incorporate or not

[endover]

You guys are exactly the right bunch to ask this question so let me throw it out there...

I live in Florida and my wife is being asked to stop working as an employee and come back as a contractor. Since we had kids, she quit working full time for them and she's now been working part time with this company for the last 3 years (about 12 hours per week) and will be putting in the same amount of time per week. The company is trying to cut their costs which is understandable but they still need her specialized services. We like the company and are not trying be greedy. We just want to make the best decision going forward. Almost all of her work can be done over the internet and from home however, she will need to go into the office a few hours per week for face to face meetings. Since we live 5 miles away, there's no real travel expenses. Cell phone and internet are the main expenses. Oh yeah...the nature of this business means there's virtually no way to get sued. So...why would I go to the trouble of "incorporating" versus not? Cost of incorporating versus cost of NOT incorporating? Other risks? Tax issues? Easy versus hard? Thoughts anyone?????

[colterphoto1]

wherever possible, I try to keep attorneys out of my life.

[JJkizak]

No way to get sued? That's something new in this day and age. Incorporating allows you to charge off cars, offices, computers, to the business. And a much more complicated tax return. You probably should talk to a good industrial lawyer about things.

JJK

[InnerTuber]

Incorporating will probably hurt you on taxes, of course everything depends on income levels, but corporations are subject to taxes as well as employees of said entity. Furthermore, if you don't meet the ongoing requirements the corporate shell could be pierced (meaning you get sued personally anyway). People can sue the Board of Directors too. People can sue about most anything and often it's a tactic to get settlement payouts. Don't let right and wrong confuse you. Don't worry too much about that stuff until she's quite successful IMHO. Incorporating requires some effort, a Board, meetings, note, etc., to really shelter personal assets. Again, you can still be sued. That's entirely different from getting a judgement against you.

On the flipside there are conditions that define a private contractor versus and employee. Typically contractors are not permanent and must set their own hours. You can research that, but in the event of dispute it would probably be between the employer and the state, not you.

You can really do nothing, just have her work, get paid and pay taxes. Since there will be no witholdings you should pay quarterly to avoid potential fines. She might want/need to get a business ID and call it a sole proprietership. Then she can get a business membership at Sam's Club. Now yer talkin free coffee. She could be a minority women owned business which in some things helps.

My wife has worked as a contract nurse practitioner without incorporating. She did have malpractice, but there is more risk in medicine stuff. She tecnically was an independent contractor (although she would have failed the criteria, but that was her employers issue, they get to avoid FICA I think it is).

I'd be cautious about using a part of your house as an office. You can deduct routine expenses like the supplies, phone, internet, but when you toss a room into the mix things get more complicated. Essentially you depreciate part of your house and have to revalue at sale. You can read about that being a flag to the IRS, but my issue with it is when you go to sell it, things can get ... more complicated. Maybe that's less of an issue in a declining housing market but the capital gains if you sell at a profit have to be dealt with.

Personally, deducting office space never even made much $ sense. She just deducted supplies and phone stuff basically. Driving direct to her work is probably not a deduction.

Keep in mind you can still charge off cars, computers, etc. The issue with the car is she probably uses it for personal and business purposes. Thus you have to split usage and keep records. As I recall, driving to your first business location from home isn't deductable. That may be wrong for a contractor, I forget. It's a little easier for say a drywall contractor to deduct his drywall pickup.

I wouldn't worry about overcomplicating it unless she's making big hootin bucks, then get a tax CPA before a lawyer is my suggestion. Lawyers cost money and don't save much. Tax CPA might actually save you some booty. She would probably need bookkeeping anyway, unless you or a family member is really into something like Peachtree.

You can use TurboTax and model different scenarios if you want to study car and house deductions. Plenty of info on the internet too.

Note I'm not a lawyer or CPA so it's worth what you paid for it. Keep in mind that for her to stay equal they need to bump her hourly rate a bit since she will pay more taxes I think.

Good luck
IT

[j-malotky]

Look into doing a LLC. I have set up several in my life. Cost is about $250 if you find a lawyer. If it is a single owner LLC to keep it simple, you can just use your wife's SSN and give your customer a W9.

I suggest you set up a company. Even though everything looks green and happy now, that can change. If your sued, you will wish you had corporate protection.

When ever I had side companies running, I would run my companies through my book keeper. That way he does the nessisary quarterly fileings for me as needed. The last time, he just had me adjust my working W4 as needed to keep the government happy and no big surprise tax bills or back child support to the X. I estimate he costs me about $750 a year. Well worth the lack of headache of doing it all myself.

JM

[colterphoto1]

No way to get sued? That's something new in this day and age. Incorporating allows you to charge off cars, offices, computers, to the business. And a much more complicated tax return. You probably should talk to a good industrial lawyer about things.

JJK

You can do all that as an S corp or proprietor. Much simpler tax return and rules. Look up Section 179 in the tax rules, it's made for small businesses.

http://www.section179.org/section_179_deduction.html

[tigerwoodKhorns]

wherever possible, I try to keep attorneys out of my life.

When you hire me I am here to protect you not to sue you. I just had an old farmer explain to me that he did 30 land deals without a lawyer and only one blew up on him. I'm sure that he completely understands CERCLA environmental liability, title issues, tax issues, etc. One contaminated site can wipe out an entire company. A Liz Pendens can wipe out the value of the entire property. This is serious stuff.

For the business, the LLC or corporation will pay for itself. I am not licensed in Fla, but I do know that you can set up an LLC and elect to be taxed as an S corp. This means that you can pay yourself a salary and distributions. Distributions are not subject to self employment tax (~16% at one tier and ~3% at the next). If you form a corporation, you can file it as closely held and eliminate all of the formalities that you will forget to do, but I prefer an LLC because it is easier. That will definately save you the filing fees. Plus, you can be sued at any time and having the protection is necessary. Just do it.

I assume that you will need a business license anyway (state and local).

Here is one other piece of advice. Hourly wage or billout rate. Take your yearly salary and divide by 2000. That number is roughly your hourly salary. You need to bill your new "client" at least 2 to 3 times that number becaus eyou will have expenses and inefficiencies that you do not expect.

For example, if you make $50,000, your hourly is approximately $25. You should bill your client $50 to $75 per hour.

DISCLAIMER: Th eabove is not legal advice and all of the above needs to be checked by a local attorney and/or accountant and cannot be relied on.

[InnerTuber]

What kind of business is this?

If she's a graphic artist these suggestions might be over the top. Granted, if she sells gas stations things are of a different magnitude. Somebody sewing draperies might not need all these protections. Someone selling food might.

Above post is an interesting example - charge the company 3x what she makes now when they are making the change(s) to save money. Might just windup with no job. I'd think hard about tossing that one out there in today's economy. 20% bump might be reasonable.

Just doing "it" won't stop you from being sued. It might protect your personal assets but you can still spend a fortune on legal fees in the fight. Having a corp or LLC doesn't prevent the process. Someone might conclude the business is too poor and still try to go after you. You might get it dismissed instantly, or, well, your lawyer might. That said, if you don't mind spending the cash an LLC is pretty simple and effective.

You need to have a reasonable assessment of litigation risk given whatever the heck she is doing IMHO to decide.

If she is valuable to the company have you considered just saying:
1) No, I like it the way it is - they may say okay. Or,
2) Mr. Bossman, buy insurance covering her for business libility if that's your only real concern.

To me, rather than complicating life it's about who has leverage. If she is real valuable just voice to the employer your concerns and you might find they resolve the issue.

Disclaimer - litigation goes on until there is no cash left to fight, then things oddly settle or bankruptcy emerges.

Lawyers - can't live with em, can't live without em

[Jeff Matthews]

I wouldn't bother incorporating or forming any other type of entity. Entities shield you from liability when you are NOT the perpetrator of the harm. For example, if you had employees do harm, then you, personally, might be shielded from it. That's about all.

All other business decisions remain the same. Whatever is deductible to a corporation or entity is deductible as a sole proprietor. The bad side of an entity is franchise taxes and additional tax returns.

[JL Sargent]

What Jeff Mathews said.[Y] I've been a S.P. for about 5yrs. Here we can work using our SS# as a S.P. Do a schedule C for that work on your taxes. Not a problem.

Only incorporate if you really need it and I suspect you don't.

[Cal Blacksmith]

Thanks for the input Jeff, did I hear you say that minimum hourly rates apply? JUST KIDDING!!!!!![]

I owned appartments and lived in a unit for years. I did have an accountant do the taxes (and I still do) and they are worth every penny you pay them. We pay every penny we honestly owe but don't fall into the trap of paying extra for things we don't know about. We pay about $200 every year to have our taxes done by our accountant/tax prep person and he saves us several times that much each year, as well as keeping us out of trouble. Well worth the money!!

[Jeff Matthews]

You got it. And always be sure to re-think your situation as it changes.

[tigerwoodKhorns]

Above post is an interesting example - charge the company 3x what she makes now when they are making the change(s) to save money. Might just windup with no job. I'd think hard about tossing that one out there in today's economy. 20% bump might be reasonable.

Give it a try at your normal hourly and let me know how it works out. If you work billable hours, you will not capture all of your time, and with other expenses you will be way behind. The savings comes in when you work significantly less hours. If they have full time hours they need to keep you around.

Jeff,

Check out self employment taxes on distributions. Big difference using an S Corp of LLC with an election.

[tigerwoodKhorns]

Above post is an interesting example - charge the company 3x what she makes now when they are making the change(s) to save money. Might just windup with no job. I'd think hard about tossing that one out there in today's economy. 20% bump might be reasonable.

Give it a try at your normal hourly and let me know how it works out. If you work billable hours, you will not capture all of your time, and with other expenses you will be way behind. The savings comes in when you work significantly less hours. If they have full time hours they need to keep you around.

Jeff,

Check out self employment taxes on distributions. Big difference using an S Corp of LLC with an election.

[thebes]

Sounds like a Schedule C filing with quarterly withholding would do her just fine. In my painting business I've been dong it that way for 17 years, file my own taxes and have never come close to be audited, cause, really there is no need.

Caveats.

One. Depending on the business she does, she may need some insurance, general liability (about $600), professional liability. completed operations if it's publishing etc. In other words, if you have a insurance person sit down with them before you make your move.

Caveat 2. She will now become liable for both sides of the Social Security tax (15.5%) with an effective rate of 10.5% up from 7.2%. That's an extra $3.30 per hundred coming out of her pocket. Trade off, she can deduct her cell phone and mileage but probably far from a wash.

Quite frankly the offer seems lopsided in the corps favor. I would suggest she ask them point blank what their savings are, and since she likes them, offer to split the difference. Then do your own math to see if it makes sense for you, not them. Maybe they'll have to give up at least one corpotate paid golf outing but they'll still be saving money.

[Jeff Matthews]

Above post is an interesting example - charge the company 3x what she makes now when they are making the change(s) to save money. Might just windup with no job. I'd think hard about tossing that one out there in today's economy. 20% bump might be reasonable.

Give it a try at your normal hourly and let me know how it works out. If you work billable hours, you will not capture all of your time, and with other expenses you will be way behind. The savings comes in when you work significantly less hours. If they have full time hours they need to keep you around.

Jeff,

Check out self employment taxes on distributions. Big difference using an S Corp of LLC with an election.

Chris, you make a valid point, so long as the taxpayer doesn't mind trodding into some murky areas. Yes, you could shift salary into a profit distribution or dividend, but I am not a fan of that sort of tax avoiding tactic at all. It might succeed a challenge, but it seems to me it's too obvious what the "little guy" is doing by cutting salary/wages in order to take the same money and call it something else. If this company was unusually profitable, I could see a better argument for why a high salary has a palatable limit, with the rest being profit distribution. However, I cannot see a person setting a $40k/year salary and receiving a profit distrbution of $20-30k. I just wouldn't do it.

If it was Exxon, I'd say "go for it." But if you don't want to live life wondering when you might get an audit letter just to save a few hundred to maybe a few thousand a year (tops), I'd suggest just considering all monies earned as ordinary income.

And, yes, do not forget self-employment tax. The idea behind it is to come out with the same tax as if there was social security, plus matching. You can run, but you sure can't hide.

Also, if you are ever in a position of hiring somebody, too many people think that all you have to do to save employer taxes is to just label the person an "independent contractor." That is very far from how it works. There are rules for determining when somebody is an employee versus an independent contractor. They are not the clearest rules, but they are there. There is an IRS Circular that discusses this issue at length and gives a fair number of examples.

I would hate to be the employer who should have been withholding payroll taxes for a few years and who gets a letter from the IRS telling me this and also telling me that since my employee did not file his/her tax return, I owe back withholdings, plus penalties. Ouch.

[Jeff Matthews]

Above post is an interesting example - charge the company 3x what she makes now when they are making the change(s) to save money. Might just windup with no job. I'd think hard about tossing that one out there in today's economy. 20% bump might be reasonable.

Give it a try at your normal hourly and let me know how it works out. If you work billable hours, you will not capture all of your time, and with other expenses you will be way behind. The savings comes in when you work significantly less hours. If they have full time hours they need to keep you around.

Jeff,

Check out self employment taxes on distributions. Big difference using an S Corp of LLC with an election.

Chris, you make a valid point, so long as the taxpayer does not want to trod into some murky areas. Yes, you could shift salary into a profit distribution or dividend, but I am not a fan of that sort of tax avoiding tactic at all. It might succeed a challenge, but it seems to me it's too obvious what the "little guy" is doing by cutting salary/wages in order to take the same money and call it something else. If this company was unusually profitable, I could see a better argument for why a high salary has a palatable limit, with the rest being profit distribution. However, I cannot see a person setting a $40k/year salary and receiving a profit distrbution of $20-30k. I just wouldn't do it.

If it was Exxon, I'd say "go for it." But if you don't want to live life wondering when you might get an audit letter just to save a few hundred to maybe a few thousand a year (tops), I'd suggest just considering all monies earned as ordinary income.

And, yes, do not forget self-employment tax. The idea behind it is to come out with the same tax as if there was social security, plus matching. You can run, but you sure can't hide.

Also, if you are ever in a position of hiring somebody, too many people think that all you have to do to save employer taxes is to just label the person an "independent contractor." That is very far from how it works. There are rules for determining when somebody is an employee versus an independent contractor. They are not the clearest rules, but they are there. There is an IRS Circular that discusses this issue at length and gives a fair number of examples.

I would hate to be the employer who should have been withholding payroll taxes for a few years and who gets a letter from the IRS telling me this and also telling me that since my employee did not file his/her tax return, I owe back withholdings, plus penalties. Ouch.

[colterphoto1]

Very good information regarding the SE tax and rules for employees v subcontractors.

To add to the discussion, when writing off business use of the home, remember that the use must be Regular, and Exclusive. Clearing the dining table does not count, nor does any home office use when the employer/contractor provides a suitable space. If your office or stock room does pass the test you can also write off % of utilities and insurance for that % of square footage (or % of rooms in the home, your choice). Consult your tax advisor for more details.

For instance, in my home when I was actively seeking photo business, my formal living room was turned into a photo gallery. This space was where I regularly met with clients to sell my services, show them their photos, and deliver goods. I did not use this space for any other purpose in my daily life (still don't), so it passes the regular and exclusive use test.

[endover]

Excellent Input! I knew I could count on you guys. Our plan is to review a lot of what's been said here and sit down with the appropriate professional and make sure we're dotting all the T's and crossing all the i's. In my view, simpler is better. The business she is doing would be more to the likes of graphic designer and therefore lawsuits are not a major concern. She's been with the company for 25 years and knows them very well. In this economy, there's not a lot of leverage left so we are not being greedy. If it ever beomes more trouble than it's worth, she just quits. This is additional income to the family and the intent from day one for dropping from full time to part time was to stay at home with the kids...which is priority #1.

[Colin]

• Deducting office space is not possible unless she meets clients there
• Driving direct to client’s work site is deductible, when she works at home, so is the trip back, even if she makes personal stops
• Get a tax lawyer before an accountant – you have to know all the rules anyway and the accountant will never tell you the creative ways to avoid taxes
• Keep in mind that for her to stay equal they need to bump her hourly rate up a LOT
• Keep all receipts for everything; personal and business
• Get a separate bank account for all business income and expenses (it does not have to be a commercial one, just another personal (cheaper) account
• LLCs are cheap and easy in Florida, you can do it yourself
• What about the cost of health insurance? Who pays that?
• Taxcut walks you through the decisions, but schedule C sounds like what she needs
• In a small commodity trading business, we used all “independent contractors” to avoid all the health and payroll deductions and hassles