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  • Avatar endo4jc 
    Participant
    Status: Physician
    Posts: 18
    Joined: 11/14/2018

    I’m finishing fellowship in July and have signed a PSA as an independent contractor beginning September 1. The group that pays me a salary sets up a Professional Corporation for each physician. This has been setup already for me. My PC receives a monthly salary. I’m aware that I am responsible for paying federal/state/local income taxes, and both the employee and employer portions of the FICA taxes. The group that pays me will pay my premiums for malpractice, health, dental and vision insurance. I’ll have access to an HSA and will choose the HDHP.

    1) I’ve read a few threads on setting up business checking accounts for locums. Should an IC who receives all of their income in this manner setup a business checking account?

    2) Should I elect S Corp status? Based on my current understanding (which could very well be incorrect), it seems I would save on taxes since all of my income is IC. The group that pays me does not issue a 1099 to my PC as they are not required to by the IRS.

    If I remain a PC, it seems I would pay the self-employment taxes plus a the flat corporation tax rate of 21%… is that correct?

    In order to elect S Corp status, I must submit IRS form 2553 it seems. I am the only employee of my PC. I then choose a portion of my income to be a “distribution” and a portion to be “salary”. The distribution is not subject to self-employment tax of 15.3%. The salary must be reasonable and not less than half of the income…. is that a correct understanding?

    If so, does it make sense for myself to elect S Corp status to save on taxes?

    Thanks!

    #219621 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 866
    Joined: 03/09/2017

    Your numbers and overall understanding is way off. Some people with a corporation pay themselves a reasonable salary plus a distribution. Some people will declare all their income coming on the corporation as a salary. Either way, the salary must be reasonable and the best way to insure that is to make sure that salary is set at the average income for that specialty in your area. This will max out FICA anyway for a physician ($130k or so for 2019) so the only saving you’d have is the Medicare surcharge of 2.9% in excess of the FICA limit. What income do you expect to bring in? Usually S corp election is not worth it for income less than 400k because of accounting/payroll/state fees. You get no special tax treatment for S corp election as it is a pass through entity so everything ends up on your personal taxes. C corp is slightly different but it seems improbable a C corp would be beneficial to most physicians.

    #219680 Reply
    Liked by spiritrider
    Avatar endo4jc 
    Participant
    Status: Physician
    Posts: 18
    Joined: 11/14/2018

    Salary is $500K.

    #219750 Reply
    Avatar endo4jc 
    Participant
    Status: Physician
    Posts: 18
    Joined: 11/14/2018

    Your numbers and overall understanding is way off. Some people with a corporation pay themselves a reasonable salary plus a distribution. Some people will declare all their income coming on the corporation as a salary. Either way, the salary must be reasonable and the best way to insure that is to make sure that salary is set at the average income for that specialty in your area. This will max out FICA anyway for a physician ($130k or so for 2019) so the only saving you’d have is the Medicare surcharge of 2.9% in excess of the FICA limit. What income do you expect to bring in? Usually S corp election is not worth it for income less than 400k because of accounting/payroll/state fees. You get no special tax treatment for S corp election as it is a pass through entity so everything ends up on your personal taxes. C corp is slightly different but it seems improbable a C corp would be beneficial to most physicians.

    Click to expand…

    Dreamgiver, thank you for helping me realize how little I know on this subject. Even though I’ve read WCI for a few years in residency/fellowship, I still have much to learn! Unfortunately, the more I read on this subject, the more confused I become so please bear with me.

     

    I just finished reading WCI’s post on the Pass-Through Income Deduction (https://www.whitecoatinvestor.com/pass-through-income-deduction/). Since my IC business is a Professional Corporation, then I am not eligible for the pass-through deduction as it is considered a C-corp by the IRS, and therefore must pay income taxes at the corporate rate of 21%. If that’s not a correct understanding, please explain why.

     

    In order to be considered for the pass-through deduction, I would need to elect S-corp status then. However, my gross salary is $500K, which is currently above the $415,000 income limit for filing married.

    If my numbers are correct, my adjusted gross income will be approximately $408,510.20 (500,000 – 15,489.80 [employer portion of FICA] – 7,000 [HSA] – 19,000 [employee individual 401(k)] – 50,000 [charitable donations]).

     

    I understand that the business that pays my PC its salary does not need to issue a 1099. Come tax season 2020, will my PC issue a 1099 or W2 to myself?

     

    Am I able to open an individual 401(k) if my PC pays W2 wages to myself?

     

    It seems that I need a CPA to help me…Any recommendations in the Florida/Georgia area?

    #220825 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1904
    Joined: 02/01/2016

    In order to be considered for the pass-through deduction, I would need to elect S-corp status then. However, my gross salary is $500K, which is currently above the $415,000 income limit for filing married.

    If my numbers are correct, my adjusted gross income will be approximately $408,510.20 (500,000 – 15,489.80 [employer portion of FICA] – 7,000 [HSA] – 19,000 [employee individual 401(k)] – 50,000 [charitable donations]).

    I understand that the business that pays my PC its salary does not need to issue a 1099. Come tax season 2020, will my PC issue a 1099 or W2 to myself?

    Am I able to open an individual 401(k) if my PC pays W2 wages to myself?

    The MFJ QBI phaseout for 2019 is $321,400 – $421,400 and is not based on your AGI, but rather MFJ taxable income. Which seems like what you were really stating, because deductions do not reduce AGI.

    Your PC will file a W-2 to the IRS and also issue you a W-2.

    Yes, you can make employee elective contributions to a one-participant 401k. Your PC should adopt one relatively soon. Employee elective contributions can only be deducted from compensation not already received, after the effective date of the one-participant plan, after an employee elective contribution election and with a pay date on or before 12/31.

    For 2019, you can make an elective employee contribution of $19K and a maximum employer contribution of 25% of your compensation. However, your employee elective contribution + employer contribution is limited to $56K in 2019. So your maximum employer contribution will be $56K – $19K = $37K.

    Note: If you make a $19K pre-tax deferral and receive $37K in employer contributions, that will reduce your taxable income to $408K – $56K = $352K, which puts you eligible for more than 1/2 of the QBI deduction.

    At that income level as you get closer to 40, you might want to investigate a combined 401k/DB plan. The larger potential contributions would increase your tax-deferred retirement plan contributions, reduce your taxable income, increase your QBI deduction and allow for greater income growth before being phased out.

    You should engage a CPA and do an analysis to see if an S-Corp might be a better option.

    #220974 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8128
    Joined: 01/09/2016
    It seems that I need a CPA to help me…Any recommendations in the Florida/Georgia area?

    Click to expand…

    Just so you know, the CPAs who are WCI’s recommended tax strategists all work virtually and can serve clients in any state. I would presume that the others meet via video-conference, same as we do, and probably have clients in both states you listed, same as we do. Believe it or not, we serve way more docs in CA, FL, TX, and NY than we do in KY.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #221044 Reply

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