Should You Quit Your Job To Take Advantage of the New Tax Law?

You love your job. You earn a good living. But what if quitting your job could actually save you money? Under the new tax law, there are people who could enjoy significant tax cuts by quitting their jobs and getting re-hired by the same employer as an independent contractor.

The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017 and takes effect for tax years beginning January 1, 2018, offers some significant tax advantages to individuals who offer services through a pass-through entity, such as an LLC or S corporation. In a typical structure, the individual forms a pass-through entity, and then the entity is engaged as an independent contractor by a company in need of the individual’s services. Utilizing a pass-through entity to offer the owner’s services has been a common practice for a lot of professional service workers, such as computer programmers, architects, and web designers, because an entity offers liability protection, and a pass-through entity means that the individual does not have to pay taxes at the corporate level (avoiding the so-called double taxation). The new tax law just sweetened the deal even more by allowing many owners of pass-through entities to deduct twenty percent of their revenue from their taxable income.  That’s why working for your employer as an independent contractor through a pass-through entity instead of as a traditional employee could save some individuals a lot of money in taxes. (Certain professions, such as doctors, engineers, lawyers, and accountants, are subject to income phaseouts that start at $157,000 for single taxpayers, $314,000 for married taxpayers.)

But wait, there’s more! Not only did the deal get sweetened for people who offer services as independent contractors through pass-through entities, but it also made life a little tougher (or, at least, a little more expensive) for traditional employees. Employees who have been deducting their unreimbursed work-related costs will no longer be able to do so. That’s because the new law eliminates this itemized deduction. Depending on how much in unreimbursed expenses an employee incurs, that could be a significant tax deduction that will no longer be available to them starting this year.

So with the new tax laws being skewed in favor of independent contractors and against employees, should employees be turning themselves into independent contractors? Should, for example, an architect who is employed by an architectural firm consider approaching her firm about switching from being an employee to being an independent contractor? Since she’s not limited by the specified service businesses rules (architects were essentially specifically excluded), she could set up an LLC of which she is the sole member, her firm could pay her LLC for her services, and all the income received by the LLC would pass through to her. She would then be able to deduct 20% of her income. Additionally, she would not have to worry about those unreimbursed expenses not being deductible because she would be able to deduct any work-related expenses as business expenses. Sounds like a pretty good deal, right? Well, from a purely tax standpoint, it is! But there are some potential downsides that need to be considered.

By changing over to an independent contractor she would be giving up her status as an employee. This means that she would be giving up certain protections and benefits. For example, the Title VII anti-discrimination laws protect employees, not independent contractors. So if her firm terminated her employment while she was still an employee, she could file a Title VII violation claim against them if she felt she was fired for being a woman. However, once she is an independent contractor, she loses that protection. Additionally, if she has been enjoying certain employee benefits, such as group healthcare, matching 401(k) contributions, paid vacations, etc., she loses all of those too. She also loses FMLA and workers comp protection (if she gets pregnant or sick or is injured on the job) and unemployment protection and COBRA (if she loses her job). There are many benefits to being an employee over an independent contractor that would be lost to anyone making the switch.

With all that said, because the new tax law so heavily favors independent contractors over employees, employees will want to consider whether they should form a pass-through entity and operate as an independent contractor through their entity. Anyone considering doing so, should first speak with their accountant and seek legal advice to make sure that the pros outweigh the cons for their particular circumstances. Additionally, employees may be able to negotiate the terms of their switch with their employer, since switching could benefit the employer too.

In my next blog post, I will discuss the employer-side pros and cons and what an employer should consider if an employee approaches them about making the switch to independent contractor status. In the meantime, for more details on the tax implications of incorporating, or for other scenarios involving incorporation, see Kelly Erb’s post at Forbes.

Hey, I’ve lost my company’s domain name!

Whois screengrab

I love me some VT 220 (ok, faux VT 220, but close enough)

The registration system for domain names isn’t really set up for corporate ownership, since the “owner” of a domain name is typically the person who is listed as registrant rather than the corporation. The down side of this system is something we see all the time, particularly with small companies – a domain name is registered by a well-meaning, tech-savvy employee (all too often in his or her personal account) and, when that employee moves on, the company is stuck without control over critical domain names and related accounts. If the employee is fired, it’s even worse, since the now-disgruntled employee may well have control over the company’s entire online presence for an indeterminate period of time.

While there’s no silver bullet here, there are a few best practices which make it easier to regain control over a domain under the control of a wayward (or simply unreachable) ex-employee. Those are:

  • Make sure the company name and address is listed as the Registrant, along with the name of an officer who is most likely to remain with the company. The tech savvy employee can be listed as administrator, to facilitate management of the domain without jeopardizing ownership.
  • Corporate web assets should be held in an account which is in the company’s name and paid for with a company credit card, and should be kept separate from other business or personal websites and domains.
  • Have an agreement in place making it clear that, upon termination of employment for any reason the domain name registrant and admin are to be changed to an officer of the company’s choosing. Ideally, this should be in a standalone agreement so you can provide it to the registrar without divulging hiring or salary information.
  • Make sure renewal notices and the like go to a generic e-mail address, ideally one which is monitored by more than one person, so that termination or resignation of an employee doesn’t result in a lapsed registration (although there are downsides to this as well).
  • Make sure someone other than the admin knows the password to the account (but be judicious, you also don’t want the password becoming generally known). For particularly active accounts, you may want to request a regular update confirming the password and listing all domain names along with expirations dates for the corporate account.
  • Make sure all domains are registrar locked against transfer and deletion

The above isn’t foolproof, since a knowledgeable or well-placed employee can manage to retain control no matter what the circumstances, and given that registrars differ in how they handle requests relating to domain name ownership. Also, be aware that some of the above suggestions may have downsides as well, so consider what’s best for your organization when determine who has access to accounts and how.

The Basics of US Employment Law Part IV: Healthcare and Retirement Plans

It is widely known that unlike many countries in Europe, the United States does not have universal healthcare coverage for its citizens. This issue has been at the forefront of many political debates and was even the subject of the 2007 Michael Moore documentary, Sicko. Even with the passage of the Affordable Care Act, most US citizens must still pay to receive healthcare coverage.

Under the current system in the United States, without universal free healthcare, the burden of providing healthcare coverage  falls largely on employers, including many small businesses. Much like the vacation time I discussed in my last blog post, even though healthcare coverage of employees is not mandated, most companies offer their employees some form of healthcare coverage. In fact, it has come to be expected that if you are employed, you (and your family) will have the option of joining your employer’s healthcare plan. However, this does not mean that all employers pay all the costs of covering their employees. Many companies ask that the employees pay all or a percentage of the insurance premiums and other costs for their (and their families’) coverage. There are also a wide range of healthcare plans for employers to chose from of varying degrees of quality and price. One of the benefits employees look for when choosing a job is the type of healthcare plan and coverage an employer offers. Therefore, even though healthcare coverage is not required, many employers, especially larger ones, offer generous healthcare plans in order to attract high quality employees.

Additionally, employers with 20 or more employees who offer healthcare coverage are subject to a federal law known as COBRA, designed to make sure there is no break in healthcare coverage when an individual is between jobs. COBRA requires employers with 20 or more employees to allow former employees to stay on the employer’s healthcare plan for a certain period of time after the employment relationship has ended. COBRA does not normally mandate continuation of any payments the employer may have been making towards the coverage. Accordingly, even if an employer covers 100% of the costs of its employees’ healthcare, it does not have to cover any costs of former employees’ healthcare under COBRA and can require former employees to pay for up to 102% of the costs (the extra 2% being meant to cover the employer’s administrative costs of keeping the former employee on the plan). Many states, including Pennsylvania, have similar laws known as “mini-COBRA” that apply to employers with fewer than 20 employees.

In addition to healthcare plans, many (if not most) larger companies and many smaller companies offer their employees some type of retirement savings plan. The most common type of retirement plan is known as a 401(k) plan, named after the section in the Internal Revenue Code governing the taxation of this type of retirement plan. In addition to offering a 401(k) plan for its employees to contribute money to, employers will sometimes offer a “matching” contribution. For example, an employer might offer to match up to 3%, meaning that if the employee elects to contribute 3% of her salary to her 401(k) plan, the employer will match that contribution with an equal amount of money contributed to the employee’s 401(k) plan. As with healthcare coverage, retirement plans are a benefit employees look for in deciding whether to accept a job offer. Employers seeking to attract and retain top quality employees generally find it necessary to offer their employees a competitive benefits package that includes both a group healthcare plan and a retirement plan.