(I realize there is a separate “case study” forum, but my situation deals with so many tax & legal issues, that I thought I’d get better advice here. I have no doubt I’m missing some big things and finding an accountant and/or attorney is in my future, but wanted to get some feedback and continue investigating options on my own before I take that step.)
This year I’m transitioning from being a w-2 employee to being a 1099 employee and my own business income. Here are some details and assumptions.
Currently:
- Married filing jointly
- business is sole proprietorship
- current side business income ~$25,000/year
Transitioning to:
- 1099 long-term arrangement making $30,000 plus possible commissions
- side business income low estimate = $70,000/year (possible this could go as high as $150,000/year within 2-3 years)
Side business products & services
- I write, print, sell, and mail printed materials. The sales are business-to-business, although I often send materials straight to my business customers’ customers. This isn’t my product, but it would be like if I created custom refrigerator calendars and sold them to real estate business and then mailed them out on behalf of the real estate agency directly to previous & likely customers.
- I also give presentations/workshops for businesses/organizations and provide consulting services.
Other considerations
- Married, with 3 children. My two older children (ages 7 &9) legitimately help with some work-related tasks. Much of my business involves mailing (will work up to about 1500 envelopes a week) and my children already seal the envelopes for me. As they get older, they will be able to stuff envelopes, affix stamps, and seal them. I currently pay them some cash (I currently have much lower volume) and its just fun money for them.
- My spouse has a similar advanced degree to mine, currently edits everything I write, helps with printing, mailing, etc. She also attends conventions with me and helps me make sales/take orders. The only thing that I do entirely on my own is the presentations.
- employer-based health insurance ends on 9/1/17
Tentative Plan
My plan is to incorporate as an S Corporation before 1/1/2019 with my spouse and I as the only two owners/shareholders. We’ll pay ourselves a reasonable wage and (if there is enough income for it to make sense. We’ll be buying health insurance through the Corporation.
I plan to create some type of retirement plan through the corporation.
I plan to hire my children as regular employees – I’m confident I can make the argument that they are providing “common, acceptable, helpful, and appropriate” work for the business.
We don’t currently plan to hire any outside employees. If we do, they would be extended family members (retired parents) who wouldn’t need health insurance or a retirement plan.
Questions:
1) Given that my children will be employees of an S-corp, I’ll need to deduct self-employed taxes for them – correct?
2) Obviously it helps with taxes to pay my children as much as possible (to an extent) – it sounds like they could earn up to $12,000 year each and not pay any additional income tax. Would it be unreasonable to pay them $11 or $12/hr, $15/hr ?? Sounds like some states (not mine) will have $11/hr be their minimum wage. I’ll need to keep careful records of regular payments for actual services.
3) My wife does not have a W-2 job and she can perform many of the job duties as well as I can. So we’re in a situation where we could structure how much time each of us spends working on the business ….For example, we could split the workload 50/50 OR she could entirely focus on raising our children and I be the only one who works on the business. Let’s assume that we decide to pay ourselves $70k from the side business – what is the differences/advantages (if any) to the following splits:
Me: $70k/spouse: $0
Me: $50k/spouse: $20k
Me: $35k/spouse: $35k
(Let’s assume that I’ve already determined that the salary amount is reasonable for my time/skills). Does the breakdown between me and my spouse make any difference? And I recognize that the amount would need to be connected to actual time and/or expertise that my spouse and I are bringing to the business.
4) How should I structure the retirement plan through the corporation? What type of plan would be best?
5) What obvious things am I missing or what information would be useful to examine other options?
Thanks!