That second trick? If you’re not yet ready to elect S status but you are ready to set up an LLC, therefore, just postpone the step of making the S election. In either case, that extra accounting costs time or money or probably both (as a guess, maybe another grand for a small S corporation if you outsource the work?). The Mad FIentist is one of the most intriguing people in the financial independence blogging realm. Mad Fientist did you a solid on this! Jaco said, “In an S corp, the QBI deduction is 20% of profit …”. I know it violates the “optics” principle, however, I feel this could easily be justified to the IRS since the time spent in the business is so minimal. The DIY kit also includes sample LLC operating agreements. My question is about the S Corp paying the health insurance for the single employee (and their family). Great article clearly explained for the tax-inept of us out there. Great article Steve! 5. And you need to have paid that reasonable salary before the calendar year ends. Optics matter (in a sense) to the IRS computers trying to pick out the 12,000 S corporation tax returns the IRS will audit and to the hundreds of IRS auditors auditing those returns and trying to decide whether someone’s salary is reasonable. Second thought: If activity isn’t a business, it probably doesn’t make sense to use accounting you describe. I am an independent consultant organized as an LLC. Minimizing shareholder wages also minimizes the FICA and Medicare taxes paid directly or indirectly by the shareholder. It’s the Mad Fientist again. 6. Two thoughts come to mind about your situation HardMoney. Really late, but revisiting because it’s tax time…. And it meshes with the averages pretty well. 15,417 people follow this. Let me issue three cautions before I wrap this up. But here’s where a second trick comes into play. 4000 – 1099 worker The big complicating issue you have with a late election is you’d need to pay Dan the employee reasonable wages between now and the end of the year. I’m an independent consultant (LLC), and will earn ~$135K next year working 1/2 time (about 1000 hours billed for the year). I thought the 100k was profit after deductions. This is because I believe that vanilla Roth 401k contributions are not subject to the five year rule, so long as they are rolled over to a Roth IRA that is five-years old. In this case, the corp treats both the $40K and the $10K as wages and reports $50K in box 1 of Diana’s W-2. Hi Elton, the S corporation lets you avoid self-employment taxes (aka payroll taxes) on some of the pension fund contribution, your self-employed health insurance and on the amount of business profit not counted as wages. Long story short, I recommend to just outsource it. Explaining that “toughness” requires 500-1000 words… but it boils down to way FICA savings work when you more than one W-2 job and the optics of the 1120S tax return which spotlight your S corp wages and your S corp distributions. Could a Sep IRA or Solo 401k get around the employer’s 25% limit on 401k wages Brad references above since our other income streams do not have any other retirement benefits? Section 199A of the Tax Cuts and Jobs Act of 2017 is the biggest tax break of the last 50 years so find out how to take full advantage of it! 2. A third final comment: We have a giant S corporation tax practice. We did look at ADP and Paychex as they are the largest of the payroll outsourcing companies. I think most smart people are trying right now to figure out how to do the opposite of this article – to dissolve their S corps and get back to a sole prop, or form a partnership. Further, an S corporation burdens you with additional tax accounting. Over a year-and-a-half and two million plus downloads later, the Afford Anything podcast has hit another awesome milestone: the 100th episode! He is wrapping up a ... (e.g. Form over function? 30k – I pay myself The Mad Fientist analyzes the tax code and looks at personal finance through the lens of early financial independence to develop strategies and tactics to help you retire even earlier. The idea is the business would pay for itself initially and we would mostly work for the retirement benefits with one employee taking a taxable annual salary of no more than $12,000 and the other no more than $4,000 until the loan is paid off. Join over 100,000 others on the Mad Fientist email list and start tracking your progress in the FI Laboratory! That’s too expensive. Hi – I’m revisiting this article as I reflect on my decision to convert to a S-Corp and comparing rough pro-forma taxes as both a S-Corp and LLC in the State of Ohio. If so, did the IRS give any pushback or try to impose the 10% penalty? If your business makes a lot of money (i.e. But according to every accountant I have worked with, that $60k still flows to your 1040 and you end up paying taxes on it anyway. Withdraw Roth IRA conversion amount, which is treated as a Roth contribution. But say they did.) Jim, it’s possible that your book royalties wouldn’t be business income at all and therefore not subject to SE tax in the first place. On Diana’s 1040 tax return, she reports $50K as her wages subject to income taxes… but she probably also takes a $10K self-employed health insurance deduction. Can you make the credit apply for you LLC resource (instead of just the S-corp) for those of us who need to start with that step? I was so satisfied I will not even ask him to price match this deal. I haven’t run the numbers but this might help. And in this case, that 15.3% tax (now Social Security and Medicare taxes) only applies to the wages. No separate office, car mileage, wire fees and any professional fees are all I have for deductions. Another example? Since the royalties are ~2/3rds of the revenue, using 100k as an example: 67k = Royalties Create New Account. The biggest problem, however, is the 5-year waiting period, so you have to have a decent amount of post-tax money already available in order to optimally execute on this strategy. Regarding how to approach the question of incorporating your business, you’d need to determinate what your reasonable compensation amount is, look at any nontaxable fringe benefits you can provide, and then calculate your payroll tax savings. That sequencing may increase the Section 199A deduction. Is 100k in profits a good ballpark to make this realistic? For these states, you need to double-check your math. ), the ship has sailed for this year but might be something I consider for 2019. But here’s the way this works now (and the way it’s worked for years). And here’s the other thing to keep in mind. His qualified business income equals $60K. This is a great post. Factors like the hours required and worker skill matter play into this. Unfortunately, given the S Corp declaration needs to occur by March 15 (and I already have an LLC – any workaround for this?! I’m still a little confused. Roughly $600-ish of savings? I’ll contribute the full $55K to my solo 401(k) along with about $4K to an HSA. Regarding optics, I think they *do* matter. I kept track of my business expenses in a spreadsheet and when tax time rolled around, I just filed a Schedule C for my Sole Proprietorship and used those business expenses to reduce my W-2 taxable income. More Articles → Latest Podcast. Dan, I think high five figures is where an S corporation most often begins to make sense. as part of your wages. Not Now. Military FIRE – The Tax, Investing, and Travel Benefits of Military Service. If you’re paying the average, you are pretty boring to the IRS’s computers. In your opinion, is that still borderline in terms of work-ability with this approach? If you use a Mad scientist VPN you can sometimes avoid paying taxes on woman purchases. About See All. Any limitations there? Same thing for HSA contributions if applicable. And I would say the S corporation election and the Section 199A deduction are actually complementary. In this case is it worth it? Regularly S corporation owners go ape when setting their salaries. 15,537 people follow this. (This point gets missed by most people who wonder about dissolving an S corporation.) Great article, as I was just recently researching this topic – thank you! Convert portion of tIRA during period of no/low income (taxed at reduced rate) to Roth IRA. Create New Account. Join over 100,000 others on the Mad Fientist email list and get instant access to my FI Spreadsheet! Log In. If you've enjoyed the last 9 years of ad-free content and want to say thanks, here's how →, Why You Should Form an S Corporation (and When). In this case, the business needs to call out a chunk of the profit as wages. Website . Along the way on his blog and podcast, he shared the spreadsheets, techniques, and insights that allowed him to achieve financial independence sooner in life. Thanks to Steve for making these free for Mad Fientist readers and be sure to get your state’s kit before the end of the year because the code will expire on 12/31/2018! Why I think high five figures is where an S corporation thing work for a flier! Does the drop off in savings still make S corp or other LLC be set up a Texas LLC and! Directly or indirectly by the shareholder the taxpayer pays too much payroll tax savings you the. Quickly and efficiently as possible that employer contributions are a deduction in the of... 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