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New dentist - tax filing questions

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  • New dentist - tax filing questions

    I'm a 27 year old recent graduate (dentist) in CA who will be making about $120,000 as an independent contractor and $20-30,000 as an employee as I will be working in two different offices. I've been told by a CPA that it is advantageous for me to create a S-corp but I'm seeing a lot of threads on WCI/Bogleheads that it's not as advantageous as it seems especially for someone in my income range.

    Should I file as a sole proprietor instead? Does it make sense to create an LLC for myself and create a separate bank account under that name? What retirement accounts can I look into to take advantage of deductions other than a ROTH IRA?

  • #2
    Why does the CPA feel it is advantageous? Get a different CPA.

    Sole proprietor is likely the best way to go. No need to create an LLC. Look into a solo 401k.

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    • #3
      Get that i401k open and funded even if only with a few dollars. The ability to roll IRA and 401k assets into this plan could be huge for you one day as you may one day want to consolidate assets from multiple plans and still to back door Roth IRA contributions. Get your spouse in the plan too if that is an option.

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      • #4
        No need for LLC unless you have employees (professionals c/n use an LLC in CA). I agree on the advice not to set up the s-corp. That’s the default recommendation for some CPA firms. Don’t use a SEP, go with the solo-k.

        Molar Mechanic, can you pls clarify what you mean by “Get your spouse in the plan too if that is an option”? If you mean put your otherwise non-working spouse on the payroll, this is not an idea I would endorse.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Originally posted by jfoxcpacfp View Post

          Molar Mechanic, can you pls clarify what you mean by “Get your spouse in the plan too if that is an option”? If you mean put your otherwise non-working spouse on the payroll, this is not an idea I would endorse.
          I'm certainly not recommending any thing illegal or unethical. I wasn't educated enough to do then when I had 1099 income (I established a SEP), but if I'd had the foresight to establish even a trivial Solo-K, then that flexibility would be paying large dividends now compared to my practice 401k. My assumption is that a spouse who performs duties for the sole proprietorship could be paid and therefore contribute to their own Solo-K account. These two future accounts could be maintained and used as the receptacle for future IRA or 401k Rollovers.

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          • #6
            Good to know. I'll look into the solo 401k as well.

            Does it matter if I open a personal or business checking account for my sole proprietorship? Regarding paying taxes and retirement funds, that should be out of my personal account, correct?

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            • #7
              Originally posted by Molar Mechanic View Post

              I'm certainly not recommending any thing illegal or unethical. I wasn't educated enough to do then when I had 1099 income (I established a SEP), but if I'd had the foresight to establish even a trivial Solo-K, then that flexibility would be paying large dividends now compared to my practice 401k. My assumption is that a spouse who performs duties for the sole proprietorship could be paid and therefore contribute to their own Solo-K account. These two future accounts could be maintained and used as the receptacle for future IRA or 401k Rollovers.
              Sorry - your mind went in a totally different direction than what I meant. Nothing to do with unethical or illegal, but not cost effective. If the spouse has no other job, then you would have a total 12.4% tax hit for SS on her salary (not to mention the hassle of payroll) up to the first $142,800 in payroll. So, you are exchanging profits on your income with zero SS expenses for 12.4% in SS for her. Had you asked me about the choice as someone with a side hustle, I w/h told you that most people wouldn’t be interested in paying a 12.4% load in exchange for getting a deduction for contributing to a spousal solo-k. Much cheaper to contribute to a taxable account. That’s a good example of prioritizing the impact on net worth before the tax savings.

              Hope that helps!
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                I disagree. I’d happily go back and pay my spouse a thousand dollars, forfeit the $124, and get her into the solo k. The flexibility of a solo 401k is unmatched when it comes to rollovers and self directed investing.

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