Starting an S-corp

[destined26]

Hello. I am doing locum tenens and was recommended to create an s-corp. I started it with legal zoom and they are asking me questions I am not sure how to answer. Help please. There are 10K shares.

1) They want to know how much of the shares I have - I assume 100% since I'm the only one in the corp. Correct?

2) They want to know how much I contributed to receive the 10K shares. I don't know how to figure that out.

Help please

[spiritrider]

If this is moonlighting income Stop! An S-Corp in a moonlighting situation is almost always a bad choice.

If you have no primary W-2 employment then an S-Corp may be advantageous. However, you should really engage a professional to determine what is best for your specific circumstances.

This knee-jerk reaction that all white coats should have an S-Corp is not helpful. At a minimum you should slow down.

1. There is seldom a need to issue that many shares in an S-Corp. Certainly not one with a single shareholder.

2. What they are referring to is how much capital you are investing in the corporation. This is one way to establish basis in the corporation. Which can be useful in many situations. This is one reason for a professional to advise you.

[destined26]

Thanks for responding. I no longer have W-2 employment. Just doing locums for now but am considering going permanent with one of my locum's jobs. What kind of professional should I be seeking for advise?

[jfoxcpacfp]

If you are located in CA, you must have either an S-corp or a sole proprietor - doctors are not allowed to have LLCs in that state. If you are in any other state, heed the advice of spiritrider. Until you have gross receipts of $300k - $350k, an s-corp will cost you more than it will save you. This is not a DIY project (at least for most people, and you appear to be one). You should seek advice from an competent CPA, preferably with multi-state tax expertise if your locums will be performed in more than 1 state.

[Sean]

As I've been reading up on S-Corp vs LLC, the experts' consensus appears to be that unless gross receipts are at least about $300k or so, the admin costs of an S-Corp generally outweigh the Medicare tax you'd save, as aptly pointed out by Johanna above.

However, one glaring advantage of an S-Corp seems to be the ability to have a solo 401k and be able to max it out with both the employee salary deferral and the employer contribution.  In my case, since my current W-2 employer doesn't offer a 401k or health insurance (though offers a lump sum amount to buy my own), but rather has a SEP IRA with a two- or three-year waiting period, would you still recommend I go for an S-Corp if my anticipated gross revenue were around $200-250?  Would an LLC be better with that revenue range?  If I were to choose to work in another state part time as well, would I need to register the S-Corp or LLC in that state, too?

I've been trying to convince the employer to switch from a SEP IRA to a 401k as the latter has several advantages over the former, incl option to do a backdoor Roth conversion.  So even once I am eligible for the group SEP IRA, I'm not sure if I'd want that as then I'd run into the pro rata rule if I wanted to continue doing the backdoor Roths.

[Zaphod]

Sean wrote:

As I’ve been reading up on S-Corp vs LLC, the experts’ consensus appears to be that unless gross receipts are at least about $300k or so, the admin costs of an S-Corp generally outweigh the Medicare tax you’d save, as aptly pointed out by Johanna above.

However, one glaring advantage of an S-Corp seems to be the ability to have a solo 401k and be able to max it out with both the employee salary deferral and the employer contribution.  In my case, since my current W-2 employer doesn’t offer a 401k or health insurance (though offers a lump sum amount to buy my own), but rather has a SEP IRA with a two- or three-year waiting period, would you still recommend I go for an S-Corp if my anticipated gross revenue were around $200-250?  Would an LLC be better with that revenue range?  If I were to choose to work in another state part time as well, would I need to register the S-Corp or LLC in that state, too?

I’ve been trying to convince the employer to switch from a SEP IRA to a 401k as the latter has several advantages over the former, incl option to do a backdoor Roth conversion.  So even once I am eligible for the group SEP IRA, I’m not sure if I’d want that as then I’d run into the pro rata rule if I wanted to continue doing the backdoor Roths.

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You dont need to have an s corp for that, also available to sole proprietors.

[DMFA]

You don't have to have an S-corp to have a 401(k) or business write-offs. Anyone with self-employment income of any flavor can do it. The contribution limit seems different, but it's actually the same, just expressed differently. 25% of W-2 earnings is the same as 20% of total income since the contribution is excluded from W-2; it's just expressed as 1/4 instead of 1:4.

[Sean]

Thanks for your prompt responses.  However, re: 1099 sole proprietorships (Schedule C), the IRS has strict rules as to who's actually an indep contractor vs an employee, esp if I work at the same practice full time.  I tried joining it as a 1099, but was told it wasn't kosher per IRS rules.

[childay]

Sean wrote:

I’ve been trying to convince the employer to switch from a SEP IRA to a 401k as the latter has several advantages over the former, incl option to do a backdoor Roth conversion.  So even once I am eligible for the group SEP IRA, I’m not sure if I’d want that as then I’d run into the pro rata rule if I wanted to continue doing the backdoor Roths.

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So you are thinking starting a s-corp would allow you to set up your own retirement plan, despite being covered by a plan by the employer?

That sounds like it's probably not allowed.  It may be an "affiliated service group" and thus you could not set up a second plan.  Someone will chime in I am sure.

[Sean]

Childay, that's not what I meant.  What I meant was that as of now, I'm a W-2 employee and my employer has a SEP IRA for which I am not yet eligible as there's a waiting period.  I've tried to show him the advantages of a 401k over a SEP going forward, but I haven't heard back.  Even once I'm eligible for the SEP, I'd rather have a 401k instead as it'd allow me to do a backdoor Roth every year.  Besides, with a SEP no employee contrib is allowed.

Now, another option I've been toying with is to form a LLC or S-Corp instead of remaining a W-2.  (a 1099 has the IRS sniff tests so the employer didn't agree to that).  I could even cut back hours at this job and contract part time with another practice, also as a LLC or S-Corp, to enable me to contribute the max to a solo 401k, save on taxes, and have more leeway in general.  Downside: were I to also work in another state as an S-Corp, I suppose I'd need to register my corp in that state too, adding to the cost and complexity.

[Zaphod]

Sean wrote:

Childay, that’s not what I meant.  What I meant was that as of now, I’m a W-2 employee and my employer has a SEP IRA for which I am not yet eligible as there’s a waiting period.  I’ve tried to show him the advantages of a 401k over a SEP going forward, but I haven’t heard back.  Even once I’m eligible for the SEP, I’d rather have a 401k instead as it’d allow me to do a backdoor Roth every year.  Besides, with a SEP no employee contrib is allowed.

Now, another option I’ve been toying with is to form a LLC or S-Corp instead of remaining a W-2.  (a 1099 has the IRS sniff tests so the employer didn’t agree to that).  I could even cut back hours at this job and contract part time with another practice, also as a LLC or S-Corp, to enable me to contribute the max to a solo 401k, save on taxes, and have more leeway in general.  Downside: were I to also work in another state as an S-Corp, I suppose I’d need to register my corp in that state too, adding to the cost and complexity.

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Can you get them to put a portion of your salary up to the max into the SEP instead of as pay? I'd try that as well, though trying to convince them to switch to 401k is a good thing as well.

[jfoxcpacfp]

Zaphod wrote:

Can you get them to put a portion of your salary up to the max into the SEP instead of as pay? I’d try that as well, though trying to convince them to switch to 401k is a good thing as well.

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The employer would have to do the same for all employees on a % basis.

[spiritrider]

I know I am starting to sound like a broken record.

I wish it wasn't such an implied consensus that white coats should always form an S-Corp. To borrow a quote from a Meatloaf lyric "stop right there".

It is generally counter productive for white coats to form an S-Corp for moonlighting income. This is because they will almost certainly make more than the Social Security maximum wage base (2017 = $127,200).

They will pay more in FICA taxes than they would in SE tax for someone taxed as a sole proprietor.

Another myth busted, is that an LLC provides adequate liability protection to a 1099 white coat. The 1099 personal services of the owner generally receive no liability protection in an LLC. A sole proprietor with malpractice and general business liability insurance is far more adequately protected.

[Zaphod]

spiritrider wrote:

I know I am starting to sound like a broken record.

I wish it wasn’t such an implied consensus that white coats should always form an S-Corp. To borrow a quote from a Meatloaf lyric “stop right there“.

It is generally counter productive for white coats to form an S-Corp for moonlighting income. This is because they will almost certainly make more than the Social Security maximum wage base (2017 = $127,200).

They will pay more in FICA taxes than they would in SE tax for someone taxed as a sole proprietor.

Another myth busted, is that an LLC provides adequate liability protection to a 1099 white coat. The 1099 personal services of the owner generally receive no liability protection in an LLC. A sole proprietor with malpractice and general business liability insurance is far more adequately protected.

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Absolutely agree. There is very limited benefit outside of a distribution, which even that is suspect unless you have some perfect scenario. For side income it makes little sense, and in states like CA in addition to the tax annoyance, its also expensive.

[ginmqi]

Hopefully spiritrider can chime in again as, interestingly (and not surprisingly), I saw his same username on bogleheads forum when I was searching for tax burden reduction strategies as a 1099/independent physician contractor.

 

Currently locuming for an outpt clinic (out here in Hawaii) and am estimating about 320k in gross income at the end of 2018. Just paid my Q1 federal estimated (and also just sent my Q1 hawaii estimated) taxes and the pain is real.

I'm living out of state (home state is missouri) so I was able to deduct as much as I can (housing, health insurance premiums, license fee, etc.) but since I do not own my own office/building, there's not much else i was able to deduct. (my locum agency pays for my rental car, I can deduct a few dollars in gas I guess but I live 1mile from my office and barely use my rental car for work anyway....majority has been sight seeing with the rental car)

I've thought about a SEP IRA vs a Solo 401(k) for the roth (already maxed out a backdoor Roth IRA) but I do also have 6-figure student loans and I figure a dollar paid to my student loans (fed loans, 6.5%) is worth more than contributing alot to a SEP IRA right now to lower my taxable income...especially I'm aiming to pay off the loans in the next 2-3 years. I haven't read up too much on LLC/S-Corps but seems like I'm a bit limited in ways to reduce my tax burden.

Thanks for any advice!