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  • #16
    I think Johanna and some of the physician members can probably give you a better insight.

    I used to use a general rule of thumb that an S-Corp usefulness is tied to the Social Security Maximum Wage Base (MWB), 2018 = $128.400. Contrary to conventional wisdom a business owner will get the most benefit from an S-Corp with a business profit of 1/2 MWB to 1 1/2 MWB. Then it is far less useful from 1 1/2 MWB to 2 1/2 MWB. Finally, above 2 1/2 MWB an S-Corp starts to provide significant FICA savings again. 2 1/2 MWB = $128,400 * 2.5 = $321K. Also, the addition of the 0.9% Medicare surtax probably skews this a little lower to maybe $300K.

    So ordinarily I would say with your income, you could go either way S-Corp or sole proprietorship. The monkey wrench in all this is the new 20% deduction on Qualified Business Income (QBI). I'm not sure we entirely know what the best option will be.

    One thing you should know is that you can get a waiver of the S-Corp election deadline. Which by the way was on March 15th. So you already need a waiver, the question is just how long.

    Personally, I would wait until this all sorts out and then get professional advice for your state(s) and specific circumstances.

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    • #17




      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!
      Click to expand...


      Yes, taxes hurt. It's better to think in terms of your overall balance sheet. As a small example, would you prefer that the locums company not pay for your rental car so that you could get the deduction? Of course not - better to not be out of pocket than to pay the full expense for a tax write-off that will only partially refund what you paid.

      As @spiritrider said, you are on the cusp of moving over to an S-corp, but you need to know what additional expenses you will pay (mostly accounting fees). State licensing fees and annual reports are not very costly ($50 to set up an s-corp and $12.50 for annual online renewal). You will compare these to the savings to be had by taking part of your pay in distributions.

      In the past, that was the main consideration. Now, we have the new tax law to consider and the fact that your income may be low enough to qualify you for a deduction based upon wages paid. To reiterate SR, we do not yet know how all this is going to fall out. We will be doing some significant tax planning with clients beginning in July/August this year. If you do not have a CPA, find one. This is not a DIY project - you need projections and information to help you make good decisions. You can file an election to be taxed as an s-corp going back to the first of the year, if necessary, but you must consider that you will be treated as having taken s-corp distributions for the first of the year and will need to catch up by paying yourself wages for the rest of the year.

      Add in the fact that you are trying to pay student loans and prioritize between loan payments (why haven't you consolidated to a lower rate?) and contributions to a solo-k (not SEP, please, unless you are setting one up for 2017). Think about this scenario now: you may qualify for a significant pass-through tax deduction by contributing to a retirement plan, which make that contribution even more valuable. This might mean you should focus more on the retirement plan than the student loans. But you won't know without sound tax - and financial - planning. A lot going on here - please get professional help.
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #18




        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!
        Click to expand...


        Like Johanna mentioned some of this decision is muddied with the new tax law.  This is particularly so if other forms of entities (sole-p and LLC) will be required to start paying a salary with the passthrough deduction rules in place.  I think at your current income levels, you are better off in as a sole proprietor for now with adequate malpractice insurance.  In addition to your deductions, set up a Solo-K to further reduce your taxable income.

        There is also no reason to be paying 6.5% on your student loans unless you are still pursuing PSLF which is unlikely in a Locum's job.  You should refinance your student loans to the shortest term you can afford.  To provide context, you can get a 5 year fixed as low as 3.25% and a 10 year fixed around 4-4.5%.  I agree with you, at 6.5% it's a lot harder to justify investing, but once you refinance to 3.5-4.5%, it's a lot easier to beat that rate in the market.  You should be taking advantage of a 401(k) to both reduce your tax bill and receive tax deferred growth.

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        • #19
          With great appreciation to SR, Johanna, and Clint!

           

          I am now prioritized with what I need to do:

          -Work with a professional to assess and strategize for this year. (Any tips on how to find a good CPA/firm? I've googled around my current area, Honolulu, and many have good Google/Yelp reviews and unfortunately my colleagues haven't been too much of a help with them working with someone far out of state....or they have a family member who helps out. I'd rather do something better than choose a CPA like how I choose next weekend's restaurants...lol)

          -I will certainly get off my lazy bum and call to refinance my fed loans. I refinanced a smaller 30k private loan and just paid it off 2 mo ago. One thing that's annoying is I do have credit freeze on all 3 bureaus but the hassle of temp lifting that freeze is certainly worth the big savings for the next 2-3 years.

          -Solo 401k it is!

          I've been very favorable to Roth spaces (contributed to both a Roth IRA and Roth 403b during my residency years) but with my current high tax bracket and to take advantage of tax savings, I will certainly look more into a tax-deferred account rather than a tax-free account.

           

          Thanks again to all for the very prompt reples!

          Comment


          • #20
            We have clients in Hawaii and meet via Zoom, but I'm sure you can find someone local if you prefer. Oddly enough, it's really hard to get reliable feedback on CPAs and the CPA profession has not done as good a job of creating self-policing organizations as has the financial planning profession. I guess there are so many crooks in the financial/investment industry that it was a natural result, while CPAs have been able to remain complacent and set in their ways.

            You might also read this post on WCI:

            How to Find a Great CPA

            It even sports an old picture of me  
            Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #21




              We have clients in Hawaii and meet via Zoom, but I’m sure you can find someone local if you prefer. Oddly enough, it’s really hard to get reliable feedback on CPAs and the CPA profession has not done as good a job of creating self-policing organizations as has the financial planning profession. I guess there are so many crooks in the financial/investment industry that it was a natural result, while CPAs have been able to remain complacent and set in their ways.

              You might also read this post on WCI:

              How to Find a Great CPA

              It even sports an old picture of me
              Click to expand...


              Great!  And you have an email Johanna!  

              Comment


              • #22
                Yes, online entities will file your S-corp in minutes, they are very good at that (and only at that). Generally, it is recommended to lay out the map of how your corporation will be handled once formed:

                1) Who is going to do bookkeeping?

                2) Who is going to prepare the corporate tax return?

                3) Who is going to advise you on proportions on salary and distribution from a corporation? Online help is useless here.

                4) Will you keep minutes of annual shareholder meeting?

                5) Will you be exempt from state disability taxes (if your state imposes them) being a sole shareholder of the corporation?

                6) Will you be doing business under a fictitious name, do you need or have a permit to do the same?

                7) Who is going to keep track of payroll taxes and pay them in a timely manner to state and federal entities?

                8) Do you know the zoning of your home (presuming that you will give corporation address as home address) allows such business entity to exist? It is really not a home-based business and therefore it matters.

                If you do not have a clear answer to these questions, you should not have online entities help you. If you have clear answers on these and have a go-to person, please have him/her file for a corporation for you.

                If you pick someone to incorporate for you, try to hire someone who will also help you with day to day operation, bookkeeping, taxes etc. Very often, people go to someone, get incorporation filed and then have no idea how to manage a corporation.

                If you are a complete DIY (like me, I do all of the above myself, including filing), recommend reading in depth before you plan to incorporate. There is no rush to incorporate for solo physicians or locum tenens as you can incorporate later in the year as well (hopefully allowed in your state).

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                • #23
                  I am graduating from residency next month and will be working full time locum. I won't have a W2 job. I am planning to make between $400k-$500k. My CPA recommended me to set up LLC taxed as S corp rather than LLC. Also I will likely be working in multple states in a year. He said it could be really complicated to file tax return for each state and he charged me high fees for that. He also recommended me to set up an S corp in Delaware instead of NYC where I live because I would have to pay city tax in NYC. Any comments?

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                  • #24
                    I’m not a fan of the Delaware route, typically used by very large corporations. You’ll pay a fee in DE and for NY state, I’d have to research the city issue and it’s too early in the morning  

                    It’s not that complicated to file taxes in multiple states at the corporate level (filing in CP states at the personal level is more complex) because the software does most of the work. It will add to the cost, however. Since you’re just starting out, may want to get a 2nd opinion.
                    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment

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