Discussion:Help - S or C for 1 man professional

This is how I see it. Am I right?

If he chooses C Corp, he can create a medical reimbursement plan (or HRA), and can have the C Corp pay and deduct all medical insurance premiums and medical expenses for his family. Remember, he had no other employees other than his wife, and now himself, of course.

Then the C Corp can get a defined benefit plan and pay and deduct the contributions.

The only downside, the C Corp will be a PSC subject to 35% federal corporate tax rate (or whatever it is now) and could get nailed if bookeeping goes awry or he loses deductions in an audit. Ouch.

Or he could be an S Corp, which would take care of the PSC worries, but the corporation would only be able to deduct the health insurance premiums (yeah yeah, put them on Box 1 of the W-2 BS) but would not be able to have the corporation pay and deduct a medical reimbursement plan. If so, the corporation would have to treat those payments as distributions. Of course there would be a defined benefit plan here, which would keep the FICA game out of the picture since he wants a max W-2.

So C Corp, corp pays for and deducts medical health insurance premiums and expenses, but is subject to PSC rates.

Or S Corp, corp pays for and deducts medical health insurance premiums BUT NOT medical expenses, but no PSC worries.

Can it boil down to something this simple?

Any input appreciated. Sorry for the ramble here, but I understand it better now just by writing it out.

If there is a significant retirement plan expense, it can be used to gobble up any income at year-end that sneaks through. You can fund the retirement account by the due date of the corporate return. Any others chime in?

Since he can have a 105 now, and a defined benefit plan now, he must have powerful liability reasons for incorporating, but in a personal services corporation (S or C), the corporation will not save him from his own misdeeds.

If he is deadset on feeling good about liability, then he can get the same bogus protection with a SMLLC. And if his wife is a real employee, then he can still do a Sec 105 plan for her.

What you lose is the FICA tax on the defined benefit plan. But if he's gonna be above the SS base anyway then that is only 3%.

And what if the client isn't willing to spend the money to make the models? Then you have your answer: Neither C nor S. Schedule C or, maybe, LLC.

Really, Kendrick, what is your gut telling you? Does this client really need a corporation?

In regard to state taxes, if he drains the C Corp every year and was in PA, he'd have little or no corporate taxes, but the same cannot be said for an S Corp that shows profits over and above salary. Book income is averaged and capitalized by dividing by .095, dividing by 2 and allowing a 125K threshold. Above that Capital stock tax is padi, so state taxes do make a difference.

But it sounds like I have the bottom line right - an S corp can save the disaster of the high federal corporate tax rate of a PSC. A C corp, by risking that danger, can write off substantial medical expenses with a medical reimbursement plan. Just have to watch the year-end bottom line VERY closely.

Correct me if I am wrong, but with an S corp in CA, the wife will now effectively be a more than 2% shareholder, so a medical reimbursement plan would not work. If there was one, the payments would be treated as distributions - no deduction.

So the 105 is OK with a Schedule C with his wife as the only employee?

Just curious, does a sole proprietor need anything fancy to effect a 105 plan? Matter of fact, I believe I have read a few of the regular contributors say NO, that all you need to do is draft something up that spells it out, simply. And then just do it. I just can't bring myself to pay that Section105.com outfit the $500 just to become their customer.

In my clients case, he will never have any employees other than his wife.

Also, I don't believe he can be an SMLLC in CA due to his licensing requirements. That would simplify things, though.

Thanks again.

IMO a 105 plan only needs to be a simple draft, especially if the only employee is the owner and family. In fact, there are some tax cases which allow a 105 plan based only on long-standing company policy, with nothing in writing. Others please chime in if you are familiar with this, or if this is no longer a valid 105 precedence.

With a Sch C, I believe the owner is not eligible to participate in a 105 plan. Neither is the owner's spouse. A 105 plan can be set up for unrelated employees though.