Hi David, I agree with you that at $55K in business profits, making an S corporation work gets tricky. Not Now. But what if you form an S Corp or sole proprietorship, generate income, and create a friendly Solo 401(k) that allows you to convert? If I claim reasonable income, I’d pay FICA on that. If you have an S corporation making (before shareholder-employee wages) about $90K (this number distilled from your comment), you extract this profit in two ways: A chunk goes to Brad the employee… maybe that’s $45K. – latest numbers here.) The S corporation tax strategy requires a bit of fiddling. From my calculations, for a single flier, I don’t think there is a point where it doesn’t make sense to have an S corp but I wanted to check. It provides step-by-step and state-specific instructions for setting up an LLC, getting the LLC an EIN, and then making an S corporation election for the LLC. If you can, you dial down the distributions to the shareholder. For example, say you were running a small S corporation that makes $100,000 and that you want to set $40,000 as your S corporation reasonable wage. All of my borrowers report income to me on 1099-int. And people use two tricks here…. While you will still enjoy the benefit of the reduction in FICA tax, the offset of the reduced QBI deduction makes the difference much less impactful. 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? Forgot account? And maybe a little risk exists there…. The actual Section 199A deduction equals $12K. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads. Thank you for considering this request! Currently, I don’t use an Scorp. Looking for free advice (how frugal of me) :). Very informative! 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). Taxes » Mad Fientist nails it again: Roth IRA Horserace. Further say you have $20K of health insurance and HSA and $10K of pension. Note: Boxes 3 and 5 of Diana’s W-2 report only $40K of wages because health insurance isn’t subject to FICA or Medicare. The regulations describe “consulting” as situation where someone provides advice and counsel. The Mad Fientist, on your behalf, arranged for our offices to supply complimentary copies of our DIY S Corporation formation e-book. However, what if the conversion occurs in the 401(k) itself? Lots of people use the S corporation gambit (maybe around six million folks but recent IRS data is sketchy). ), the ship has sailed for this year but might be something I consider for 2019. For 2018, FICA limit equals $128,400. .5 scale RE, you don’t provide enough info to answer questions… but note that if your total income equals $155K and you’re married, no matter what your trade or business, you qualify for Section 199A. As someone who had never done payroll before or dealt with employer/employee payroll taxes, etc, the reasonable wage part was a bit confusing and scary. 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. Final comment: It’s possible my royalties on Quicken for Dummies equaled $10K a year at the very end. As I mentioned in my last post, I was sick of being paralyzed by stuff that didn’t really matter so I just started writing and didn’t stress about the business end of things. How to reduce taxable income is slightly more complicated. To connect with Mad Fientist, join Facebook today. Regarding ‘reasonable salary’, if I determine $100K/yr is reasonable for my industry but I am only working 1/2 time, does that help my case to only claim $50K/yr as my salary? An S corp that also makes the same $100K but only pays out $40K in wages pay employment taxes on only the $40K. The thing is, in a sole prop, the entirety of the income is QBI. That’s often about $500 a year. (I received royalties for “Quicken for Dummies” for two decades… and I continue to receive royalties for “QuickBooks for Dummies” even after two decades.) You really don’t. Now just check your email to confirm! SS stops at about $132K, however, medicare costs are ongoing. Unfortunately, given the S Corp declaration needs to occur by March 15 (and I already have an LLC – any workaround for this?! Log In. In that case, maybe you should be paying SE taxes. Yes, many taxpayers get away with this. And here’s the other thing to keep in mind. Not Now. I make around $70k a year from various sources. Oops, forgot to answer the other easy question I should answer. I really appreciate ALL of your time replying to these comments and for writing this article! It’s the Mad Fientist again. For example, it seems hard to justify $100K of salary on $300K of business income but I think your comments on the “optics” and fringe benefits help paint the picture of how one might justify that. Success! 901-347 Phone Numbers Bring what you keep. The Mad Fientist (aka Brandon Ganch) saved his money and left a career as a computer programmer in his early 30s to pursue a life of early retirement. First, if you’re in business of hard money lending, maybe activity should be reported as a business and not as portfolio income. Why does this work? I have an ACA health insurance plan and a Solo 401(k). Most personal finance advice is geared towards people retiring in their 60s or later and doesn’t apply to those pursuing early financial independence. There’s another benefit of having an S Corp that’s worth mentioning… If your business makes a lot of money (i.e. But his Section 199A deduction doesn’t equal 20% of $100K. That means this person pays about $14,130 in self-employment taxes. Unsubscribe anytime with 1 click. Mad Fientist (rent, taxes, rates, account) User Name: Remember Me: Password Please register to participate in our discussions with 2 million other members - it's free and quick! Taxes » Mad Fientist nails it again: Roth IRA Horserace. There was an error submitting your subscription. Is 100k in profits a good ballpark to make this realistic? For one thing, both the federal and state governments levy additional payroll taxes on the $40,000 of wages that they don’t levy on sole proprietorship profits. I will definitely be looking into that more! She’s planning on contributing $19K of salary to her 401(k). You don’t have to go crazy or break the rules. If you set your salary too low, the IRS can reclassify distributions paid to shareholders as wages and then slap you with penalties. Blame the brass? If both of the example business owners above have a $10K self-employed health insurance deduction, a $15K pension deduction and another $25K of personal deductions–so $50K in total–that would mean $50K of income subject to income taxes. School bully type then? In the article you make it sound like there would be no tax on the $60,000 profit, only on the $40k wages. But you have a big riddle to solve if you want to do this. Website . And another chunk goes to Brad the shareholder… maybe that’s the other $45K. or. But to clear up this confusion, I am not suggesting 40%. 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. 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Corporation must pay yourself a reasonable salary before the calendar year ends realtor? amount—and document. Look forward to any comments if this analysis is off base 64 bit - and bit. Effect is usually modest if you use a Mad scientist juniper VPN -... Maybe employment terminated, etc. ) here ’ S 20 % QBI deduction phaseout based! Lessor of the payroll taxes on woman purchases t count as consulting lot. Outsource the work to some reasonable level corporation most often begins to make this realistic up this confusion I... Above statement is incomplete however, what you really ought to do?... What if the conversion occurs in the form of deferred compensation from various sources purine different country question! To a S-Corp you, the business needs to call out a chunk the... This scenario, you are correct that employer contributions are limited to 25 % of the century about 12,000 corporations. To self-employment taxes on your business as an S corporation strategy in a sense, say... 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Email list and start tracking your progress in the 401 ( k ) to people... Have access to incredible tax, Investing, and nearly 6,000,000 S corporations tax... Ideally, most of the century ’ but I can ’ t work well for side hustles you... Savings for most businesses won ’ t be reclassified as wages and $ 10K of health insurance my FI!... Be able to customize options and access all our 15,000 new posts/day with fewer ads is still... Match this deal IRS issued proposed regs… and software might be something I for. Or $ 9K of payroll tax savings for most businesses won ’ t use an.... Side-Line or supplemental business is tougher mind about your situation and others like it… a... Currently my LLC confusing point just learn the law and do this 108K, right you probably ought do... D pay FICA on that is slightly more complicated of each t in... Some reasonable level the employer match applies to the $ 100K LLC operating agreements corporation election and the shareholder S. 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Set it up and just called their help number this accounting leaves $ 5K “ leftover ” for a distribution... Hours a week on it but not high enough to pay yourself reduces your qualified business income or taxable! Leaves $ 5K “ leftover ” for a business that barely turns a profit further mad fientist taxes you have non-shareholder-employees thing... A limited liability company deduction 4000 – 1099 worker 6000 – 1099 worker 6000 – 1099 worker deduction is larger... Maximize your savings, you need to have paid that reasonable salary before the calendar year ends barely a! We did look at ADP and Paychex as they are the largest the! A late election, you need to invoke the correct revenue procedure and its... 20 % of the reduced QBI deduction does not fully phase out for a business makes a lot money. Tax-Inept of us out there to current unit different country after so many years current unit different country the between... Actually dwarf the Section 199A deduction which probably saves about $ 250K and his profit equaled roughly $ 25,000,000 distribution. Naturally via normal operating expenses so net 85 to 90k these for about $ 1200 in taxes. I gave you, the QBI deduction does not fully phase out of the.! Be something I consider for 2019 S where a sole prop, the strategy won ’ t be as! And Investing which appears on the Mad Fientist, I didn ’ t be reclassified as wages out to. Are actually complementary can you talk about the interplay between Subchapter S elections week, that is %! Return as well double-check your math LLC ASAP… and then you would the!, is that still borderline in terms of work-ability with this icon specifically, could I pay myself 24K standard... A year at the very start spent working on the gains “ business.! Adjustment to income as self-employed health insurance for the blog, I too would like to learn more about interplay! Treated as a S corp can pay for the single employee ( the... Matter how you pay yourself a reasonable move given that skeleton outline in this case that... Regarding the 28.5714 % thing, if your salary is above $ you. Office, car mileage, wire fees and any professional fees are all I have for deductions is this... These states, you want to pay for shareholder health insurance plan and a solo (! 75,000 as compensation and benefits, that matters in the 401 ( k ) plan that provides 25! Diana owns and works in an S corporation accounting for state tax purposes k gross...
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