Scroll down for a discussion on Tax for The Independent within the General Insurance Agent Discussions.
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 ...
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?
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.
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, 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?
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.
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.
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.
I guess another issue, since the decision to go independent has not been made yet, is whether to go independent as a Schedule C filer or go ahead and do an LLC and do all the contracting that way.
I mean 1040 Schedule C, profits from individually owned business.
Another consideration when thinking through whether to stay sole proprietor or use an entity, (Corp or LLC), is that filers of Schedule C's (sole prop), especially those will higher incomes, have a higher incident for selection for audit... Of course there are magic ratios for deductions, and exceeding one of more of the limits by percentage on a deduction will automatically throw you hat into the ring for fan mail from the IRS.
So whenever the decision is close, and a fair amount of business income is involved, I say ENTITY all the way. For a small agent or agency, I think that LLC is the logical choice. You can elect to have the LLC taxed as an S-Corp and the savings on the self employment taxes should be about 10K per year.
When your net income begins to exceed 250K, then it is time to consider using dual entities... Maybe having a C Corp in addition to the LLC... The C Corp could be paid certain fees for mgmt, then deductible as expenses to the LLC... Then the net income from the C Corp can be used to provide certain benefits to it shareholders that have greater deductibility than that of an LLC, or S Corp. In other words, the C Corp would have enough mgmt fees paid into it to have enough of a net income to pay all of your own employee benefits, health insurance, reimbursement plans, auto expenses, etc... A little more paperwork but likely another 5K or more in tax savings...
As was mentioned in an earlier post about a Keough being available only for sole proprietor... as a S corp or LLC one could pay into a SEP-IRA, simplified employee pension... which has the same limits as a Keough Plan... up to 25% of net income, not to exceed 46K in 08, and 49K in 09.... so the bennies are there for a small operator, corp, LLC or sole prop... just that LLC, S and C Corp expand the use of these bennies and deductions.
------------------------------------
"A successful man is one who can lay a firm foundation with the bricks others have thrown at him." David Brinkley
Another consideration when thinking through whether to stay sole proprietor or use an entity, (Corp or LLC), is that filers of Schedule C's (sole prop), especially those will higher incomes, have a higher incident for selection for audit... Of course there are magic ratios for deductions, and exceeding one of more of the limits by percentage on a deduction will automatically throw you hat into the ring for fan mail from the IRS.
So whenever the decision is close, and a fair amount of business income is involved, I say ENTITY all the way. For a small agent or agency, I think that LLC is the logical choice. You can elect to have the LLC taxed as an S-Corp and the savings on the self employment taxes should be about 10K per year.
When your net income begins to exceed 250K, then it is time to consider using dual entities... Maybe having a C Corp in addition to the LLC... The C Corp could be paid certain fees for mgmt, then deductible as expenses to the LLC... Then the net income from the C Corp can be used to provide certain benefits to it shareholders that have greater deductibility than that of an LLC, or S Corp. In other words, the C Corp would have enough mgmt fees paid into it to have enough of a net income to pay all of your own employee benefits, health insurance, reimbursement plans, auto expenses, etc... A little more paperwork but likely another 5K or more in tax savings...
As was mentioned in an earlier post about a Keough being available only for sole proprietor... as a S corp or LLC one could pay into a SEP-IRA, simplified employee pension... which has the same limits as a Keough Plan... up to 25% of net income, not to exceed 46K in 08, and 49K in 09.... so the bennies are there for a small operator, corp, LLC or sole prop... just that LLC, S and C Corp expand the use of these bennies and deductions.
Thanks for sharing guys. I know LLC won't cover personal assets for professionals like doctors and lawyers. I have a feeling an insurance agent/financial advisor is not covered, either.
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...
Originally Posted by Franz Kafka
I know LLC won't cover personal assets for professionals like doctors and lawyers. I have a feeling an insurance agent/financial advisor is not covered, either.
Well Franz, it seems that you hhave now changed the subject... everythiung up to this point in the thread was about taxes, and how to structure for the best tax posture... Now you shift gears and say that the LLC doesn't address your personal liability...
Let me clue you in here, for a shareholder of any entity, (Corp or LLC) who is hands on practitioner, there is NO business structure which protects your personal assets... Problem being is that you personally are the one performing the task, be it medicine or insurance, or whatever, and if the task goes array then the claimant will come after the party who perpetrated the loss. For this exposure you have INSURANCE...
Now there are some things that can be done to minimize exposure, when speaking of personal liability... When forming an LLC, make sure you have multiple members, and avoid the single member LLC trap. It is easier to pierce the single member LLC and obtain a charging order against the assets of such an entity, than a multiple member LLC.
The other thing that can be done to provide greater asset protection is have multiple entities, and segregate assets so that all your eggs aren't in one basket. Another common one is for any personal real estate owned to be in the name of your spouse, assuming he or she is in a low liability line of work. Otherwise, you guessed it, have the real estate owned by a multi-member LLC. This way even if a claimant were to obtain a judgment against you personally, they couldn't execute against the multi-member LLC that owns the property(s). They coudl only do so if the props were sold and a distribution was made to you personally, then that is fair game.
The problem with asset protection is that it takes TIME... and there is a monetary cost to managing all the entities. Once you have your first big lawsuit, then you will see the advantage to the time and money spent. There are plenty of ways to set it up so tha you are reasonably protected under most events that are likely to occur. But back to the original premise, use an entity for greater tax savings.
Ah, so you want to protect assets from potential creditors?
[Charpress corners Kafka at Christmas party] "Let me tell you about the advantages of annuities...."
Can I Deed my house to one of those annuity thingies...?
Charpress's assertion of asset protection of annuities is not universal and differ greatly from state to state. States like FL give 100% exemptions while others give scant protections... so before you slam someones $$$ into an annuity contract and tout the creditor firewall, be sure you know your states rules...
Many states only protect annuitization pymts and only if the annuitant is ill, disabled or over a certain age... Just know your rules...
Tax for The Independent
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.
Linear Mode
