Different sort of question...
Here's my scenario...
Employee (w-2) of a company until June 13th 08, when I was laid off under the cover of a position elimination as a result of my company being bought last year. Received a lump sum 6 months severance and free COBRA thru the end of 08, can extend a high level of coverage for $1700/month for a year afterwards. Company withheld taxes etc. out of my severance but essentially I'm an employee thru the end of the year, gross salary will be in the vicinity of ~$123K. Have my own independent Life Insurance.
I'm about to get an offer for three-four months of consulting work for a company that will be expanding next year so it is a possible contract-to-hire situation, which is very ok with me due to other info I have, but also a red herring for the purposes of my question - probably.
I need to shield the family and considerable assets from liability, so I need to form a company - the question is what kind and what tax status. At this time I would be the only employee but may put my wife to work doing the books, something she has several years experience with. I am leaning strongly towards an LLC but what taxing status should I elect - sole propietor or S-Corp? And if the potential hire doesn't happen and I stay a consultant, is there a way to have the COBRA extension paid by my company and if so, what would be the best scenario for doing that?
I have startup funds and the severance so I can cover expenses until paid.
Thanks!
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Sole Proprietor LLC for you
Hi,
I think given your specific situation, an LLC taxed as a sole proprietor would be best/easiest.
Why? Because your $123K of W-2 wages already received in 2008 maxes you out for the FICA cap. Therefore any income you get from the LLC would only be subject to the 2.9% medicare portion of the SE tax. On the other hand, if your company is taxed as an S-Corp, then you would need to take a reasonable salary which would be taxed at the full combined employment tax rate of 15.3%. You could get the employee's portion back on your 1040, but the employer's portion is unrecoverable.
If you're going to hire your wife, you can set up a Health Reimbursement Arrangement (HRA) for her. She pays the COBRA premiums & other out-of-pocket health-care costs and is reimbursed by her employer, your LLC. The HRA can cover your employee & her dependents, which just happens to be you.
However, beware that the IRS is looking at this situation closely. You must have a written HRA plan. You should set up a separate bank account in her name only. Put her HRA payments & paychecks into that account. Pay the premium & expenses out of that separate account. You want to be sure you're treating the your wife as an arms-length employee. If you do then those HRA reimbursements are an expense to the company and reduce both your income & SE tax.
Another advantage of the sole-proprietor is it's easy to close down if you do get hired as an employee by the company. If not, you can opted to be taxed as an s-corp in future years by filing Form 2553.
Hope this helps...
L:)
thanks, one more...
It certainly does. I'd be taking a salary anyway and move the other capital to various investments and IRA.
In your scenario, would my wife be able to pay the COBRA premiums even though they are in my name as the employee of record?
No Salary for Sole Propietor
Hang on. If you're taxed as a sole proprietor, you don't get salary. You just take a draw from the company.
Look into a SEP-IRA or Individual 401 instead of a traditional IRA. The maximum contribution is higher.
The company just wants the premiums paid. As long as the payment gets applied to the correct account that shouldn't matter.
L:)