Re: financial impact of incorporating

[Laurel Nelson <Laurel_Y_Nelson -at- NOTES -dot- SEAGATE -dot- COM>]

(This information is also US-centric.)

Keith:  I'm a W-2 contractor and have not had to incorporate yet, but one
of the developers I work with (an independent contractor who is
incorporated) told me about something he calls the 60/40 rule. He claims 60
percent of his income as dividends and 40 percent as salary. By doing this,
he only pays the FICA tax on the 40 percent that he claims as salary.

Because he does this, his social security benefit will not be as large when
he retires, but he has more disposable income that he can use for personal
investments or paying down debt. Considering the future of social security,
I personally feel that following the 60/40 rule is beneficial.

The developer also told me that his accountant advised him to claim the
opposite--40 percent dividends and 60 percent salary--but apparently his
accountant wasn't quite sure what the dividing line would be with respect
to being audited at income tax time.

The developer ended up calling a district court judge to find out how he
could split his income without being under the threat of being audited. The
judge told him about the 60/40 rule, which he's been following ever since
(and has never been audited).

Just thought I'd tell you this. Others on this list may have a different
opinion, which I would be interested in hearing. Have a good day, Laurel

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