Have a Tax Question? Ask a Tax Expert
Hi; I would like to sell my group health insurance agency. Iam a Nebraska C Corp. Iam the only employee. Iam also the only owner. In other words a "one man shop". Can the buyers pay me about 80% on a non-compete contract and pay the other 20% to my Nebraska C Corp. over the next 27 months????? How would the non compete agreement dollars be taxed???? My CPA said we could use "box 3 of a 1099" from the buyers and that would be "classified as UNEARNED INCOME" so that I could start taking social security. Iam currently age 62 1/2 and would like to start taking social security in Jan. of 2014 but don't want to get screwed with their goofy 2 for 1 trade down rule. In other words you can't make any "earned income" over $15,120 in 2013 to qualify for social security. Would love to hear from you. Thank You. The question seems to be from my CPA is that the "Nebraska C Corp" owns the accounts. Not Me. So that is why he is suggesting that the buyers pay the Corp. some money and also pay me as an "individual" some money as well on a non-compete contract. My "understanding" is that a "non-compete contract" is classified by the IRS and social security as "unearned income" and could be reported on a 1099 under box 3 so that I could sign up for social security and not worry about the 2 for 1 trade down rule which would not allow me to take social security. I hope I have not confused you on all of this.
You can divide up the sale proceeds any way you see fit. The corporate entity sells its assets,, which primarily consists of the accounts and goodwill.
The non-compete is for you as a person, because the corporation doesn't need a non-compete. It would be worthless to have the corporation sign a NCA because you could then simply quit the corporation and compete individually.bypassing the entire NCA purpose.
A payment to not work is not earned income.
You will need some way to get the profits from the sale out of the corporation, and since you are no longer an active employee, you will only be able to do that with after-tax dividends. So any money flowing through the entity will be subject to double-taxation.
The only other way to get money out of the corporation is through salary, and if you have a salary, you are back to having earned income.
Is my CPA correct that if the buyer pays me for the non-compete as an "individual" and not my C Corp. then they will give me a "1099 and check Box3" so that it will be classified as "Unearned Income" and therefore won't count against me when I apply for social security??????
Am I correct that if the buyers pay me as an "individual" under the non-compete agreement then they will issue me a "1099 and check Box3" so that it will be classified as "Unearned Income" and thus will not count against me regarding social security????
All of these statements above same the same thing. So, yes, yes, yes.
However, the longer you delay starting your Social Security benefit, the more you will take home in lifetime income as long as you live to at least Age 83. You can delay taking your retirement benefit until as lat as Age 70. Each month you delay, your monthly benefit grows.
Of course, if you need the current income to live, then cash flow becomes more important to you than overall benefits.
I just want to say a big "THANK YOU" for your help and advice. Where are you located out of curiosity??? Take Care. Chuck Petersen