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New business owner – currently only have SEP set up what other options are there

Home Tax Reduction New business owner – currently only have SEP set up what other options are there

  •  allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    S – corp owner husband and wife only employees – filing joint and 5 dependents.
    Itemized deductions would be around 32,000
    W-2 income combined $100,000
    S-corp income after all expenses and salaries paid will be $230,000
    Currently only retirement contribution SEP for both at $12,500 .
    We are new business owners as of 2018 and only contributed to employer sponsored 401K in the past.

    What can we do to make maximum contributions to retirement accounts and what accounts are suggested ?

    I am reading having the SEP only limits us to 25,000 contribution (12,500 each person at 25% from W2 wage of 50,000 each ).

    What retirement should we open and how much could we contribute to max everything out and also reduce income since S-corp income is pass through .

    Thank you.

    #170574 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    Well a solo 401k is an option for a business with only 2 spouses as participants and no additional employees

    But let’s start at the beginning.

    What line of work is this?

    Why the S Corp?

    Have you asked your CPA this question?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170598 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6148
    Joined: 01/09/2016

    I really hope you are working with a good CPA. If you have a CPA, I hope the CPA justified the recommendation for s-corp and SEP and also discussed backdoor Roth IRAs, HSAs, business mileage reimbursement, and the like with you.

    You can set up a solo-k and each contribute more than the SEP allows at this level. If you have already contributed to the SEP for this year, you have to wait until 2019 to open the solo-k. If not, it’s not too late to open a 401k (deadline is 12/31 – do it asap). You’ll be able to r/o your prior 401k balances to your solo-k accounts, too.

    Obviously, intra-year tax planning would really benefit you guys.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #170628 Reply
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018
    Earnest refinancing bonus

    No additional employees. Only 2 spouses .

    Executive Search Practice.

    It is a LLC taxed as S-corp.

    I did ask her she only suggested the SEP with 25% contribution per person based of the 50K W2 salary each spouse making it a 12,500 SEP contribution from the business.

    But at combined 100K W 2 income and then having $230,000 in the account at the end of the year I did not want to increase payroll but rather make a distribution and see what else can be opened to contribute and make a good tax choice as well.

     

    At this point I also do not have time to look for a different CPA and trying to figure this out . I am very new to this and quite lost to be honest .

    I am trying to learn and I am open to suggestions from others who are more knowledgeable in the subject matter.

    I believe a SOLO 401K needs to opened by the end of the year .

    This is what I came up with when I entered 50,000 for each spouse for a Solo 401K in the Etrade caluclator .

    Name

    Owner

    Eligible

    Estimated Aggregate
    Contribution

    Estimated Profit
    Sharing/Deferral

    husband
    Yes Yes $27,794 $9,294/ $18,500
    wife Yes Yes $27,794 $9,294 / 18500

    If the business make a contribution does it need to be funded by Dec 31 and is this the profit sharing portion. Can this be done in one lump sum ? The numbers above show profit sharing portion to be 9,294 coming from the business .

    The employee portion I believe is called deferral does it have to be made by payroll or can the employee just write out a check for the maximum which i believe is 18.500.

    #170631 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    In your line of work, what would be a reasonable salary for the work you and your spouse do for the practice, were you not doing this on your own, but rather employed by an outside entity?

    Have you made contributions to the SEP IRA yet for 2018 tax year?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170633 Reply
     ajm184 
    Participant
    Status: Other Professional
    Posts: 473
    Joined: 07/14/2017

    Knowing the line of work and what type of salary you two would command as an employee would provide context.  A newly formed business would generally go the S-Corp route, though agree with Jfox here, the CPA needs to be more engaged in asking question of the OP than appears to be the case.

    A $230K NI in an S-Corp is a tell tale sign (barring significant working capital requirements) of a business that should be considering a switch to a c-corp along with a solo or group 401k plan.  Though you can dividend out the NI, it presents other tax planning issues the CPA will need to work with you upon.

    Guessing I’m wrong but thought a SEP employee contribution amount was the $12.5K, though allows an employer contribution of 25% of gross income upto a $54 or $55K total annual contribution limit?

    #170635 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    Knowing the line of work and what type of salary you two would command as an employee would provide context.  A newly formed business would generally go the S-Corp route, though agree with Jfox here, the CPA needs to be more engaged in asking question of the OP than appears to be the case.

    A $230K NI in an S-Corp is a tell tale sign (barring significant working capital requirements) of a business that should be considering a switch to a c-corp along with a solo or group 401k plan.  Though you can dividend out the NI, it presents other tax planning issues the CPA will need to work with you upon.

    Guessing I’m wrong but thought a SEP employee contribution amount was the $12.5K, though allows an employer contribution of 25% of gross income upto a $54 or $55K total annual contribution limit?

    Click to expand…

    OP relayed the net income of the Corp as $330k. You forgot the wages.

    Still I would strongly disagree with your comment about a C Corp which only introduces more complexity and would likely cost the OP more in accounting fees and taxes.

    If you feel differently, please come back with numbers to support your C Corp comment.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170636 Reply
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    jacoavlu  and  jfoxcpacfp  thank you for the reply it is much appreciated.

    To answer some of the questions:

    a reasonable salary is between 40K  Base salary up to 90K but in this line of work you also have commissions pushing the lower end with base salry of 35K to 100K and the 90K base salary to 200K or above if one is really good. The line of work operates mostly on a low base and higher commission portion.

    OR the employee with 7-10 + years can have a salary of 100K to -135K but then not much commission and it is is more of a managerial type role at that time .

    No contributions made to SEP yet .

    The CPA mentioned she does not know much on contributions for the different options but to talk to a broker at one of the banks.

    She mentioned she is NOT an aggressive CPA whatever that might mean.

    NO backdoor ROTH options mentioned .

    HSA has been funded for the year for a High deductible plan. Bus mileage ect goes through an accountable plan that has been set up .

    We did not expect to earn this much in the last 2 months hence the situation we are in .

    I feel fortunate to be in the situation there are other that are far worse . 😀

     

     

    #170638 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    Do you and spouse do the same work for the Corp? Or is there some differentiation between your duties?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170643 Reply
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    Yes the same duties essentially that involve the day to day operation of the business .

    The only difference I see (haven’t given it prior thought ever)  spouse does more overnight travel to client engagements / or candidate meetings that are further away .

    Spouse also does a little more of the  direct  Business development  – face to face selling of our services to attract the client.

    #170647 Reply
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    ajm184 I thought there are no employee contributions on the SEP as per table below only Employer or is the employee able to contribute as well as well.

     

    Reply to your comment below.

    ” ajm184  “Guessing I’m wrong but thought a SEP employee contribution amount was the $12.5K, though allows an employer contribution of 25% of gross income upto a $54 or $55K total annual contribution limit?”

    Employee Contribution Limits:
    • Not applicable
    Employer Contribution Limits:
    • Lesser of 25% of compensation or $55,000 for 2018.
    • Employer is not locked into making a contribution each year and can decide whether and how much to contribute to employees’ accounts (Note: if employers do contribute, must contribute for all participants who are enrolled in the plan)

     

     

    #170651 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    ajm184 is incorrect, SEP contributions are employer only

    I think the first question to be answered is whether an S corp vs a qualified joint venture makes the most sense from a tax perspective for your business. I would take a stab at the comparative numbers but there are smarter people here and I’m not a CPA so I’d rather someone else try to figure that. It comes down to a comparison between the two of the applicable FICA tax costs, allowable contributions to a qualified retirement plan (a solo 401k is likely a better option than a SEP IRA), and section 199a QBI deduction.

    Also may matter what state you’re in as some states levy additional fees on S corps as opposed to a sole prop or QJV.

    You are certain to get more into a retirement plan as a QJV. At least at the level of salary you’re paying now.

    @jfoxcpacfp @spiritrider ?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170661 Reply
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    We live in California .

    #170673 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6148
    Joined: 01/09/2016

    They do not qualify for a QJV (imo) as the purpose of a QJV is for a specific task, project, or business undertaking that is not permanent (a “venture”) as opposed to a continuing business. I realize some people use it for more permanent activities, but I believe that subverts the purpose. They do, however, qualify to be a partnership. With a partnership, no payroll is needed and all profits flow through. Given the projected income of this business, that is probably what I’d recommend, along with the solo-k.

    Do I understand that this is the 1st year of the business? You can dissolve the corp in 2019 if you want (too late to undo all of the payroll) and change to a QJV if you want. You will file 2 separate schedule C’s on 1 tax return. You need to have a deep discussion to have with your CPA about all of these issues.

    By saying she is “not aggressive”, that probably means she is very interested in CYA rather than finding legal ways to save you taxes, but that’s just my impression of the whole situation

    Actually, @spiritrider just quietly corrected me (because he’s a gentleman  😳 ) on the above. A QJV sounds like exactly what you need – I was totally confused and jacoavlu was 100% correct.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #170675 Reply
     ajm184 
    Participant
    Status: Other Professional
    Posts: 473
    Joined: 07/14/2017

    The CPA mentioned she does not know much on contributions for the different options but to talk to a broker at one of the banks.

    Click to expand…

    This is an issue IMO. It sounds like you have a CPA who doesn’t work with small business alot or exclusively within their practice.  Not saying they should be providing financial advice, but knowing the basics of retirement plans/limits/some rules in conjunction with business types should be a staple of a small business CPA practice (in addition to payroll stuff).

    If you feel differently, please come back with numbers to support your C Corp comment.

    Click to expand…

    Not necessarily numbers, though setting up a c-corp is not terribly complex; incorporation cost me $700 to $1k (get the TIN here), $75/year bribe to the State of Illinois for a Certificate of good standing, $300/year for preparing/ filing a corporate tax return, $30 for some corporate checks and off you go. Did my own payroll, tax payments and solo roth 401k.

    All the above being said, given OP is in the placement profession (grats btw on killing it this year), I would not be very gung-ho on going the C-Corp route in this case, unless there are thoughts of expanding (adding employees).  Professional placement I’m guessing is fairly volatile from an earnings standpoint.

    #170681 Reply

Reply To: New business owner – currently only have SEP set up what other options are there

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