I was talking to another physician entrepreneur recently about his tax situation when we realized I had a significant tax advantage over this other doc. The reason why is that, as a partner, my clinical income is paid on a K-1 whereas this other doc, as an employee, sees his clinical income come in on a W-2. We both have S Corps for our entrepreneurial ventures. So what's the big deal? Well, as the CPAs in the audience know, the difference is over $8K in Social Security taxes. Let me explain.
Double Social Security Taxation
The idea behind Social Security taxes for a high earner is that you only have to pay them on the first dollars you make each year, $137,700 in 2020. After that, Social Security taxes go away. Medicare taxes are assessed on all of your earned income, so we're really only talking about Social Security taxes here. Social Security taxes have two halves, the employee half (6.2%) and the employer half (6.2%) that add up to 12.4%. 12.4% * $137,700 = $17,074.80, of which $8,537.40 is paid by the employee and $8,537.40 is paid by the employer.
This is no big deal if you don't make more than $137,700. You just pay Social Security tax on everything. It's also not a big deal if you make more than $137,700 at a single job. After $8,537.40 has been paid for the year, no more is taken out of your paychecks and the employer doesn't have to make any more payments either.
But what happens if you have TWO W-2 jobs and you make $150K at both of them? Well, it turns out that EACH employer will withhold $8,537.40 from your paychecks. EACH employer will also pay $8,537.40 from their own pocket. Well, that's not fair at all is it? No, it isn't. And luckily, despite the fact that life isn't fair, Congress and the IRS have made a provision where you can get back the extra money you had withheld from your paychecks for Social Security. It's called Line 11 of Schedule 3 of Form 1040 and it looks like this:
No big deal, right? That seems fair. However, guess what isn't fair? The employer is hosed. Congress and the IRS don't seem to care about employers as much as employees. Maybe they don't have as many votes or maybe it's just a bit of “socking it to the rich” since business owners are likely to be richer. So while the employee can get their $8,537.40 back, the employer cannot. It's gone. No way to reclaim it. Sucks to be the hospital right? But what if YOU WERE the hospital? How would that feel?
Well, that's the situation you are in if you are paid on a W-2 for your clinical work and you are an S Corp for your entrepreneurial (or even side-gig clinical) work. S Corps pay their owners both wages and distributions, but payroll taxes (Social Security and Medicare taxes) are due on just the wages.
Normally this is a good thing and the reason people form S Corps, because if you are a sole proprietorship or a partnership you have to pay payroll taxes on ALL of your income. But the way sole proprietorships and partnerships pay this (essentially as a “self-employment” tax at year-end on Schedule SE that flows into line 14 of Form 1040) ensures you don't overpay the employer half of Social Security tax.
With an S Corp, you pay this differently, on Form 941 that you file each quarter. Now YOUR S Corp is the “hospital that is getting hosed” having to pay extra Social Security tax.
So in my case, with my clinical K-1, my S Corp W-2, and my S Corp K-1, the employer half of SS tax is only withheld once. But in this other physician entrepreneur's case, that tax is withheld twice. He's basically out $8,537.40. I guess it's not quite that bad, since that tax is a deductible business expense, but it still stinks to pay.
Mixing In Retirement Accounts and the 199A Deduction
Things get even more complicated when you descend into the pit of despair that is figuring out the best way to maximize the 199A deduction. This massive deduction for a pass-thru business (qualifying sole proprietorship, partnership, or S Corp) owner is well worth making changes in your financial life for. But there were already many factors at play in this calculation BEFORE the extra Social Security taxes folks like my physician entrepreneur friend have to pay came into the equation. These include:
- Making sure your salary is high enough to be reasonable per IRS guidelines
- Making sure your salary is high enough to max out retirement accounts
- Ensuring salary is high enough to maximize the 199A deduction
- Making salary as low as possible to minimize Medicare taxes
If you don't have a good grip on how the 199A deduction works (which frankly is most of the people reading this post), you should probably brush up on that first. In fact, I wrote a great post a year ago that discusses the four factors above that is probably worth reading first.
Don't forget that with the 199A deduction it matters whether you are below the first 199a phase-out limit ($163,600 single, $326,600 married for 2020), above the second limit ($213,300 single, $426,600 married) or between the two limits. And if you're above the first limit, it matters whether your business is a specified service business like medicine or law.
I'm not going to reproduce that post today, but if you have no idea why our salaries as WCI owners are set at approximately 28.6% of the sum of our salaries and the ordinary business income, you should probably go back and review the post. Basically, that % is where we minimize Medicare tax while maximizing the 199A deduction.
The method doesn't necessarily change if you have another W-2 job as we are discussing in today's post, but it does make the benefit much less significant. Now, every additional dollar you pay in salary/wages as an S corp owner without non-owner employees to try to increase the 199A deduction, at least up to $137,700 in 2020, means you're not only paying additional Medicare tax, but also the much larger Social Security tax.
Life Above the Upper Phaseout Limit
So let's say you make $500K at your W-2 job and your S Corp salary is $50K and you decide to pay yourself an extra $10K in salary in order to increase your 199A deduction. This increases your 199A deduction by $5K and if you have a marginal tax rate of 37% like I do, that would save you $1,850 in federal income taxes. But that $10K increase in salary would cost you more in payroll taxes, 2.9% for Medicare and 12.4% for Social Security for 15.3% total. Of course, half of that is deductible at 37%, so really it's 12.47%. 12.47% of $10K is $1,247. This move, while good, is not nearly as good as it would be for me who only has to pay the additional Medicare taxes. Instead of only coming out $603 ahead, I'd come out $1,614 ahead with the same change.
Once you get above the $137,700 wage limit, it would be exactly the same, of course.
Life Below the Lower Phaseout Limit
Now, if your taxable income is lower, below the lower phaseout limit, you're not playing this game anyway because the 199A deduction is not subject to the 50% of wages paid test. In that case, increasing your salary not only increases your payroll taxes, but also decreases your 199A deduction because it decreases your ordinary business income. These folks now have even more incentive to keep their salary as low as possible.
Now your biggest concern is likely your retirement accounts. Minimizing your salary is great, but the lower the salary, the less you can put in retirement accounts. Plus, any “employer contributions” into those retirement accounts reduces your ordinary business income and thus your 199A deduction just like paying additional salary.
The best workaround is likely doing employee contributions plus Mega Backdoor Roth IRA contributions, although this might involve getting a new retirement plan and even a professional to help you make sure you're doing it right.
Life Between/Around the Phaseout Limits
To make matters worse, lots of docs are actually right around or between these two phaseout limits. If you thought life was complicated above or below the limits, you had no idea. Now you actually want to use lots of tax-deferred accounts to try to get your taxable income into the range where you can actually take the 199A deduction and have as little of it phased-out as possible. That might mean paying yourself a larger salary in order to contribute more to get your taxable income down!
Holy Cow Batman! Good luck planning that all out in advance. Better to grow that side business above the phaseout limits as soon as you can just to make tax planning easier!
What To Do If This Is You
So what should you do? Well, the first thing to do is get yourself out of this situation if you can. Consider changing jobs to a partnership job if possible.
You could even try to talk your employer into hiring you as an independent contractor, but make sure you get paid enough more to make up for the loss of benefits. Be sure to sell them on the fact that they won't have to pay those extra SS taxes so that amount can be paid to you as salary instead. This will eliminate the “double Social Security taxation” issue. Of course, it also takes you from having two unrelated employers to just one, which means you only get one $57K 401(k) limit.
Probably more realistically, figure out where you stand in relation to the phaseout limits. If you are well above both limits and not in a specified service business, go ahead and just pay yourself the higher salary even though the benefit isn't as much as it is for someone else. If you are below both limits, try to keep that salary low, even if it means less retirement account contributions. The savings you get with the 199A deduction and the lower Social Security taxes probably makes up for the retirement account benefits. Whether well above or well below the limits, Mega Backdoor Roth IRA retirement account contributions are likely a good move.
If you're in the middle, and especially if you are in a specified service business, try to forecast things as accurately as you can to make the best decision and give serious consideration to tax-deferred contributions.
What do you think? Are you paying double Social Security tax? Are you struggling with how to set your S Corp salary or whether to form it at all? How did you determine how to set your salary? Comment below!
First, thank you for everything, you have completely changed my financial life over the past 5 years. I own my own practice taxed as an S corp. I am a little confused about the phaseout for the 199A deduction even after reading your other posts. So is the taxable income subject to the 199A deduction phaseout calculation based just on my profits paid out at K1 distributions? Or is my W2 from the company also calculated in the wages paid for 199A deduction phaseout calculation? Previously I wasn’t worried about this as I thought it was total wages (W2 and K1 combined) which would have phased me out this year. However, after this article, I am thinking maybe just the K1 is what matters and the highers my W2, the closer I might be to actually getting the deduction! Quick example, say the companies profits are $500K but my salary is $200K, leaving $300K in K1 distributions. As a married physician would I fully qualify for the 199A deduction or be completely phased out? Thank you!
For specified service businesses in 2020, the 199A phaseout occurs between a taxable income of $163,300-213,300 ($326,300-426,300 MFJ)
Since distributions and wages count toward that taxable income, a doctor with a taxable income of $500K isn’t going to get a 199A deduction no matter how she divides it up between wages and distributions.
This deduction is for relatively low paid doctors married to a non-earner who own their own practice and for people like me who make a lot of money doing non-doctor work and pay wages to employees. I have no idea what you make, but if you can’t get your taxable income under $426K, you’re not going to get much of a deduction.
This stuff makes my head spin.
I wonder if the 199A deduction will survive a change of power in DC or if it is even on the radar.
It’s already scheduled to sunset in 2025 as I recall. Enjoy it while it lasts. Who knows who will be in power in The White House and the halls of Congress in 2025?
Isn’t your blog a SSTB under the TCJA, disqualifying you from the pass through deduction due to MAGI limits, as it relies primarily on the reputation of you and your writing? Please correct me if I’m wrong.
I disagree that the revenue of this site primarily relies on my reputation or my writing. After looking into it carefully, we determined it was not a specified service business. Perhaps my speaking gigs could be, but they’re a nearly irrelevant portion of the revenue.
If two physicians both w2 full time making over 250k and side gig around 50k as S corp with no other employees yet , is there a need to change to LLC or solo instead ? We are planning to hire an MA soon. It appears that the scorp as been very beneficial for us so far. Would it be better for one of us to be 1099 instead?
Is there a “need”? I guess not. You can do that. It just costs you more in SS taxes.
I’m not sure why you think the S corp is so beneficial for you so far. Why do you think it is because I wouldn’t bother forming one for an entity that made $50K? Way too much hassle for way too little benefit in my view.
Just started doing some locums work and trying to understand how to handle the additional income. I am a W2 employee making an additional 50k-75k as an independent contractor on the side. The more I have read into your related articles, it doesn’t seem that would be nearly enough to warrant starting an S corp. Regardless, I will still be responsible for the full 12.4% payroll taxes come years end with no credit back? Also, even though I max out my W2 employer-sponsored 401k, I can still open a solo 401k and contribute 20% of 1099 net wages?
Yes, open a solo 401(K), but I wouldn’t incorporate so you can avoid paying SS tax twice.
I am in this process and figuring things out as I go. Wondering what your thoughts are. I am employed and working as an independent contractor. I spoke to some people and decided to incorporate. Still not sure if that was best. Originally, I was going to keep my S Corp W-2 income low in order to avoid social security, but have changed my mind because of the SEP-IRA. In my employed position, I am maxing out my Roth 401K contributions and the employer is essentially contributing the rest in order to get pretty close to the $57,000 limit. My S-Corp SEP IRA will also be maxed at $57,000 and then I will convert to Roth as I go. If I calculated correctly, it is still worth it this way because I will end up with some pretty significant tax free growth since it will be another 20 years before I can touch my retirement money. The goal is to do this for the next 5-10 years. It seems like a lot of tax now, but there won’t be as much later. What are your thoughts?
Why are you using a SEP-IRA instead of an individual 401(k) + Backdoor Roth IRAs (although converting the SEP-IRA to a Roth each year may fix that issue)
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Also, why Roth 401(k)? That’s usually not the right move for a doc in peak earnings years.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
But I agree that incorporating is going to cost you some serious cash paying a second employer SS contribution. That was the point of this post.
Thanks for the response! I looked at SEP-IRA vs individual 401K. I actually used your post to decide:
“That’s a lot of advantages. Yet I have used a SEP-IRA several times and have never opened a Solo 401K. Why is that? I never actually needed any of these advantages. If you’re already maxing out an employee 401K at one job (or make more than $254K), don’t need a loan, don’t want to use Roth options (or convert all your SEP-IRA contributions to a Roth IRA), and are under 50, why not choose the simple and easy option? You can always roll the SEP-IRA over into a solo 401K if you change your mind.”
I already maxed out Roth 401K contributions (TSP before I separated from the military last year) and was planning on converting the SEP IRA into a Roth IRA, so I used the simple and easy options.
The Roth 401k decision was mainly because of the time I have left to invest and the fact that I haven’t been in a super high tax bracket until this year. I still need to sit down and do the actual math. Even with the higher income last year, I paid less than 20% in actual taxes. I also worry about higher taxes later, depending on the day. I will have to look at your post and see.
Thanks again!
Okay, sounds like you know what you’re doing.
Only enough to be dangerous and I am still just learning about all of this. Your website is super helpful and I know a lot of my colleagues come here for counsel. The question I am facing now has to do with setting my salary. Of course setting a reasonable salary, do I try and set it lower and pay less employment taxes or set it high enough to max my SEP IRA employer contribution? And still sorting out the Roth vs pre tax assignment.
I read your post and the link to the Finance Buff. Neither of you addressed the tax on the earnings in the retirement accounts, which isn’t addressed in the marginal tax rate. It seems to me like the question is weighing the tax dollars now on the investment vs the tax dollars later on the sum of the investment and the earnings.
What are your thoughts?
Thanks again. I really appreciate your website. This is stuff that nobody every tells you when you are training.
B
Lots of factors there, right? Even worse now with the 199A deduction. More discussion here:
https://www.whitecoatinvestor.com/how-much-should-you-pay-yourself-as-salary/
https://www.whitecoatinvestor.com/section-199a-deduction-qbi-and-retirement-accounts/
https://www.whitecoatinvestor.com/section-199a-deduction-qbi-and-retirement-accounts/
https://www.whitecoatinvestor.com/section-199a-deduction-qbi-and-retirement-accounts/
It’s almost never about weighing tax dollars if you do it properly in these discussions. It’s about tax rates. For most docs, you’re already maxing out SS taxes (I don’t think I’d pay myself less than the $137,700 2020 cap on that), so you’re really weighing Medicare tax vs more retirement contributions + possible 199A deduction. Obviously no point in a higher salary than you need to max out the retirement account and get any potential 199A deduction. Bear in mind you need less salary to max out an i401(k) if you can use the employee contribution.
“Normally this is a good thing and the reason people form S Corps, because if you are a sole proprietorship or a partnership you have to pay payroll taxes on ALL of your income. But the way sole proprietorships and partnerships pay this (essentially as a “self-employment” tax at year-end on Schedule SE that flows into line 14 of Form 1040) ensures you don’t overpay the employer half of Social Security tax.
With an S Corp, you pay this differently, on Form 941 that you file each quarter. Now YOUR S Corp is the “hospital that is getting hosed” having to pay extra Social Security tax.”
I’m sorry but this is very confusing. Looking at the above, you said that the reason people form S Corps is to prevent paying higher taxes in the first paragraph, then in the one below it as noted above, you say the exact opposite. It seems to me that pass-through is pass-through is pass-through so I don’t understand what the issue would be. I am working part-time in a W-2 job, starting my own Direct Primary Care business with no income as of yet, but hopefully will some time by the end of this year. I did get legal advice which recommended S Corp for my business as being the best because the losses, etc would pass-through to my personal taxes every year. Was that advice wrong?
Well, that’s what the post is about.
People form S Corps to save on payroll taxes. But if your other job is an employee job, you’ll end up paying Social Security tax you wouldn’t otherwise pay if your other job were a partner job.
That advice you received could be wrong. You might be better off forming an LLC taxed as a sole proprietorship instead of an S Corp. Not enough info to know for sure.
I am a dental specialist working both a W2 job and a 1099 job for 2021. I was advised to incorporate by CPAs and elect for S Corp. However, it doesn’t make sense to me, though I am only beginning to learn this tax stuff. I will be earning about $150,000 at my W2 job and $150,000 at my 1099 job. I would be maxing out social security taxes this year at my W-2 job so the S Corps wouldn’t serve its purpose for me right?
W-2 plus S Corp isn’t my favorite because you end up paying the employer half of SS taxes twice. I wouldn’t form an S Corp in your situation. I’d just be a sole proprietor. I’d ask the advisor why they think you should be an S Corp.
Thanks for writing the post; it’s very informative. I have a w2 job and make $425k and also have a sis gig LLC and my accountant wants me to change to an S-corp. My wife and I run the business and have 4 employees (1 Full, 3 PRN). My accountant wants to put my wife on payroll as salary to save on SE taxes on earnings.
For example: Business income = $222k with $115k in expenses
She said by changing to an S-Corp will save approx $6k in taxes
Below is the breakdown she sent to me. Does this make sense for me to do? Thanks again for all you do!
Single Member LLC S Corporation
Income 222,175 222,175
Business Expenses (115,395) (115,395)
Officer Compensation (40,000)
Unemployment Taxes (393)
Payroll Taxes (3,060)
20% QBI (13,382) (13,382)
Additional Tax Return Required (500)
Business Profit 93,398 49,445
SE Tax on Earnings 15,088 –
Federal Taxes 17,171 17,889
State Taxes 4,293 4,472
Unemployment Taxes 393
Payroll Taxes 7,020
Additional Tax Return Required 500
Total Tax + Expenses 36,551 30,274
Savings as S Corp each year $6,277
I apologize for the mess of numbers from my previous post; it did not space out like I had it. Hopefully the below makes more sense.
Single Member LLC
Income 222,175
Business Expenses (115,395)
Officer Compensation –
Unemployment Taxes –
Payroll Taxes –
20% QBI (13,382)
Additional Tax Return Required
Business Profit 93,398
SE Tax on Earnings 15,088
Federal Taxes 17,171
State Taxes 4,293
Unemployment Taxes –
Payroll Taxes –
Additional Tax Return Required –
Total Tax + Expenses 36,551
S Corporation
Income 222,175
Business Expenses (115,395)
Officer Compensation (40,000)
Unemployment Taxes (393)
Payroll Taxes (3,060)
20% QBI (13,382)
Additional Tax Return Required (500)
Business Profit 49,445
SE Tax on Earnings –
Federal Taxes 17,889
State Taxes 4,472
Unemployment Taxes 393
Payroll Taxes 7,020
Additional Tax Return Required 500
Total Tax + Expenses 30,274
Total Tax Savings = $6277
Are you asking if your accountant’s calculations are right? I can’t really tell what’s going on, but I’m not convinced they are.
Assuming your wife doesn’t have another job, I don’t see much advantage to you tax wise in her working. You would owe SS taxes on her work whereas you would only owe Medicare tax on your income from the side gig. Better for you to earn all the money, at least from a tax perspective.
If that’s the case, then yes, incorporating would save you 2.9%* whatever you call distribution, $75K in this case. So a couple of thousand. Wouldn’t be worth the hassle of incorporation to me, especially since it would also cost you 6.2%*$40K.
I think the best option tax wise here is for you to earn all the income and not to incorporate, but I confess to not knowing exactly what is going on in the business, particularly with her income.
This article is very informative. Thank you! I own a single member LLC (taxed as sole proprietor) that currently earns $300K profit with no employee, and has two W-2 jobs earning a total of $250K. My wife’s W-2 job earns $100K. I regularly withdraw almost all the business earnings for personal investment. I’m expecting the business income to grow more in the coming years, and worry about increased tax burdens. Will incorporating my businsiness (S or C Corp) save any taxes? Should I pay myself a salary (doesn’t seem like I should from your article)? Thank you.
The fact that you also have a W-2 job would wipe out much if not all of the tax benefits of incorporation or even cost you money if you incorporate. That’s what the article is about. You can run the numbers and see where you’d stand, but I doubt it’ll pencil out for you.
Thank you so much for this post. My husband and are both full time physicians with W2 jobs. We also have a side gig s Corp that until recently was making less than 30k per year and no profit. We are expecting it to increase to 70k profit this year. From what I am reading, maybe we need to switch to a sole proprietorship? Or if we keep the S Corp, only pay one person a salary? How much could be disbursement from this if we did that?
The IRS rules are that you need to pay employee-owners a fair wage, but that’s a bit of a gray area.
If my husband is doing all the work anyway, would it be better for us to switch to a sole proprietor?
“Better” in what way? Tax wise? Probably, because you would save on those SS taxes. It takes a LOT of saved Medicare tax to make up for just a litlte extra Social Security taxable income.
Liability wise? Maybe not. Might want an LLC taxed as a sole proprietorship if the business has significant liability.
Thank you so much for writing in depth about this topic!
I wanted to ask you about our current joint filing status and see if this makes sense.
My employment situation:
– W2 job brings in $215k with $19.5k deferred to 401k
– 1099 job brings in $140k. I’m planning to set up a solo 401k
My husband’s employment situation:
– 1099 job brings in $120k. He is currently incorporated as a S-corp and is paying himself $100k yearly. We are also planning to set up a solo 401k for him
My questions are as followed:
1) Judging from this post I should stay as a sole proprietor and NOT incorporate as a S-corp to avoid the double SS taxation as mentioned. Is that right?
2) We both work in healthcare and will be limited for the 199A deduction. From this $140k sole proprietor income the most I can contribute to the solo 401k is $26021 and after all other deductions (~$30k) are accounted for (before his solo 401k contribution deduction), our combined taxable income will be around $400k which is right before the final cutoff for joint filing. I’m at a loss as to how we can calculate his ideal W2 salary (paid from the S-Corp) in order to balance the SS tax, medicare tax, 199A deduction, and his solo 401k contribution. From your previous post you’ve stated that the ideal % for yours was 28.6% but your financial situation is vastly different from ours.
Thank you in advance!
First of all, bear in mind there is a bill in Congress that will take away the main benefit of an S Corp. If it passes this entire article will be out of date.
1) Yes and that won’t change if the bill passes.
2) If this bill passes it will affect this decision for many people but not your husband since his main savings is SS tax not Medicare tax. But you’re right there is no perfect answer. The more he is paid the more he can put into the solo 401k. The less he is paid the less SS tax he pays. The SS tax is probably a bigger deal than the 401(k) contribution so I’d probably try to keep his salary as low as I could justify. Perhaps as low as $60K.
Naturally, the 199A deduction screws that all up. By maxing out retirement accounts you can keep yourselves below the final phaseout for that deduction. I guess the best thing to do is get some tax software and experiment a bit. Change the salary and retirement contributions and see which results in the lowest tax bill. However, you don’t really know what a retirement account contribution is worth in the long run since it’s really just deferring tax whereas avoiding SS taxes is a true tax savings (although at the potential cost of a lower SS benefit down the road).
You have good reason to feel a bit flummoxed. It’s complex and and requires you to know some things about the future that are still unknown.
I am a physician and a little unsure about the best path forward after reading your article. I have two sources of income:
-Independent Contractor through an LLC with an S election (taxed as an S-corporation) that makes $285K/year in wages and $285k/year in distributions
-W2 employee of a hospital making $150K per year
Obviously I chose to have my LLC taxed as an S-corporation in order to reduce my tax burden. But it sounds like you’re saying that this may instead increase my tax burden through social security double taxation. I have two questions:
1) Do you recommend that I choose to be taxed as a sole proprietor instead of an S-corporation?
2) Please explain how receiving income as a W-2 employee and as an S-corporation results in double taxation on me since the employer’s portion of the social security tax on my W-2 income comes out of the hospital’s pocket and not mine. Doesn’t that mean that I only pay the employer’s portion of the social security tax once (i.e., for the S-corporation)?
Thank you!
1. I’m not licensed as an accountant, attorney, or financial advisor in your state so I can’t make any sort of formal “recommendation”, but if I were looking at your concern, I would run the numbers. Are you saving more in Medicare tax than you are paying in SS tax? It looks like it comes out about even to me but I’d have to run the numbers to know for sure. It is pretty clear that you aren’t getting much benefit for having an S Corp in your situation, probably not enough benefit to be worth the hassle.
It’s easy enough to run the numbers (note that I’m doing it before taking the business deduction for the employer part of payroll taxes but since that affects both equally, I think that’s a reasonable simplification.)
$285K * 2.9% = $8,265 that you’re saving by having an S Corporation.
$147K * 6.2% = $9,114 that you’re paying in extra SS tax you would not have to pay if you were a sole proprietor.
So you’re coming out $849 behind before that deduction and maybe something like $600 behind once you take it.
2. You’re right that it technically comes out of the hospital’s pocket, but that means they can’t pay you as much as they otherwise could. Alternatively, you could look at it the other way. Your S Corp is paying the employer half of payroll taxes that it would not otherwise have to pay. That’s definitely coming out of your pocket.
If your situation isn’t going to change significantly in the next couple of years, you might want to go back to being a sole proprietor. This article is aimed at your situation.
I’m a bit confused after going through the article and comments in detail. It seems like I have to pay the SS tax as a S Corp no matter what. It’s only the IRS that stands to gain, rather than a loss from my end.
S Corps for docs are mostly about saving Medicare tax, you’ll almost always pay all the SS tax with or without the S Corp.
In the situation discussed in this post, an S Corp and a W-2 job, you (as the employer) may end up paying even more SS tax than “the max.”
Recently had a partner meeting where the S Corp question came up. We all are W2 earners making 600k. A new accountant said it is a no brainer for us all to convert to s corp individually. He advised to take 200k in w2 (so that we could still max out 401ks), but take the rest of our 400k salaries in ‘dividends’ to max out tax benefits. Thoughts?
Love the site
Overall I think he’s right. $200K seems a little low to me though. Can you really hire an employee to do your job for $200K?
Hi there,
Had a small question on the “Life Above the Upper Phaseout Limit” portion of your article. In it, you state:
“But that $10K increase in salary would cost you more in payroll taxes, 2.9% for Medicare and 12.4% for Social Security for 15.3% total. Of course, half of that is deductible at 37%, so really it’s 12.47%. 12.47% of $10K is $1,247. This move, while good, is not nearly as good as it would be for me who only has to pay the additional Medicare taxes. Instead of only coming out $603 ahead, I’d come out $1,614 ahead with the same change.”
However, if you had a $500K W2 job, then you’d have already paid employee payroll taxes up to the SS wage limit. In that case, wouldn’t the calculation be 4.82% of $10K = $482 since you’d be refunded the employee portion of the payroll tax from the portion of W2 income from your S-corp? So in that case, you’d come out $1,850 – $482 = $1,368? Or is there something I’m missing here…
You’re right that you would be refunded the employee portion, but not the employer portion.
Thanks Jim for all your content and info. I’m a Physician Assistant looking into starting an S-Corp side gig. Trying to figure out the taxes/cost/hassle/benefits. From a numbers perspective do you have a sense if it would make sense to start a S-Corp in this situation.
Currently our house has 2 sources of income:
1 (Me) a PA @ Hospital System W2 making 85K before taxes
2 (Wife) a PA @ ED Staffing Company W2 making 165k before taxes
Would me adding a second job of about 100K before taxes as an S Corp make financial sense?
Or would it be best to just eliminate my W2 job? Get insurance benefits through wife’s employer. And become fully employed by my S-Corp at 200k before taxes?
Thanks for your time.
More than doubling your income would definitely help your financial situation whether you do an S Corp or not. I’m guessing you’d still end up maxing out SS taxes so you’re just saving Medicare tax. Is it worth the hassle to you for something like $2,500 off your taxes a year?
The S Corp would be more beneficial at $200K, but whether you come out ahead or not depends on a lot like the value of benefits.