Contractor job - what type of entity?

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petebogle
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Contractor job - what type of entity?

Post by petebogle » Sat Aug 12, 2017 10:32 am

Question about contractor job opportunity that just came up

Background:
- Husband and are wife are in mid 30s with 3 school aged kids (no more kids planned)
- Married filing jointly
- NY residents, single family home with mortgage
- Husband has mid 6 figure W2 income and maxes out 401k (as well as backdoor roth and mega backdoor roth)
- Wife has low 6 figure W2 income and maxes out 401k (as well as backdoor roth)
- Wife’s job is ending in 1 month with severance
- Family medical insurance provided through husband’s job

New consulting opportunity:
- Wife being offered a software development position as a consultant with a different company after her current job finishes
- Work from home position with no driving/travel required
- No other benefits
- Consulting company is based in Canada with no other US employees
- Consulting company wants wife to create a legal business entity to pay her, rather than paying her as an individual
- Wife expects to try to maximize whatever retirement option is available to her once legal entity is set up

Questions:
- What is the recommended business entity to create for fact pattern above?
- How will this affect our joint tax filing? Are more things deductible such as some home office expenses, computer purchase, etc.
- Does the Canadian domicile of the company affect anything in the analysis?
- What questions should be asking the consulting company about the arrangement? Is a contract required?
Last edited by petebogle on Sat Aug 12, 2017 3:56 pm, edited 1 time in total.

RudyS
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Re: Contractor job - what type of entity?

Post by RudyS » Sat Aug 12, 2017 11:03 am

Here's a recent thread. Maybe more info than you need/want, but you can look at this while waiting for more replies.
viewtopic.php?f=2&t=223114&p=3449893&hi ... p#p3449893

mrsytf
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Re: Contractor job - what type of entity?

Post by mrsytf » Sat Aug 12, 2017 11:20 am

I presume this is a 1099 position.
If I were her, I would not necessarily open up any business entity. If this were her own company she was starting that would expose her to some liability, an LLC could be considered. But since that does not appear to be the case, I wouldn't bother with the paperwork to do any kind of entity. Can't the company just write a check to her in her name? If they are firm on this issue, I would simply create an LLC titled, ("Wife's full name LLC).This can easily be done by herself, no lawyer needed.
I would also open up a SEPIRA or solo401k for retirement contributions: solo 401k if looking to do a backdoor roth and no other pretax IRA's exist.
In terms of deductible expenses, would need to know a little about what she does to make recommendations. For example, is there a little spot in your home that could be designated her home office? The catch is that it has to be used exclusively as her home office - i.e. can't be her bed, the dining room, etc.
In terms of taxes, if she is an LLC, you can file jointly. Her income/expenses would simply be filed under schedule A (self employed income).

RudyS
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Re: Contractor job - what type of entity?

Post by RudyS » Sat Aug 12, 2017 12:09 pm

The company appears to want there to an entity rather than an individual. I believe that this income and expenses should be reported on Schedule C, self employment income, rather than A. It is indeed easy to set up an LLC yourself with minimal trouble and cost, I've done that myself.

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vitaflo
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Re: Contractor job - what type of entity?

Post by vitaflo » Sat Aug 12, 2017 12:24 pm

Have her file for an LLC with the state and get an EIN number for it from the IRS (more than likely the EIN is what the company is looking for). Set up a business bank account for checks to be deposited and expenses to be paid from. This can almost all be done online with not much money.

For taxes she will be filing quarterly estimates with the IRS and state. Has to be paid at least quarterly or you'll get dinged by the IRS come tax time. Keep in mind that she will also be paying extra in self-employment tax. Anything she uses exclusively for work (computer, home office space, etc) can be deducted and should. All of this is part of Schedule C and will go on your joint return.

Her retirement options are basically Solo 401k and SEP IRA. Many do the Solo 401k, personally I have a SEP IRA. This is one of the largest benefits a contractor gets so be sure to max it out if you can.

I would most definitely get a contract signed, either one the company gives her to sign (which is usual) or one you draft up. I would never start work without one, you're just asking for trouble otherwise. Note some companies require contractors to have liability insurance (mostly for "errors and omissions"). If the company has a contract for you to sign, be sure to look for this in the language.

Don't know how Canadian law plays into all this, but I might also look into hiring an accountant. Not everyone does, but mine saves me a ton of time (and money). It's my favorite check to write.

petebogle
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Re: Contractor job - what type of entity?

Post by petebogle » Sat Aug 12, 2017 1:00 pm

mrsytf wrote:
Sat Aug 12, 2017 11:20 am
I presume this is a 1099 position.
I'm not sure. Who would file the 1099, the employer or the employee? The employer is Canadian with no US employees, so may not know what a 1099 is.
mrsytf wrote:
Sat Aug 12, 2017 11:20 am
For example, is there a little spot in your home that could be designated her home office? The catch is that it has to be used exclusively as her home office - i.e. can't be her bed, the dining room, etc.
We have a room for a home office, but half of it is used for personal stuff as well.


vitaflo wrote:
Sat Aug 12, 2017 12:24 pm
Have her file for an LLC with the state and get an EIN number for it from the IRS (more than likely the EIN is what the company is looking for). Set up a business bank account for checks to be deposited and expenses to be paid from. This can almost all be done online with not much money.
Is this preferred to a "sole proprietorship"?

vitaflo wrote:
Sat Aug 12, 2017 12:24 pm
For taxes she will be filing quarterly estimates with the IRS and state. Has to be paid at least quarterly or you'll get dinged by the IRS come tax time. Keep in mind that she will also be paying extra in self-employment tax. Anything she uses exclusively for work (computer, home office space, etc) can be deducted and should. All of this is part of Schedule C and will go on your joint return.
How do I estimate today what the overall tax impact will be for $100k of individual LLC/Schedule C income vs. $100k of W2 income? She'll have very few deductible expenses except the computer she buys. What about items that are partially used for work, like internet, utilities, etc?
vitaflo wrote:
Sat Aug 12, 2017 12:24 pm
Don't know how Canadian law plays into all this, but I might also look into hiring an accountant. Not everyone does, but mine saves me a ton of time (and money). It's my favorite check to write.
I likely will but I like getting as educated as possible before talking to a professional.

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vitaflo
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Re: Contractor job - what type of entity?

Post by vitaflo » Sat Aug 12, 2017 1:50 pm

petebogle wrote:
Sat Aug 12, 2017 1:00 pm
I'm not sure. Who would file the 1099, the employer or the employee? The employer is Canadian with no US employees, so may not know what a 1099 is.
The client files the 1099, but it doesn't much matter if they do. You need to report all income regardless of if you get a 1099 or not. A 1099 is just an informational document. You just want to make sure that if you do get a 1099 it's not for more than your books say you were paid (I've had that happen). Otherwise you just use your books.
We have a room for a home office, but half of it is used for personal stuff as well.
It kinda depends then. An accountant can be really helpful here as there are a couple different options for how to even start with these deductions (regular and "simplified" versions) that will dictate what can and can't be done and how it affects your deductions, etc. This is always one of the more confusing deductions to take, because it can also affect what happens when you sell your house (depreciation recapture).
Is this preferred to a "sole proprietorship"?
In this case it's the same, you are an LLC taxed as a sole-prop (IE a "single member LLC"), but you have an EIN number. The company in question doesn't care how you are taxed (for example you can be an LLC taxed as a C-Corp if you want). The Single Member LLC is why you get to file all this on your joint return. It's what I've been doing for almost a decade.
How do I estimate today what the overall tax impact will be for $100k of individual LLC/Schedule C income vs. $100k of W2 income? She'll have very few deductible expenses except the computer she buys. What about items that are partially used for work, like internet, utilities, etc?
In your case since the amounts are similar it should be simple. Look up her prior year W2 info and the taxes you will pay this year will be the same except you will pay extra 7.65% in self employment taxes or $7,650. So add $7,650 to your total from the prior year to get a ballpark of what you need to pay this year. Note SE taxes are deductible so in the end you don't actually pay that entire amount but it should get you a start.

Utilities and the like are part of taking the home office deduction IF you take the regular office deduction, not the simplified version. For a regular office deduction if your office takes up 5% of the square footage of your home you can deduct 5% of the expenses for things like mortgage interest, property taxes, all utilities, insurance, as well as improvements. The simplified office deduction is just a flat $5 per sq ft of your office, so you can't deduct any of the individual items like you can in the regular office deduction (those are accounted for in the $5). Like I said an accountant can really help out with this one.

petebogle
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Re: Contractor job - what type of entity?

Post by petebogle » Sun Aug 20, 2017 8:26 am

Quick update:
After further discussions the company is able to pay the wife simply as an individual - no business entity required. Her legal relationship will actually be with a consulting company that has a contract with an end client, so she would effectively be a subcontractor.

The plan is to stick to a sole prop for now, especially since this is a relatively simple operation (one person working from home on business laptop, no travel). A single member LLC seems like more paperwork/expense/hassle for what looks to be overstated liability protection.

So the main questions that remain to me:
- Is there a good example of a software (or more generic) consulting contract that covers the financial arrangement, but also includes indemnification language to limit losses to amounts paid?
- how important is E&O insurance for a software development contractor? any recommended insurance providers for this?
- wife has already maxed $18k of 401k for 2017 (plus employer match) from previous W2 employer. For remainder of 2017, can she start a solo 401k for her SP and contribute just the employer portion (25% of income). For 2018 and on she will max out her and employer contribution for the SP.

thanks

pshonore
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Re: Contractor job - what type of entity?

Post by pshonore » Sun Aug 20, 2017 9:06 am

petebogle wrote:
Sun Aug 20, 2017 8:26 am

- wife has already maxed $18k of 401k for 2017 (plus employer match) from previous W2 employer. For remainder of 2017, can she start a solo 401k for her SP and contribute just the employer portion (25% of income). For 2018 and on she will max out her and employer contribution for the SP.

thanks
Employer portion for for a sole prop is 20% of (net income - 1/2 of SE tax). If she formed an S-Corp and was paid via a W2, it would be 25%. They tell me the numbers work out the same.

simas
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Re: Contractor job - what type of entity?

Post by simas » Sun Aug 20, 2017 4:34 pm

"
- wife has already maxed $18k of 401k for 2017 (plus employer match) from previous W2 employer. For remainder of 2017, can she start a solo 401k for her SP and contribute just the employer portion (25% of income). For 2018 and on she will max out her and employer contribution for the SP.
"

Yes she can. As EmployER (which is who she would be in her business as independent contractor) she can do the 20% regardless of any employee contribution

Also, if you want to really accelerate retirement and do not need the money business would bring, think something like custom solo 401k (i.e. discountsolo401k.com or similar outfits) that would give you full control including ability to execute Mega backdoor Roth or do anything else (checkbook control over the plan). the costs (<1k to establish , 100-200 per year to maintain ) are trivial compare to retirement benefits you may gain. Think ability to put 30-40k a year into Roth

petebogle
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Re: Contractor job - what type of entity?

Post by petebogle » Sun Aug 20, 2017 6:05 pm

simas - thanks for pointing this out. Interesting that you can set up a custom solo 401k yourself that allows for mega back door roth like some corporate 401k plans do.

I guess the one consideration is that there is still a $54k overall 401k limit (for 2017). Depending on how much net income the business has, there may not be that much room left to do back door roths before hitting the $54k limit. For example, at $150k of net income you can contribute ~$46k ($18k personal + ~$28k employer), leaving about $8k of room for mega backdoor roth. At around $190k of income you are maxed out.

Is that correct?

simas
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Re: Contractor job - what type of entity?

Post by simas » Sun Aug 20, 2017 7:06 pm

"Interesting that you can set up a custom solo 401k yourself that allows for mega back door roth like some corporate 401k plans do."

correct. solo 401k is generally available from the usual suspects (discount brokers like fidelity, e-trade, etc) with traditional/roth components. I am not aware of any pre-packaged prototype plan that allowed both after tax contribution and in-service withdrawals thus desire to go with specialized plans/trusts outside of major discount brokerages.

"At around $190k of income you are maxed out."
not a bad problem to have, right? if you are making a living selling your time , then the amounts are pretty limited anyway. if you are instead collecting value from time of others (your employees, etc), there are many other options beyond self employed solo 401k :) . solo 401k is limited to proprietor and spouse with no employees which makes plans cheap and easy to write (no discrimination testing or highly compensated provisions if you don't have employees to begin with).

denovo
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Re: Contractor job - what type of entity?

Post by denovo » Mon Aug 21, 2017 12:41 am

There have been many threads on this forum about people working as independent contractors. You should consider the many benefits that your prior employer covered that you will not be getting. For example, you may find up if you add up all the employer benefits paid (unemployment, SS and Medicare taxes, health, or 401k match, sick days), may be worth around 25-30 percent of your salary if you want to try to get an apples to apples comparision.

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