Tax for The Independent

[Franz Kafka]

I've been thinking about going independent and have a tax question. My career shop pays 1/2 of my FICA although I'm a statutory employee (independent contractor). They offer 4% matching on 401K and 5% pension (upon certain production). They also pay 2/3 of my group health coverage and other cafeteria plans (life, disability).
I'm finishing off my 2nd year in the industry and I've done more than double the last year's production and am trying double this year's production next year.
I get absolutely no help from my agency (well they try but their help is more of hinderance). If you were in my shoes would you seriously consider going independent?
How are you independent guys handling the FICA? Are you paying the full 15.3% or are you incorporated and paying yourself dividend/distribution instead?

 

[xrac]

I've been thinking about going independent and have a tax question. My career shop pays 1/2 of my FICA although I'm a statutory employee (independent contractor). They offer 4% matching on 401K and 5% pension (upon certain production). They also pay 2/3 of my group health coverage and other cafeteria plans (life, disability).
I'm finishing off my 2nd year in the industry and I've done more than double the last year's production and am trying double this year's production next year.
I get absolutely no help from my agency (well they try but their help is more of hinderance). If you were in my shoes would you seriously consider going independent?
How are you independent guys handling the FICA? Are you paying the full 15.3% or are you incorporated and paying yourself dividend/distribution instead?

How much are the benefits worth in dollars? How much better will be your payout on going INDY? What kind of overhead will you have if you go INDY? How do you find prospects now and what will you have to do then? Put a pencil to it all and see if it makes sense or not. If you go INDY you can do taxes either way. If you incorporate my understanding is you will want to be an S corp. If I did that I would pay myself a modest conservative reasonable salary. You can then bonus yourself as it is appropriate plus maintaining a reserve of retained earnings that can smooth the ups and downs of the sales cycle. It will save you some employment taxes to do distribute some money as dividends.

 

[Franz Kafka]

How much are the benefits worth in dollars? How much better will be your payout on going INDY? What kind of overhead will you have if you go INDY? How do you find prospects now and what will you have to do then? Put a pencil to it all and see if it makes sense or not. If you go INDY you can do taxes either way. If you incorporate my understanding is you will want to be an S corp. If I did that I would pay myself a modest conservative reasonable salary. You can then bonus yourself as it is appropriate plus maintaining a reserve of retained earnings that can smooth the ups and downs of the sales cycle. It will save you some employment taxes to do distribute some money as dividends.

xrac, what did you mean I could tax either way. If I'm a straight sole-prop under 1099 am I not required to pay the whole FICA? I figure I could make about 60% more by going independent doing the same work. I don't need the office - I'm never there anyways. I could work out of home. I do need a group health since I have a condition but I thought I would hire my wife as an assistant and apply for group.

 

[xrac]

xrac, what did you mean I could tax either way. If I'm a straight sole-prop under 1099 am I not required to pay the whole FICA? I figure I could make about 60% more by going independent doing the same work. I don't need the office - I'm never there anyways. I could work out of home. I do need a group health since I have a condition but I thought I would hire my wife as an assistant and apply for group.

Clear as mud am I? What I meant is that you can either pay your taxes as self-employed or incorporate and go that route. As self-employed you will only pay all taxes on the portion of your income that is profit after expenses and will need to pay quarterly estimated taxes. That would be all 1099 income less business expenses.

Incorporated you will do withholdings and pay in the employment taxes probably monthly and will be subject to taxes on any business profit when you file taxes. Future quarterly estimates may apply to that portion of your income as well. The tax savings incorporated is being able to take some income as dividends and not be subject to FICA taxes.

Disclaimer! I am not an accountant or lawyer so seek someone experienced for firm advice. However, these are understanding that I have from 15 years of being self-employed and incorporated.

Sounds to me that the health insurance cost may be the biggest issue you have to hurdle. I would check out the health insurance costs first. What type of insurance are you in?

</IMG>

 

[Franz Kafka]

Clear as mud am I? What I meant is that you can either pay your taxes as self-employed or incorporate and go that route. As self-employed you will only pay all taxes on the portion of your income that is profit after expenses and will need to pay quarterly estimated taxes. That would be all 1099 income less business expenses.

Incorporated you will do withholdings and pay in the employment taxes probably monthly and will be subject to taxes on any business profit when you file taxes. Future quarterly estimates may apply to that portion of your income as well. The tax savings incorporated is being able to take some income as dividends and not be subject to FICA taxes.

Disclaimer! I am not an accountant or lawyer so seek someone experienced for firm advice. However, these are understanding that I have from 15 years of being self-employed and incorporated.

Sounds to me that the health insurance cost may be the biggest issue you have to hurdle. I would check out the health insurance costs first. What type of insurance are you in?

</IMG>

I don't see any reason not to incorporate if I go independent? I wonder if there's any advantage in remaining as a sole prop??? Are you asking about my current health insurance? I'm covered under co group plan. If you are asking what type of insurance I sell .. just life until recently ... now selling health and DI and just getting into LTCi. I've noticed them to be very fun insurance to sell.

 

[xrac]

I don't see any reason not to incorporate if I go independent? I wonder if there's any advantage in remaining as a sole prop???...........

I agree. There may be some advantages as a sole prop but I do not think there is a lot. What I can think of is a sole prop has the ability to set up a Keough. The sole prop may be a little cheaper from the tax preparation stand point. As a corporation you must file 940, 941, state employment taxes, and corporate tax returns.

 

[moonlightandmargaritas]

The sole prop may be a little cheaper from the tax preparation stand point. As a corporation you must file 940, 941, state employment taxes

If you have employees other than yourself (he mentioned his wife), you'll have to do the payroll tax returns whether a sole prop or corp.

 

[xrac]

If you have employees other than yourself (he mentioned his wife), you'll have to do the payroll tax returns whether a sole prop or corp.

True!

 

[Charpress]

Much depends on state law. I ran all of this by my CPA and it is always money well spent to have your exact situation analyzed.

In general terms, you will save on some taxes, payroll/FICA in particular, by setting up an agency as an LLC or a corp (again, the decision on which may depend on state law). On the down side, you will have state and fed new tax returns to file every year. So, instead of getting a 1099, you will now take the income as an LLC and then have to account for the payments to yourself personally on your corporate returns AND your personal returns.

You also have to go through the pain of re-contracting and re-appointing under your agency. That is what I'm trying to do now before the end of the year. Bottom line: are the tax savings worth the pain in the behind of having to change everything.

PS: If you already had to create an entity to become an RIA under state law, then a good bit of the pain in the behind had to be done anyway. That made the decision somewhat easier for me.

 

[Franz Kafka]

Bottom line: are the tax savings worth the pain in the behind of having to change everything.

Both are PITA but since you are incorporating I guess that's what's giving you less PITA.