3 ms·

Possibly in your jurisdiction - which is why you've got to do your homework and get proper professional advice. It's pretty much standard practice in the UK con

by majc2 13y ago

Possibly in your jurisdiction - which is why you've got to do your homework and get proper professional advice. It's pretty much standard practice in the UK contracting/consulting market; it's been legislated against under something called IR35 - but with a switched on client, you can create a relationship that is genuinely a client/supplier one rather than an employer/employee one.

mgkimsal 13y ago
I was speaking from a US perspective, and should have indicated that. "Pay yourself minimum wage, then you can avoid loads of tax!" is a common piece of advice I hear given, and it can be a pretty big red flag to the IRS (got this from my own CPA as well as other CPAs and other financial/tax people over the last ... too many years to count). The issue is not so much whether you're an 'employee' or not, but in the US, 'wages' are subject to FICA tax (~13% IIRC), 'dividends' aren't. Making $150k, but paying FICA tax on only $15k, and treating the other $135k as 'dividends' is not kosher, as you're avoiding FICA tax on $135k (not really 100% true, because there's an upper cap on FICA-taxable income at the moment). It's simply not seen as reasonable for someone who's obviously bringing in $150k to claim they only 'earned' $15k, for example. Furthermore, your future Social Security payments are based in part on how much you've paid in FICA taxes over the years, so someone trying to engage in this will find themselves with reduced SS payments down the road, as well as a probable audit and penalties.
- ashray 13y ago
  Thanks for the detailed responses. The above comments really cleared some stuff up for me. I'd like to add that the US IRS is known to be one of the most (if not THE most) aggressive departments in the world. They have banks around the world bowing to them and it's pretty hard for US citizens to do any of the kind of tax structuring that folks in other countries can. Of course, you are right that this is all still a grey area but I'm sure the laws or precedences are clear in some countries.

by majc2 13y ago

mgkimsal 13y ago

I was speaking from a US perspective, and should have indicated that. "Pay yourself minimum wage, then you can avoid loads of tax!" is a common piece of advice I hear given, and it can be a pretty big red flag to the IRS (got this from my own CPA as well as other CPAs and other financial/tax people over the last ... too many years to count). The issue is not so much whether you're an 'employee' or not, but in the US, 'wages' are subject to FICA tax (~13% IIRC), 'dividends' aren't. Making $150k, but paying FICA tax on only $15k, and treating the other $135k as 'dividends' is not kosher, as you're avoiding FICA tax on $135k (not really 100% true, because there's an upper cap on FICA-taxable income at the moment). It's simply not seen as reasonable for someone who's obviously bringing in $150k to claim they only 'earned' $15k, for example. Furthermore, your future Social Security payments are based in part on how much you've paid in FICA taxes over the years, so someone trying to engage in this will find themselves with reduced SS payments down the road, as well as a probable audit and penalties.

ashray 13y ago
Thanks for the detailed responses. The above comments really cleared some stuff up for me. I'd like to add that the US IRS is known to be one of the most (if not THE most) aggressive departments in the world. They have banks around the world bowing to them and it's pretty hard for US citizens to do any of the kind of tax structuring that folks in other countries can. Of course, you are right that this is all still a grey area but I'm sure the laws or precedences are clear in some countries.