Discussion:S-Corp
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Discussion Forum Index --> Consumer Questions --> S-Corp
| 16 October 2006 | |
| I have recently submitted paperwork to elect S-corp status - have been sole prop. all year and just incorporated. The more research that I do the more I think I made a mistake. If all income passes through to me (I am the only officer) what is the advantage? Seems like I should have stayed sole prop. and saved the extra costs (Filing, CPA). Are there any other advantages to being S-corp? Anything that I can write off that I could not with sole prop? I will not have any losses and will generate 120,000 inc/year. I now cannot figure out what the advantages might be. I also can no longer write off my home office and utilities. Thanks for ANY advise. | |
| 16 October 2006 | |
| The big advantage to S corp over Sole Prop is the ability to reduce the amount of FICA/SE tax paid. As a Sched C business, all of the earnings are subject to SE tax. As an S corp, the shareholder-employee must be paid a reasonable salary but the profits remaining after payment of a reasonable salary may be taken out of the corporation as an "S distribution" (i.e., a dividend) which is not subject to FICA or SE tax. But as you have already learned, there is an administrative cost to that decision, in the form of payroll tax returns and corporate tax return that must be filed. In many cases, the tax savings will be sufficient to cover the cost of having those additional returns prepared for you and still leave you with a significant tax savings. The sword cuts both ways, however, because if maximizing a retirement contribution is important to you, dividends do not go into the earnings base from which retirement contributions are calculated. Thus, by paying out a salary less than 100% of corporate earnings (before the salary), you may well be reducing the amount you are eligible to put into a retirement plan. You should consider sitting down with a tax professional and looking at your specifics to determine what is best for you. | |
| October 16, 2006 | |
| Exactly. Go to www.salary.com and take a look at what a reasonable salary is for your job in that area. If it's 60k, you'll save near 6 grand in SS taxes, which more than cover the costs of being inc'd. Get some pro help. This is no area for amateurs. | |
| 16 October 2006 | |
| Yes, I am an amatuer! Thank you very much for your reply--Can I ask one more amatuer question?? -- To get this straight - As a sole prop. and earning income as an idependent contractor I would have to pay SE, FICA on the whole amount? The reasonable salary for my job is 74,000 -84,000 and I will probably shoot for 80,000. I will earn between 120,000 and 130,000. So the 40,000-50,000 that won't have that other 7.56% is where my savings comes in. I was told that I could contribute up to 44,000 in a single 401K. Sounds like I might be on the right track. I have met with a CPA but am trying to figure this all out before our next appt. in Dec. Can I pay the 401K out of earnings that do not get paid or distributed to me? | |
| October 16, 2006 | |
| You won't pay the SS/SE tax of *fasten your seatbelt* 15.3%! (you get to pay both employer and employee share) on the difference between the 80k and the SS ceiling, which is 94,200 this year, goes up every year. So 14k x 15.3% is 2k+, and then the medicare is what remains after the SS ceiling, that's 2.9% on all else, so in your case, you save 36k x 2.9%, which is another 1k+. Yes, you can do the solo 401k as well. Now the savings won't be that much this year, I figure corps cost 1-2k per year for admin cost, added tax returns, etc., but as that SS ceiling goes up and your salary doesn't...you'll be way ahead. You may a good decision, so relax. Now get someone to help you gather the fruit from it. | |
Death&Taxes (talk|edits) said: | 16 October 2006 |
| You figure that on your 80K, you will pay 6,120 of FICA/Medicare and in most states some small pittance for unemployment tax. If you made 120K, you'll have 32K left for pension. That would be 25% of your pay, or 20K. In addition 15K would come from your pay for your contribution, assuming you are under 50. You've got 12K left to take without Fica, and that 25% contribution came from dollars not taxed for FICA, unlike the Schedule C. Neato! | |
| October 17, 2006 | |
| No one has mentioned the possibility (probability?) of being audited simply because the IRS looks at the issue of salary vs. distributions for S-corp owner-employees. Does anyone have an idea of the chances of being audited in this situation?
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Death&Taxes (talk|edits) said: | 17 October 2006 |
| I've never seen a compensation audit, or for that matter an S Corp audit, this in 35 years of being active. I had one man took a 2400 salary his first year and never take another cent of pay....from 1986 to 2001, and he would show 50K of profit a year. I have seen many more Schedule C audits over the years, on all sorts of subjects besides the obligatory T&E and auto expense. | |
Davidh0911 (talk|edits) said: | 17 October 2006 |
| I realize this is a tax forum, but in some cases there are also liability issues that make using a corporate entity to run your business a good idea. The importance/"value" of liability protection depends on numerous factors (do you have any employees who will be performing work for you, what type of business are you in, will you be using debt financing and/or setting up credit accounts with vendors, etc.).
Of course an LLC can also be used for liability protection as well. | |
| October 17, 2006 | |
| That can be true, David. If you've got a business doing brake jobs on school busses, maybe the legal issues would be compelling...but sadly, in the small biz world, the legal shields are often not all they we learned about in school. And insurance is necessary. So on the practical level, all else being equal...we need to measure accurately both the costs and benefits of being inc'd. Most folks who inc do so way too early, or have no reason to...and frankly, the attorneys and all who inc. folks right and left, then send them away and don't have to concern themselves with all the debris that follows: S election, quarterly pr tax filings, separate corp. tax returns, establishing reasonable salaries, documenting basis, etc. etc. etc. Thanks for the reminder, tho'. It isn't just about tax savings. Sometimes. | |
| 21 October 2006 | |
| BGreen, see what your CPA says about a $40,000 salary to you. Then you'd be talking about 8k FICA/SE tax savings. Just curious what advice you may get. That's the million dollar question right now - "reasonable salary". I've heard some say that as long as it's even somewhat reasonable (40k in this case) you'll be ok. Supposedly the IRS is going to start pursuing these scenarios where there is low wages paid to the owner. The only IRS cases we really have to go by right now, are one's that were grossly aggressive. Like making 100K and paying 0 wages to the owner. Of course it was an attorney - always pushing the limits too far! Oh yeah, I think there was a similar case against an accountant also - oops! | |
| 2 November 2007 | |
| I have a new situation. My husband own an s-corp be he became an employee of a company that he used to pay him through his s-corp this year started October 1 2007. His salary is $120000+some commission a year. At the same time he has commission income around $80000 a year from another clients also pay through s-corp. His s-corp also a member of and LLC that has been making losses but has a huge potential to earn big money in 2008. Base on this situation, in 2008 he willl reach maximum of the Social Security tax. Since he will reach the maximum wage for FICA tax I figure there will be no benefit of keeping an s-corp. We have been putting $50000 year in the retirement plan through s-corp to safe tax and would like to keep doing that. So we are thinking about closing s-corp and having the $80000 income through 1099misc. There will not be any problem with the company who pays that money to us to change. The investment advisor told me that if my husband is a sole proprietor he could put upto 100% of his net income from sole proprietorship in the retirment plan and most of it will be tax deductible if he works just 10 hours a week.
However if we close the s-corp at the end of the year 2007, according to the retirement plan advisor, we need to allocate between the two entities (s-corp and sole propritor) because our retirement plan year start from December 31, 2007-December 30 2008 and we have contribute in 2007 for 2006 tax year already. She recommended us to talk to a tax advisor and we did. She has a big practice a master degree in taxation and has over 2000 corporations clients but she is s not familiar with the allocation issue and she said she needs to talk to our plan advisor. Below is the recommendation that she give us. | |
| 2 November 2007 | |
| There is indeed "double taxation" on the income flowing through the S Corp from the LLC. But, if your husband had held the investment in the LLC as an individual member, the LLC net income flowing directly to Peter would have been subject to self employment tax at 15.3% rather than franchise tax at 1.5%. In the future, when Peter has met his FICA limit as an employee of CMC, the LLC net income would still be subject to 2.9% self employment tax if Peter is the LLC member.
As a very basic example, we can compare two scenarios for 2008. For both, assume the following: S-corp net income before wages $57,440 LLC net income $20,000 Your husband's wages from CMC $120,000 Scenario 1 change S-corp to a sole proprietorship & your husband is member of LLC Federal Individual Income Tax (includes SE tax) =$40,815 CA Individual Income Tax =$12,907 LLC Fees $800 Total tax & fees = $54,522 Scenario 2 Keeping S Corp and the s-corp is a member of LLC. Your husband receives wages from S-corp $30000. Federal Individual Income Tax = $38,096 CA Individual Income Tax=12,693 LLC Fees $800 SCorp Franchise tax $800 SCorp share employment taxes = $2,540 Total tax & fees = $54,929 As you can see, the difference is minimal. | |
| 2 November 2007 | |
| Three other issues regarding possible dissolution of S-Corp:
1)transferring LLC interest from SCorp to Individual may involve capital gain tax on the difference between the fmv of the interest and Peters tax basis. ( My opinion, if we close the company at the end of 2007 we will not have capital gain since it has been making loss) 2)Costs of dissolution ( would be cover by the cost that we have to pay for corporate filings) 3)Loss of liability protection provided by corporate entity ( I think liability is low due the income that s-corp receive is commission base on sales) The conclusion from our discussion was that there would be no benefits in doing so. I hope this helps to clarify your decisions. | |
| 2 November 2007 | |
| The major issue that the CPA wasn't taken into consideration is our retirement plan. If we are keeping s-corp, we would have to pay salary so that we can make contritution to the retirement plan. So out of $54522 we will have to pay 30000 to salary and leave only 24522 for contribution. If we close s-corp we will not have to pay SE tax and we can put more money in the retirement plan.
The problem is that I don't know about allocation of the retirement plan contibution between the entities. Can any one give me some feedback? Thanks so much | |
Justthetax (talk|edits) said: | 15 April 2008 |
| i am self employed and earn approx $200k/yr. I am also considering making a couple of investments that will net $100k/yr/. Two questions. First, what are the pros/cons of forming an LLC vs S corp (Fica, medicare, retiremt, etc)? Second, should the corporation i form make the investment (JV) or should I make it as an individual? | |
Justthetax (talk|edits) said: | 15 April 2008 |
| i am self employed and earn approx $200k/yr. I am also considering making a couple of investments that will net $100k/yr/. Two questions. First, what are the pros/cons of forming an LLC vs S corp (Fica, medicare, retiremt, etc)? Second, should the corporation i form make the investment (JV) or should I make it as an individual? | |
Justthetax (talk|edits) said: | 15 April 2008 |
| i am self employed and earn approx $200k/yr. I am also considering making a couple of investments that will net $100k/yr/. Two questions. First, what are the pros/cons of forming an LLC vs S corp (Fica, medicare, retiremt, etc)? Second, should the corporation i form make the investment (JV) or should I make it as an individual? | |
ImBillingTime (talk|edits) said: | 15 April 2008 |
| All of your answers are here: | |
| April 15, 2008 | |
| This doesn't exactly substitute for a professional visit....there's much to it, but the crux of the conversation will center on what is a reasonable salary for your work. You can find that at www.payscale.com or www.salary.com, by region and specific job descriptions. That's the driver for the rest of the decision. Find a good local biz tax pro and visit. | |
| 9 December 2008 | |
| I'm trying to decide if I should do a S-corp in 2009. I am currently a schedule C filer. If I need to pay myself "reasonable salary" of $106,800 (social security maximum) in 2009, and projected my schedule C self-employment income would be $200,000 in 2009, then my tax savings to incorporate vs. not-incorporate is essentially 1.45% medicare of ($200,000 - $106,800) =>$1,351. Is that correct, or am I missing something? | |
| December 9, 2008 | |
| Actually double that for both sides, ER and EE...so not much savings, granted, if you reasonable salary is that high. That's pretty rare air for reasonable salary. I only have a couple clients where we're that high. But also remember that that SS ceiling increases every year, so if your salary should be around 100k, when the ceiling is 150k you're way ahead. | |
| 9 December 2008 | |
| Reasonable salary depends on what kind of company it is. IMHO, the reasonable salary for a 'consultant' is different than for a company that requires a lot of capital investment. Don't forget the increased filing costs, and PITA factor of filing payroll. | |
