Sole prop. or S corp decision

[Guest]

Wife practices IM in private solo practice in California and grosses about $400k/year. The income is expected to remain steady or rising. We have 3 employees. We are thinking about forming a S-corp for tax advantages.

Let's say overhead is 50%, net income is 200k. At 15.3% SE (self employment) taxes, she would pay $ 30600 in yearly SE taxes. If she forms a S-corp and takes 60% salary (120k salary, 80k distribution), she will pay $18360 in SE taxes. However, an S corp in CA is subject to 1.5% state tax on its net income, thus she will pay $3000 in state corporation taxes. Overall saving with S-corp by my calculation would be $9240 (30600 - 18360 - 3000). I feel I can handle the incorporation process and yearly tax returns by myself.

1) is the calculation appropriate or I am missing any factor?

2) Any arguments in the favor of sole prop.? Except the fact that no special corporate taxes, no stringent recordkeeping & "complicated" corporate tax return.

3) Is 120k a reasonable salary? She works 2 full days & 2 half days.

Thank you.

[jfoxcpacfp]

1. Social Security taxes are imposed only on the first $118,500 of earned income (2016) so the savings is not nearly what you are estimating.


2. See #1


3. Others will have to chime in on that. Since your other employees are contributing to the bottom line this sounds, to me, as if it might be reasonable.

With all due respect, I beg you not to hire yourself to file an S-corp return. In CA, it's not that easy to even set up an S-corp, but you should be able to do so. However, basis issues in S-corps are complicated. That combined with the fact that you are a physician (presumably HIP yourself) and trying to file a tax return you are not qualified to file is more likely to draw IRS scrutiny. When we obtain clients with S-corps, we frequently find mistakes made by professionals. An S-corp return is not something to take on just to see if you can do it. You'll be able to complete it, sure, but I would place a pretty safe bet that there will be mistakes and some of them will cost you taxes.

[Sergio Estavillo]

CA, we're a pretty litigious group.  How about an S Corp for personal liability protection?

[jfoxcpacfp]

Sergio Estavillo wrote:

CA, we’re a pretty litigious group.  How about an S Corp for personal liability protection?

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Of course. An LLC will accomplish the same, but they will save some taxes with the S-corp...although they may pay back the difference to their CPA if they decide to have a pro prepare the return.

S corp does not offer much liability protection to physician . Physicians (at least in CA) cannot form LLC to practice medicine.

[jfoxcpacfp]

wci wrote:

S corp does not offer much liability protection to physician . Physicians (at least in CA) cannot form LLC to practice medicine.

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You are absolutely correct, forgot about CA and PLLC's. S-corp will mainly help you with taxes but can afford some protection for acts of your employees (running down a pedestrian while running an errand for you), not professional liability, of course.

[Sergio Estavillo]

wci wrote:

S corp does not offer much liability protection to physician . Physicians (at least in CA) cannot form LLC to practice medicine.

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I should have been more specific about personal liability protection.  For example, a patient slips and falls in your practice.  You want your exposure limited to S Corp business assets, and not your personal assets.

I thought cheaper and less headachy options are workers comp., general liability & umbrella insurance will be sufficient to cover all that. Personally, I wouldn't get into S corp for "protection".

[Sergio Estavillo]

wci wrote:

I thought cheaper and less headachy options are workers comp., general liability & umbrella insurance will be sufficient to cover all that. Personally, I wouldn’t get into S corp for “protection”.

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What happens if your insurance claim is denied?  Say, your employee failed to properly clean-up a spill which caused your patient to slip and fall.

If your net worth is "that much" then one reasonable option is living trust for asset protection. You do have a point, I must say.

[jfoxcpacfp]

wci wrote:

I thought cheaper and less headachy options are workers comp., general liability & umbrella insurance will be sufficient to cover all that. Personally, I wouldn’t get into S corp for “protection”.

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They are but for some people, the extra layer of protection is desirable.