if you open a solo 401k and start contributing employer side contributions to yourself? Conceivably the IRS might go after the employer for treating you as a contractor instead of an employee and then potentially disallow the employer side advantages you bestowed on yourself as a corporate entity. I don't actually think that would happen, but I'm not an expert on the subject hence why the OP should go talk to someone who is an expert on employment law, and the potential tax implications to being forced out of a 1099 situation and onto W2.


This is a great point! When they reclassify you as an employee, which could come years later, everything gets affected.
Any references that this has ever happened?

I know they have gone after employers who mis-classify employees but I've never heard of them making the affected employees redo all of their retirement accounts and taxes as well.

winter said:   Any references that this has ever happened?

I know they have gone after employers who mis-classify employees but I've never heard of them making the affected employees redo all of their retirement accounts and taxes as well.


Hence why I mentioned that the OP should go to see an attorney that specializes in employment law and tax issues surrounding it. Likely none of us on here have ever dealt with a situation where a 1099 was challenged and brought back to W2. I've seen that type of case once before, but the IRS dropped the challenge on account of the entities attorney pointing to the IRS agreeing to 1099 in the past and on that basis the IRS dropped their challenge. So I haven't ever seen how a successful challenge has ever played out and how the IRS went through and corrected everything retroactively.

The OP needs to speak with someone who has been through a couple of those cases or has read quite a few of those cases and who can answer all of the potential outcomes better than we can. Unless of course there just so happens to be an expert on employment law floating around these forums.

^Bump

dshibb said:   

^^By the way I doubt really anybody cares, but that looks like it was my 5000th post. Wow 5000 posts! That is a lot in a few years.


Congratulations!! Thanks for all the posts. I am 40.

I think the IRS likes to target Independent Contractors in the Construction industry as they are tring to minimize workmen's compensation insurance. For a IT Consultant, the IRS got money from the consultant rather than the corporation, is there a lot of revenue they missed?

First thanks to all of you who have provided pretty good insight

I talked with one CPA and as per her, lot of their clients in my position are going for S Corp. I have another meeting with 'more experienced and conservative' CPA this week and will see how that goes. If I go that route I am thinking I will;
- Have my wife and me both as employees of the S Corp.,
- pay my self the salary I used to make as normal employee last year (say around 120K) and
- wife comparatively low salary (20K) for admin/accounting - she can easily manage books (that's her background)
- Do a some kind of tax saving like SEP IRA/Profit Sharing/401K
- Try to negotiate (hopefully) higher per hour rate with the staffing company to cover my incorporation costs and time/effort spent - the staffing agency has pretty good buffer (or share in the pie) that I should be getting


So the questions that I have for the forum are (and which I am going to ask the CPA as well):
1. Which tax saving plan will work in my situation (SEP IRA/401K/Profit Sharing)
2. What other conservative and safe big ticket expenses other than salaries and retirement plan contribution that I can route thru this S Corp (like leasing or buying a new car...)
3. The CPA also told me that I will be saving 15-16% of payroll taxes on the profit of the company after I have paid out the expenses - but after some thinking I believe that if I am paying myself the above mentioned salary I am saving only the medicare portion of payroll taxes (1.45*2=2.9%) and not on the Social Security part(6.2*2=12.4) - what do you guys think?

Thanks

winter said:   sgogo said:   ....This is a great point! When they reclassify you as an employee, which could come years later, everything gets affected.Any references that this has ever happened?

I know they have gone after employers who mis-classify employees but I've never heard of them making the affected employees redo all of their retirement accounts and taxes as well.


I do not know about this situation.

I do know that if you get an extension to file your taxes, lets say from 4/15 to 10/15, the date for your prior year contribution to your 401k is also extended to 10/15.

However, if your extension is not considered filed timely, and you made a contribution after 4/15, the IRS will later require that you redo the retirement accounts. The contributions become excess (a real pain) and the deduction you claimed is rejected for that year, and they apply penalties.

I would say that this is similar to being reclassified as an employee... you are no longer eligible for the deduction.

SteveG

mailvips said:   ...
So the questions that I have for the forum are (and which I am going to ask the CPA as well):
1. Which tax saving plan will work in my situation (SEP IRA/401K/Profit Sharing)
2. What other conservative and safe big ticket expenses other than salaries and retirement plan contribution that I can route thru this S Corp (like leasing or buying a new car...)
3. The CPA also told me that I will be saving 15-16% of payroll taxes on the profit of the company after I have paid out the expenses - but after some thinking I believe that if I am paying myself the above mentioned salary I am saving only the medicare portion of payroll taxes (1.45*2=2.9%) and not on the Social Security part(6.2*2=12.4) - what do you guys think?

Thanks


1 - I personally use a Keough (aka Personal 401k). Very little paperwork until it exceeds $250,000 in assets. Call Fidelity or vanguard and they can tell you the pro's and cons of each.

2 - I would say you can write off anything that is business related... since you have a real business. From leasing your car to printer paper. Now would be the time ot get a new PC or accessories if you need it. Note that I do not believe you can write off personal healthcare with an S-corp...but you can with an LLC.

3 - Look at this article... summarizes the benefits of S and LLC:

http://www.sba.gov/community/blogs/community-blogs/business-law-...

Good Luck!
SteveG

Skipping 1 Messages...
whodini said:   1 Setup an S Corp - you can do this yourself
2 Pay yourself a reasonable wage - just look up some job postings from non-profits(universities, governments, charities) in your area for similar skillsets. Print and save those in case the IRS later inquires.
3 Pay your wife some 1099 wages for secretarial work, so she can fund her own solo 401k.
4 Pay your kids so they can start their kiddie Roth IRAs.
5 Fund your own solo 401k-- only on wages paid to you-- plus your S-corp can kick in some matching amount.
6 There are some Section 179 accelerated depreciation on equipment you can look into
7 I would use a payroll service such as Paychex or similar, to handle employment taxes, and a CPA to prepare tax returns.

BTW, tell the woman to get off her sabbatical butt or you'll change to a new religion that doesn't observe a sabbath


Thanks whodini, the woman tells me that after busting her butt for last 15 years it needs rest and also she wants to take care of young family.. Cant argue with that or actually to preserve marital Bliss cant argue at all



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