Author Topic: Help me transition out of full-time employment and into on-demand contracting  (Read 947 times)

Paul der Krake

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I'm looking into picking the best business structure for doing 1099 work over the next 5-10 years. Some facts about my situation:
- fluctuating revenue: assume a range of $10,000 to $200,000 based on wants/needs
- will be renting from various places, some in high-tax US states, some in low/no-tax US states, some in foreign countries
- target expenses as low as 20k in some locales, as high as 60k in others
- outside of that contracting income, expecting 5-10k per year of taxable dividends/capital gains
- bunch of retirement accounts that can be used for a roth ladder in low-income years to generate income
- married, however no plans for the wife to do any work
- will be working from home
- when in the US, need to qualify for the ACA, Medicaid not an option
- not worried about liability concerns
- interested in having a setup where I can delay booking income for geographic arbitrage purposes

Where and how should I register my business? Ideally I want to be able to dial the work up or down at any moment and not feel like I'm in the wrong setup.

I realize these are super broad questions but I have no experience in corporate structuring, all my side ventures so far have been sole proprietorships with much lower dollar amounts supplementing W-2 income. I want to get this right.

bacchi

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LLC in some low tax state without a fixed franchise fee. Texas? Delaware?

If you're on a cash accounting method, it's when the cash arrives that matters. If it arrives on Jan 1, 209, it counts as 2019 income.

If you want to use your expenses as a travel deduction, you'll need to have somewhere as a base and you can't take work assignments longer than a year. This is particular -- if the contract length is longer than a year, and you leave in 364 days, it doesn't count. It's not "work travel." The contract itself needs to be no longer than a year.


Dicey

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Wait a darn minute here! Are you going to pull a Frank (EFB) on us and FIRE but not FIRE?

Paul der Krake

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Wait a darn minute here! Are you going to pull a Frank (EFB) on us and FIRE but not FIRE?
I am noticeably younger and poorer than him. Can't swing the RE part yet.

If you want to use your expenses as a travel deduction, you'll need to have somewhere as a base and you can't take work assignments longer than a year. This is particular -- if the contract length is longer than a year, and you leave in 364 days, it doesn't count. It's not "work travel." The contract itself needs to be no longer than a year.
I'm confused at what you mean by work travel. It's possible that I would set foot in clients' offices once in a while for relationship building, but I don't intend on working from their offices on a regular basis. I intend on living in a bunch of places for 2-3 years at a time, establishing residence wherever we land. But I suspect most clients will be in locations where I have no interest in establishing residence.

Something else I just thought of: I do not have my 40 SS credits. I was originally thinking a C corp would give me more flexibility in how I show income, but from what I can tell those are really beneficial if you forego salaries and pay yourself entirely in dividends, bypassing SS altogether. But maybe I could do a mix of salary and dividends?

bacchi

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I'm confused at what you mean by work travel. It's possible that I would set foot in clients' offices once in a while for relationship building, but I don't intend on working from their offices on a regular basis. I intend on living in a bunch of places for 2-3 years at a time, establishing residence wherever we land. But I suspect most clients will be in locations where I have no interest in establishing residence.

Ah, I misunderstood and was projecting. I've always thought of taking contracts in fun locations for ~6 months and using the apartment/living expenses as a write-off. Ya know, "Sure, I'd work in Boston on a 6 month contract" and then live in a downtown apartment.

So, never mind.

Quote
Something else I just thought of: I do not have my 40 SS credits. I was originally thinking a C corp would give me more flexibility in how I show income, but from what I can tell those are really beneficial if you forego salaries and pay yourself entirely in dividends, bypassing SS altogether. But maybe I could do a mix of salary and dividends?

Re: You're probably thinking of an S-Corp? Which an LLC can be taxed as (vs as a pass-through). You pay yourself a reasonable salary and then the rest is distributed, bypassing FICA taxes.

https://www.kitces.com/blog/s-corporation-to-reduce-self-employment-taxes-and-social-security-fica/

Currently, certain LLCs can take advantage of the 20% Qualified Business Income deduction.

https://www.kitces.com/blog/pass-through-business-deduction-rules-qualified-business-income-qbi-limits/

bwall

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move to Puerto Rico, apply for Act 20 benefits, set up a C Corp.

dleavitt

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A C-Corp might actually work pretty well in this case, particularly if you have a fiscal (rather than calendar) year, especially now that the corporate tax rate is a flat 21%.  Adjust wages/rents/dividends with the Corp income, load it up with fringe benefits, use the fiscal year income deferral to average out the income on your personal return.

It would require some planning, but I think it could work really well.  I don't have any experience in the international taxation arena, but that will be complicated regardless of your structure.

Paul der Krake

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A C-Corp might actually work pretty well in this case, particularly if you have a fiscal (rather than calendar) year, especially now that the corporate tax rate is a flat 21%.  Adjust wages/rents/dividends with the Corp income, load it up with fringe benefits, use the fiscal year income deferral to average out the income on your personal return.
Do you have examples of fringe benefits that could be useful? I'm aware of the 25% rule for employer 401(k) contributions, but what else can I do?

The biggest donsides I have encountered so far in researching C corps are:
- no home office deduction
- much higher paperwork burden

dleavitt

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A C-Corp might actually work pretty well in this case, particularly if you have a fiscal (rather than calendar) year, especially now that the corporate tax rate is a flat 21%.  Adjust wages/rents/dividends with the Corp income, load it up with fringe benefits, use the fiscal year income deferral to average out the income on your personal return.
Do you have examples of fringe benefits that could be useful? I'm aware of the 25% rule for employer 401(k) contributions, but what else can I do?

The biggest donsides I have encountered so far in researching C corps are:
- no home office deduction
- much higher paperwork burden

The biggest one would be a Health Reimbursement Arrangement, allowing you to effectively deduct your out-of-pocket medical costs (up to $10,000 a year if I remember correctly).  If you are considering Long Term Care insurance, the C-Corp is the only entity where you can deduct those premiums 100% as an employee benefit.

For the home office thing you can get that by having the corporation rent office space from you in your home, then you have the income on Sch. E and your pro-rated expenses against that income.

The paperwork is no higher than an S-Corp, but is a separate tax return unlike a Sch. C which is an attachment to your 1040.  However, only the C-Corp will give you the ability to delay recognizing income on your personal return and allow you to still qualify for ACA subsidies in your higher income years.  All your other options are flow-through entities.