Forming an LLC with new Tax Reform

[txallergist]

Hi WCI et al,

 

I'm a mid-career physician in private practice currently employed and compensated close to $500K (all via W-2). Would it be beneficial to convert to an LLC given the new tax reform proposal which will reduce corporate taxes to 21% (I recognize that legislation hasn't been finalized). I know that physician self-incorporating often found it to be a "wash"/loss for the work and trouble of self-incorporation, but I suspect many are now contemplating this strongly with the pending legislation. What are your thoughts?

 

Thanks

-HCD

[jfoxcpacfp]

I'm having trouble understanding your plan. You ask about converting to an LLC then talk about the trouble of self-incorporation. Sounds like you're already a corporation looking to dissolve the corporation. Otherwise, you wouldn't be paid by W2. Are you a traditional "C" corporation or an "S" corporation?

I cannot answer your question, btw. Just not enough information and, as you noted, the legislation h/n/b finalized but looking for clarity and might be able to offer some kind of helpful advice.

[DMFA]

I beg your pardon, but I don't think you've appropriately explained your situation. You're "employed" and paid on a W-2. Are you a shareholder-employee looking to change your business structure? Or are you looking at changing jobs completely from ceasing employment with your current practice and becoming self-employed?

Also, LLC has no bearing on tax status; it's a legal entity, not a taxation status. I assume you mean changing from being an employee to either a shareholder-employee of an S-corp or to a sole proprietor

[txallergist]

Hi,

 

I'm a physician employed as a W-2 employee, with FICA taxes paid for by both myself and the employer. I know that some physicians consider the idea of self-incorporating in order to minimize the tax burden since the "top" tax rate for corporations are much less than the individual tax rate. I have an employer who is willing to work with me to convert my status from a W-2 employee to a contract employee.

 

Related tax changes discussion: https://www.cbpp.org/research/federal-tax/republican-leadership-tax-plans-pass-through-tax-break-would-provide-massive

Any advice regarding this would be appreciated

-HCD

[DMFA]

You may be excluded from that since physicians are considered "professional services" which, depending on what gets passed, has a phase out of $250k single or $500k joint based on what's on your 1040.

You would take on the employer portion of self-employment taxes, an additional 6.2% up to the SS cap and an additional 1.45% on all earned income.

You would have more business-related expenses that you wouldn't have covered like you would as an employee, like insurance, but you would get to take more deductions for them...they'd cost you $0.65 or so on the dollar, though, since they'd be a deduction.

So yes, it is possible you would benefit more, depending on what you're able to take as pass-through income and what benefits you might lose and expenses/taxes you would take on from no longer being employed.

[kuma1212]

DMFA wrote:

You may be excluded from that since physicians are considered “professional services” which, depending on what gets passed, has a phase out of $250k single or $500k joint based on what’s on your 1040.

You would take on the employer portion of self-employment taxes, an additional 6.2% up to the SS cap and an additional 1.45% on all earned income.

You would have more business-related expenses that you wouldn’t have covered like you would as an employee, like insurance, but you would get to take more deductions for them…they’d cost you $0.65 or so on the dollar, though, since they’d be a deduction.

So yes, it is possible you would benefit more, depending on what you’re able to take as pass-through income and what benefits you might lose and expenses/taxes you would take on from no longer being employed.

Click to expand...

I agree.  I was under the assumption that most physicians would not qualify as pass through.

[jfoxcpacfp]

txallergist wrote:

I’m a physician employed as a W-2 employee, with FICA taxes paid for by both myself and the employer. I know that some physicians consider the idea of self-incorporating in order to minimize the tax burden since the “top” tax rate for corporations are much less than the individual tax rate. I have an employer who is willing to work with me to convert my status from a W-2 employee to a contract employee.

Related tax changes discussion: https://www.cbpp.org/research/federal-tax/republican-leadership-tax-plans-pass-through-tax-break-would-provide-massive

Any advice regarding this would be appreciated

-HCD

Click to expand...

Ok, this is a different picture than what I first envisioned.

"Strictly speaking, you can't legally just flop back and forth from employee to IC and back on a whim of your employer - even if you ask him/her and s/he agrees. Your employer would be taking a huge risk by doing so and it is not something I would advice." ~that was me talking to your employer.

Me talking to you, the worker bee:

"If the person who pays you for your work is willing to pay you as a contractor and is willing to take that risk then, yes, you should consider it. All of the burden is on the employer, not on you. Whether or not it would make sense depends upon the facts and circumstances, such as the pay differential, your gross income, joint income, the benefits you'd be losing, the lost expenses you can now deduct, and so forth. Once the legislation passes and you have clarity about the details, you should consider sitting down with your CPA to calculate a cost-benefit assessment."

[Muhlenberg]

I am in a different situation. I am a retired doctor collecting SS and decided to work 2 days a week in an Internal Medicine clinic. I will be making approximately 120k per year from the pt job. I anticipate doing this for 2 or 3 more years. Would it make sense for me to form an LLC or C Corp?

[jfoxcpacfp]

Muhlenberg wrote:

I am in a different situation. I am a retired doctor collecting SS and decided to work 2 days a week in an Internal Medicine clinic. I will be making approximately 120k per year from the pt job. I anticipate doing this for 2 or 3 more years. Would it make sense for me to form an LLC or C Corp?

Click to expand...

Sorry, I hit “like” instead of quote...although i have nothing bad to say about your question, so I guess you could make a case that I like it  

The answer depends upon several factors, some of which we do not totally know yet. I can certainly say you do not need to incorporate (C corp) without electing S status (S corp) but I do not know your taxable income which precludes me from advising S versus sole proprietor. I do not see the benefit of an LLC in your situation which leaves you with deciding between solo proprietor or s-corp, neither of which were listed as original choices. You are going to need to work with someone who can run the numbers both ways with certainty about the intent of the new tax law (JCTA) to help you make a decision. You have time to decide about s-corp in retrospect and i would advise getting beyond midyear and hiring a qualified tax pro to help you make that decision.

[spiritrider]

I would suggest following Johanna's advice.

But, contrary to what many people think, high incomes do not necessarily receive the most advantage from an S-Corp. It is someone like Muhlenberg with income close to the SS max wage base who can actually save the most on FICA vs. SE tax.

A little Independent Contractor income (even 1 or 2 days a month) in retirement can be good thing. You can claim Medicare Part B/D, Medigap and dental insurance premiums under the self-employed health insurance deduction.