To incorporate or not?

[zback]

In theory if a person has W-2 job that is their primary job with a package around 400k and then  has 1099 income worth a additional 100k, is it worth incorporating?

[DMFA]

zback wrote:

In theory if a person has W-2 job that is their primary job with a package around 400k and then  has 1099 income worth a additional 100k, is it worth incorporating?

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Why do you feel the need to incorporate?

For background, an LLC is a state-level business entity which limits an individual's business liability; it has nothing to do either with a self-employed individual's tax-filing status (sole-prop or S-corp) or the limitation of professional liability such as medical malpractice.  I have had people tell me that your business deductions are less likely to be audited if you have a formally-established business entity such as an LLC or your state's equivalent for physicians, but any self-employed person can be a business with an EIN and take business deductions on Schedule C (sole prop) or Form 1120S (S-corp).

If you mean to be taxed as an S-corp, it's unlikely that it would be beneficial from a tax standpoint since your W-2 wages put you over the SS wage level (about $128k).  If you're a sole prop, you would owe no SS tax on your self-employed earnings (only 2.9% Medicare), but would owe the employer SS tax (an additional 6.2% on up to $128k of your S-corp W-2).  That added amount would overcome any amount you take as a distribution from the S-corp (neither SS nor Medicare taxes).

Further, your self-employed 401(k) is maxed at 20% of net profit for a sole prop (income, minus expenses, minus half SE tax), but is maxed at 25% of S-corp W-2 wages, meaning if you try to get around SE taxes by taking the distribution, you reduce the amount you can put in a tax-deferred account *and* reduce your deduction.

Also, should you be able to reduce your taxable income below the QBI threshold of $315,000 for full deduction (or $415,000 for any at all), all of your sole prop income is eligible for the 20% deduction, but only your S-corp distribution is eligible for it (and is capped at 50% of your S-corp W-2 wage).  Assuming high contributions to tax-deferred retirement accounts, itemized personal (schedule A) deductions, and significant business (schedule C) expense deductions, you should be able to receive that for tax year 2018 and later.

...long story short: medical *side jobs* for primarily W-2 employees are almost always better off as a sole proprietor and don't require establishing an LLC or equivalent *unless* you're doing something other than practicing medicine which would actually have some business liability.

[spiritrider]

In your circumstances, incorporating would generally be the wrong choice.

You have already reached the Social Security (SS) max wage base 2018 = $128,400 in your primary W-2 employment.

Taxed as a sole proprietor, your Schedule SE would take that into account and you would only pay the 2.9% Medicare tax on the $100K = $2,900.

Each employer including an S-Corp must deduct/pay the full employee/employer FICA (15.3%) up to the SS max wage base for each employee.

You can get a refund of the excess employee SS (6.2%) on your tax return, but the employer SS (6.2%) is not recoverable. The net effect is you would pay 15.3% - 6.2% = 12.1% on the S-Corp W-2 shareholder-employee's FICA.

With a "reasonable salary" of $50K you would pay a net FICA of $50,000 * 0.121 = $6,050. Which is more than twice as much than you would pay for a sole proprietor's SE tax.

[jfoxcpacfp]

zback wrote:

In theory if a person has W-2 job that is their primary job with a package around 400k and then  has 1099 income worth a additional 100k, is it worth incorporating?

Click to expand...

Not unless you are in CA and don't want to operate as a sole proprietor, then you'll need to go with the s-corp. You have the financial data above you need to make your decision.