Working for a US company while living in the UK

I am sure this is somewhere but I have searched and can't find this easily.
Background
I am getting married Nov 28th here in the states.  Then filing for spousal visa and moving over in Jan 2010.
I get to keep my current job (YAY) BUT they are worried about taxes and suggested I go to independent contractor status.
I am in Texas so I don't have state taxes to care about but I do own a house that I am renting.

1. Whats the best way to work remotely and deal with tax status?
2. Are my taxes going to be a nightmare with the above?

oh and also I want to cash out part of my 401K to help pay for the move and all the fun stuff and I know I am gonna get nailed with a penalty - do you know how much?

Thank you in advance for helping me!

I don't know how severe your penalty will be but I would urge you to not cash out your 401k if you can at all help it!

geeta - I only want to take a portion to allow the move and not working for 3 weeks to allow me to settle in...Leaving the rest ;-)

From a UK perspective you are likely to be an employee so entitled to a UK contract, leave allowance, maternity pay, sick pay etc under English (or Scottish) law.

You may be a permanent establishment of the US company so requiring filing of UK corporate tax returns.

The turnover may be subject to VAT.

You will still need to pay UK tax on the income.

Technically I wont be an employee as no taxes will come out and I will make my own hours - doing sales.  Thats why I would become an independent contractor.

So I am even more confused - should I make myself a S-corp here in the US or incorporate in the UK or neither

From a UK perspective you are likely to be an employee so entitled to a UK contract, leave allowance, maternity pay, sick pay etc under English (or Scottish) law.

You may be a permanent establishment of the US company so requiring filing of UK corporate tax returns.

The turnover may be subject to VAT.

You will still need to pay UK tax on the income.

This sounds confusing. So would she be a UK employee, or a US one? Would she pay taxes in both countries on her income, or just UK taxes up to the usual amount?

Under English law I still think you are most probably an employee although I fully understand that under State law you may not be.  The law is simply different. Can you substitute another worker?  Do you have other clients for whom you will be doing sales? Are you registering to charge VAT?

An S Corp is a company from a UK perspective so would become UK resident so subjecting the profits to UK corporation tax.

If you incorporate in the UK you would create a CFC so requiring 5471 filing and potential Subpart F income reporting in the US.

Professional advice from a US/UK dual qualified tax adviser would be prudent.