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1099 S corp Dilemma

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  • Avatar toothed 
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    Status: Dentist
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    First time poster here-

    I’m currently a 1099 for all of my income and last year made around 285k.  An accountant advised me to make an S corp (which has maintenance fees to set up that the accountant needs to charge for ) so that I can save on half of my self employment tax. On the other hand, my attorney told me not to do so as it it not worth the hassle.  I’m stuck as to what to do and perhaps should have asked this earlier in the year in case I should have incorporated.

    Thanks!

    #229004 Reply
    Avatar Peds 
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    prob no scorp. but others will ask for the pertinent info.

    #229009 Reply
    jfoxcpacfp jfoxcpacfp 
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    Do you have employees? If so, you already have to comply with payroll filing, so an s-corp would not cost you any more in that area. But as 1099, I’m guess no other employees.

    • As for the accountant, that is probably (but maybe not) a boiler-plate recommendation given to all business owners. It is impossible to make a rec without running a projection to see which way will lead to more final net worth. You’re right on the cusp of where I would make a BP recommendation on this forum, but we always prepare a cost-benefit analysis before telling a client what to do.
    • As for the attorney, s/he is also making an OTC recommendation. I would ask both to back up their rec’s if you are paying them.

    Regarding when to incorporate in the year, you will qualify for an automatic Rev Proc waiver to elect late on your initially-filed 1120S if you go that route. Don’t recommend waiting past Sept/Oct as you’ll have payroll filing to catch up, though. Sounds like you need more advice.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229010 Reply
    Avatar GasFIRE 
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    As a 1099 I would check eligibility for 199A pass-through deduction. Would likely beat any SE tax savings as S-Corp.

    #229014 Reply
    Liked by seattlee
    Avatar toothed 
    Participant
    Status: Dentist
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    No employees-  I’m currently working and an independent contractor in a bunch of different offices as an associate. If I keep my current jobs, I should be making around 20 k more this year.  Definitely need more advice and may be looking for a different accountant.

    #229022 Reply
    jfoxcpacfp jfoxcpacfp 
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    As a 1099 I would check eligibility for 199A pass-through deduction. Would likely beat any SE tax savings as S-Corp.

    Click to expand…

    The OP would qualify for 199A in either scenario, as they’re both pass-through’s. That is another reason tax planning is so important. Another 199A consideration is the Roth option on the solo-k.

    Planning to maximize your Section 199A deduction

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229032 Reply
    jfoxcpacfp jfoxcpacfp 
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    No employees-  I’m currently working and an independent contractor in a bunch of different offices as an associate. If I keep my current jobs, I should be making around 20 k more this year.  Definitely need more advice and may be looking for a different accountant.

    Click to expand…

    Note – you will qualify for a home office deduction if you’ll dedicate a space and use it for such and should get a nice mileage writeoff to boot.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229033 Reply
    Avatar toothed 
    Participant
    Status: Dentist
    Posts: 5
    Joined: 07/09/2019

    No employees-  I’m currently working and an independent contractor in a bunch of different offices as an associate. If I keep my current jobs, I should be making around 20 k more this year.  Definitely need more advice and may be looking for a different accountant.

    Click to expand…

    Note – you will qualify for a home office deduction if you’ll dedicate a space and use it for such and should get a nice mileage writeoff to boot.

    Click to expand…

    Even if I am renting?

    On a side note- is Fox CPAs limited to MD doctors or dentists as well?

    #229051 Reply
    Avatar seattlee 
    Participant
    Status: Attorney
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    The S-corp probably won’t save you more than $5k per year in taxes, if it saves you any money at all.  Why bother jumping through accounting/taxes/payroll/401k/compliance hoops to save the $5k.  Just work a few more shifts and keep the easy simplicity and flexibility of the 1099 rather than burning the time to setup and facilitate S-corp?  If you start making $500k plus, maybe worth reconsidering IMHO.

    Optics and Electronics Patents

    #229065 Reply
    jfoxcpacfp jfoxcpacfp 
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    Even if I am renting? On a side note- is Fox CPAs limited to MD doctors or dentists as well?

    Click to expand…

    Yes, you can get a HO deduction even if you are renting. See FAQs about home offices for doctors.

    Fox CPAs is my firm. I have no affiliates and don’t ever plan to and everything we do is transparent. No sales gimmicks.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229073 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
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    Joined: 02/01/2016

    Given your net profit, an S-Corp 2% shareholder-employee’s W-2 reasonable salary should likely be >= the Social Security maximum wage base (2019 = $132,900). This means you will only be saving 2.9% on the difference between an S-Corp 2% shareholder-employee’s W-2 salary and a sole proprietor’s business profit * 92.35%. The sole proprietor may also be paying a minimal amount of the 0.9% ACA Medicare surtax on (business profit * 92.35%) – $200K S or $250K MFJ.

    I agree with the others, one key consideration is whether you qualify for the Section 199A 20% QBI deduction or not. The taxable income phaseout of the QBI deduction for 2019 is; $160,700 – $210,700 S, $321,400 – $421,400 MFJ.

    A sole proprietors Qualified Business Income (QBI) is their self-employed earned income (business profit – 1/2 SE tax) – any Self-employed health insurance deduction – any pre-tax employer retirement plan contributions (employee elective contributions + employer contributions). An S-Corp 2% shareholder-employee’s QBI will be their S-Corp’s K-1 distribution.

    If you are eligible for the QBI deduction and assuming maximum employer retirement plan contributions. Your S-Corp QBI is likely to be about $100K less than your QBI as a sole proprietor. That will result in about $20K less in a QBI deduction. Depending on your marginal tax bracket (likely 32% – 35%). You will receive about $6,400 – $7000 more in net tax benefit with a sole proprietor over an S-Corp. This will more than offset the S-Corp FICA savings.

    I made a lot of assumptions here and just through out some rough numbers, but as you can see. Your QBI eligibility can significantly impact the S-Corp vs. self-employment choice. You will have to run your own numbers, but the QBI deduction has completely changed the business entity selection trade-offs.

    Even before the QBI deduction, $300K was borderline for electing an S-Corp. You maybe saved a net of $3K ($1.5K in CA), but to me the hassle factor just made it not worth it.

    #229085 Reply
    Liked by Peds
    Avatar toothed 
    Participant
    Status: Dentist
    Posts: 5
    Joined: 07/09/2019

    Thanks for all the input.

    I worked it through and it looks like I should have contributed to my 401k to qualify for the pass through deduction.  The good thing is that I delayed my 2018 taxes because my accountant was busy.  Bad thing is that I did not open a solo 401k and its too late.  I could open a SEP IRA, however, I already contributed to my Roth IRA.

    I called vanguard and they said I can contribute to a ROTH and a SEP IRA but I read many times over that I shouldn’t on WCI.  Looks like I need to look this over with my accountant.

    First full year working and I should have had better tax planning. I will work on being more prepared for 2019.

    #229573 Reply
    jfoxcpacfp jfoxcpacfp 
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    Posts: 8358
    Joined: 01/09/2016

    Thanks for all the input.

    I worked it through and it looks like I should have contributed to my 401k to qualify for the pass through deduction.  The good thing is that I delayed my 2018 taxes because my accountant was busy.  Bad thing is that I did not open a solo 401k and its too late.  I could open a SEP IRA, however, I already contributed to my Roth IRA.

    I called vanguard and they said I can contribute to a ROTH and a SEP IRA but I read many times over that I shouldn’t on WCI.  Looks like I need to look this over with my accountant.

    First full year working and I should have had better tax planning. I will work on being more prepared for 2019.

    Click to expand…

    You can contribute to a SEP for 2018, open a solo-k for 2019, and r/o the SEP before 12/31 and not get taxed on your b.d. Roth conversion.

    See Backdoor Solo-401k Plans

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229579 Reply
    Liked by spiritrider

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