Best route for a financial adviser to help incorporate and taxes (contractor)

[xilex]

Hi all, I'm going to start a 1099 contractor job position (around Los Angeles/Orange County region). I will have to preface a few things before I get into what I'm looking for.

My plan is going to do an S-corp. I believe to do that, I would require the services of a lawyer who specializes in that. In addition to an S-corp, taxes will have to be filed differently. I am up for doing it myself, but I need to learn how and to make sure I'm doing it right. This initial learning phase is where I feel I would like to have some direct help. From what I understand, you will file quarterly and then you also have to make it look like you're a corporation. Then there is tax optimization with an S-corp, which I think guidance from an adviser would be helpful.

Regarding investments, I can manage that myself (allocations, etc). The intent is to set up a solo401k with either Fidelity or Vanguard. The only unknown I have is how to do the employer contribution into the 401k, given that I will be an S-corp.

I was referred to this local group in California but they want to charge $300 a month as a retainer fee, which I feel is expensive. I saw the blog post containing the list of financial advisers. Is that something I should do, or should I look for something locally?

Basically, I need a) help with forming S-corp, b) learn how to fill the tax forms correctly, c) learn how to fund the 401k correctly (18k employee, 35k employer). Thank you.

[VagabondMD]

I would inquire of the recommended list of advisors as to who could get you started and do so for an hourly rate (with an estimate) or set cost for the scope of the project. It might be useful to have an ongoing relationship with one as a CPA, but that is your choice.

[ajm184]

Hopefully there is an attorney who can answer #1 better (especially for CA.), but my experience is that a 1099 is from a company to a person and the income (and associated business expenses) pass through to an individual 1040, specifically schedule C.  You do need tax ID number as I recall to pay all those taxes below, hence you need someone (i.e. lawyer) for registration/incorporation.

As for taxes, yes you file and make estimated quarterly federal income taxes, in April, July, October, and January (of following year) to the US Treasury (EFTPS.Gov).  In addition, you make payroll tax payments (FICA, Medicare).  It is easy to do yourself if you wish, a simple excel spreadsheet will suffice. Alternatively CPA's are able to do the tax payment stuff, though they can charge a couple hundred monthly; depends on your time/effort versus money, but if you are here......   In my experience, the state had their own electronic payment system for state level income taxes and annual unemployment taxes; again you can do yourself with a bit of research/IT savy.

Vanguard will help you get the paperwork together for a 401K if that is the direction you choose.  I would highly consider a ROTH 401K versus a solo 401K. Funding/sending money to your retirement account is very easy after setup.

[xilex]

Vagabond MD wrote:

I would inquire of the recommended list of advisors as to who could get you started and do so for an hourly rate (with an estimate) or set cost for the scope of the project. It might be useful to have an ongoing relationship with one as a CPA, but that is your choice.

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Thanks to both for replies. About this one...I may be confused regarding the difference between CPA and financial adviser. Can you clarify the purpose of each? Many of the financial adviser description talks about asset management, real-estate planning, etc, which I do not need.

[ajm184]

CPA stands for Certified Public Accountant.  Means they have passed a test (a no joke painful test) and depending upon their age have a master's degree in accounting.  Like a doctor, most have a specialty with accounting, tax, audit, government, etc.  For you, you'll want to focus on a individual/small business accountant.  Take your choice very seriously because ideally you'll want to work with the person for a long time.  Interview CPA's/people and make sure that person has a similar outlook/approach on taxes.  Yes, you can get TurboTax or something similar, but the $300 I pay every year to have our CPA do our taxes and ask a question or two throughout the year (i.e. Simple IRA/ROTH conversion) it is well worth it.

Financial adviser/asset manager/financial consultant-  I'm sure there is some nuances between the titles in some government study somewhere.  The basic punchline is they provide (and most time want to 'manage' or decide) where your money is invested.  I imagine there are a number of blogs/discussion in this site on compensation structures of financial advisers; poke around a bit and ask more specific questions as you understand more.  The issue here (in my opinion) is that anyone can claim a financial adviser title. Like Doctors, there are designations that can be attained.  Focus on these two if your going to use a financial adviser, CFP (Certified Financial Planner) or CFA (Certified Financial Analyst).

[xilex]

ajm184 wrote:

CPA stands for Certified Public Accountant.  Means they have passed a test (a no joke painful test) and depending upon their age have a master’s degree in accounting.  Like a doctor, most have a specialty with accounting, tax, audit, government, etc.  For you, you’ll want to focus on a individual/small business accountant.  Take your choice very seriously because ideally you’ll want to work with the person for a long time.  Interview CPA’s/people and make sure that person has a similar outlook/approach on taxes.  Yes, you can get TurboTax or something similar, but the $300 I pay every year to have our CPA do our taxes and ask a question or two throughout the year (i.e. Simple IRA/ROTH conversion) it is well worth it.

Financial adviser/asset manager/financial consultant-  I’m sure there is some nuances between the titles in some government study somewhere.  The basic punchline is they provide (and most time want to ‘manage’ or decide) where your money is invested.  I imagine there are a number of blogs/discussion in this site on compensation structures of financial advisers; poke around a bit and ask more specific questions as you understand more.  The issue here (in my opinion) is that anyone can claim a financial adviser title. Like Doctors, there are designations that can be attained.  Focus on these two if your going to use a financial adviser, CFP (Certified Financial Planner) or CFA (Certified Financial Analyst).

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Thanks. Sounds like what I'm looking for is then 1) someone to set up S-corp next year; and 2) a CPA to help file taxes?

[spiritrider]

You are putting the cart before the horse so to speak. It may very well be that you should use an S-Corp, but you want the advice of a "good" CPA and lawyer, "before" you create a business entity. Conventional wisdom can be wrong for your personal circumstances.

Just like MD next to your name doesn't necessarily make you good at your profession, passing the CPA/bar exam does not necessarily make you good at your profession.

Specifically, my experience is that many individual CPAs are not particularly knowledgeable about small business retirement plans. Also, it is probably useful to use a professional with experience providing services. The professional-professionals who post here are "extremely" knowledgeable.

Finally, conventional wisdom is again wrong when it comes using Vanguard for a one-participant 401k. Their Individual 401k does not allow you to invest in Admiral class shares, requiring using the higher expense ratio Investor shares. Fidelity, Schwab, TD Ameritrade, etc... offer allow share classes and/or ETFs with expense ratios <= Admiral class shares.

Vanguard also does not allow incoming rollovers and employee eligibility restrictions.

[jfoxcpacfp]

These posts may help you understand some of the nuances of what you are asking about. An attorney is not always necessary for setting up an entity in CA.

1. What Business Entity Should I Choose?


2. How to Set Up Your New Business

To answer your question about financial advisors, anyone who advises about your finances can be considered a financial advisor - there is no trademark on the term, which is very vague term and used by insurance agents, tax preparers, financial planners, broker-dealers, etc. If you need tax and business advice from a professional, you should look for a CPA. If you need financial planning and investment advice, you should look for a fee-only Certified Financial Planner, preferably one who is a member of a group that requires a minimum level of expertise and attestation to the fee-only business model in order to be admitted as a member. Some of these organizations are: NAPFA, XY Planning Network, and Garrett Planning Network.

Be sure to choose a fee-only financial planner not a fee-based financial planner. This post may be helpful: Beware the F-Word Scam

[Zaphod]

You do not "need" to set up an S-corp. Make sure there is a very advantageous and reasonable issue why you're going to before doing so. Its very expensive, requires more tax paperwork and with limited difference between just being a sole proprietor.

[xilex]

Thank you for the links (fee-only vs fee-based).

I am required (per the group) to incorporate. This means either LLC or S-corp, correct? I do not think

[jfoxcpacfp]

I was afraid of that - you're not the first one to have to deal with that issue. In CA, physicians cannot operate as LLCs so you're stuck with an S-corp. An unnecessary cost, but apparently you have no choice.

[xilex]

jfoxcpacfp wrote:

I was afraid of that – you’re not the first one to have to deal with that issue. In CA, physicians cannot operate as LLCs so you’re stuck with an S-corp. An unnecessary cost, but apparently you have no choice.

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That is news to me. The CPA/financial adviser group I spoke to never mentioned that. So is your advice in the previous post still applicable - "If you need tax and business advice from a professional, you should look for a CPA. If you need financial planning and investment advice, you should look for a fee-only Certified Financial Planner, preferably one who is a member of a group that requires a minimum level of expertise and attestation to the fee-only business model in order to be admitted as a member."?

If I understand correctly, I could do sole proprietor, but since I have to incorporate, I have to do S-corp instead.

So I was quoted about $300/month to do all the S-corp paperwork. Is that an appropriate price? I guess I have to actually speak with other CPA groups to find out, then.

[ajm184]

Just conjecture as there is not enough information, but I'm guessing the $300 a month is to calculate your taxes (fed/state) and send in the requisite monies on your behalf.  I'm not a big fan of the CPA/Financial Adviser role.  Though I'm sure there are a lot that are good at it, I would much rather have each role with a different person, especially at relationship inception.  My CPA accountant has this role, though for me he only does taxes and the 'financial adviser' stuff he does is limited to paying bills on behalf of clients who are not capable of making those decision on their own because of age or other health issues.

Incorporation should not be terribly expensive (c.a. $1K), the essence of which it to register you (tax ID number) and has an annual kick back (like $100) to the state to remain in 'good standing' (i.e. you are still paying your taxes and some fee to the state).  With a Tax ID number (TIN), a person can in turn set up online accounts with the Feds (EFTPS.gov) and State of California (ftb.ca.gov) with the TIN.   The major taxes being paid will include, Federal Income taxes (paid quarterly), Payroll (Medicare, FICA; paid every paycheck) and Unemployment (annual).  The state has Income taxes (paid quarterly) and unemployment (paid every paycheck).  It will be a bit of a pain the first couple of times, but use excel, check your math and it becomes a twenty minute to half hour thing every two weeks or months (depends on your pay schedule).  In essence, the accounting firm is charging you $2,600 to do six hours worth of work for a year. The question is; are you willing to spend an additional 8 to 10 hours figuring out how to setup the online accounts, doing some paperwork, etc?  Both the Feds and the state want to make it as easy as possible to remit taxes to them, so it tends to be one of the more user friendly parts of government.

As for Incorporation, there are a number of types, though per one of the above posts, LLC is unavailable to physicians in California. S-Corp is a passthrough, meaning all the income passes through an individual income tax form 1040.  You get to take deductions, write-off equipment/supply purchases and such. The other one is a C corp.  Slightly more expensive to setup and maintain, but not onerously so.  A big difference is a separate corporate income is filed.  In addition, it is viewed as a distinct legal entity, which conveys some legal protection to individuals of the corporation.   As a contractor, if you setup the agreement between two corporations (one seeking the service and other providing) with a exhibit/amendment in turn stating the individual A will be providing the agreed upon service through the corporation, then you have some more interesting control levers at your disposal from a financial perspective. These would include salary, matching amounts, type of retirement plan offered, year end dividends, etc.

 

[xilex]

ajm184 wrote:

Just conjecture as there is not enough information, but I’m guessing the $300 a month is to calculate your taxes (fed/state) and send in the requisite monies on your behalf.  I’m not a big fan of the CPA/Financial Adviser role.  Though I’m sure there are a lot that are good at it, I would much rather have each role with a different person, especially at relationship inception.  My CPA accountant has this role, though for me he only does taxes and the ‘financial adviser’ stuff he does is limited to paying bills on behalf of clients who are not capable of making those decision on their own because of age or other health issues.

 

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I agree. I am completely for learning how to do it myself and then paying them to review it, but I just need initial guidance. Individual taxes I already do on my own, but with the S-corp and as a 1099, it is completely different. I think I will contact a few CPAs around the area, see if they do a lot of taxes for MDs, and then see if they are agreeable with my plan (incorporate, do the taxes once or twice, then I learn from it). I wish there was a place that can teach step by step from an example how to file these.

Do you think a local CPA or an online service would be better? When I searched online, I see a few CPA groups offering an S-corp package where they take care of all that stuff for about $2500/year.

[childay]

ajm184 wrote:

S-Corp is a passthrough, meaning all the income passes through an individual income tax form 1040.

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This is not accurate.  An S-corp will pay employees (you) a salary and may (or may not) also have a distribution.  In most states that would be the reason to form an S-corp, to save on payroll taxes with the distribution.  I am surprised to hear LLC or PLLC are not allowed in CA, that stinks.

OP, I would do like you say and talk to a local CPA.  The incorporation itself is not too difficult (at least in my state) and you could probably do it with some research yourself.  The tax forms, payments, and whatnot are where you should get some professional guidance..