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  • solo 401k side S corp, + max 401k W2

    I couldn't figure out the exact answer to my question, although I think it has been asked before.

     

    Current W-2.  401k + profit sharing = 54k/yr

    side S corp, reporting profits ~50k (gross-expense).  health care consulting business. No patient care.

     

    1.  Can I create a solo 401k?  My accountant said no.

    2.  Any other tax deferred options?

    3.  although the spouse helps, she is not an employee.  I figure that must be an avenue too.

     

    thanks

  • #2

    1. Yes.

    2. HSA?

    3. Possibly. You would definitely get more deductions if she is not already maxed out on FICA, but that would really defeat the purpose. You want to ultimately end up with more in your pocket.


    Quite frankly, I see no reason for an S-corp unless you are in CA and your current insurance coverage is not adequate for your consulting business.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      This is bread-and-butter stuff. How do certified financial professionals not know 401(k) basics?

      Unless your employer account is a 403(b), or you are somehow related to your usual W-2 employer, you can have an individual 401(k). You only get $18,000 of employee contribution (elective deferral) across *all* 401(k) accounts, which you probably do entirely from your employed job.

      Each unrelated employer can contribute up to a total of $54,000 per account in employer contributions, such as matching or profit-sharing. For S-corp, the limit is 25% of your wages on the W-2 box 1 you furnish yourself as a shareholder-employee. So if your S-corp makes $50,000 and you can't take a distribution because it was your own work, you'd put $40,000 on your W-2 box 1 as wages and contribute $10,000 to your individual 401(k) as an employer. With sole-prop self-employed work, it's 20% of net profits, but it still ends up being the same amount, just expressed as 1/5 instead of 1:4.

      Note that 403(b) accounts are considered to be controlled by you and not your employer, so if you have a 403(b) which is maxed at $54,000, then you can't have any individual 401(k) contributions.

      Comment


      • #4
        What do you mean by "relationship?"  I assume you do not mean familial relationship.

         

        I own my S-corp, health care consulting business. I am the only shareholder.  So, in the $50k profit  example, the S-corp, as the employer, can contribute 20% of net profits to a tax deferred solo 401K?  I, as the employee, cannot contribute because I maxed out of the $18k from my W-2 paycheck.

         

        Am I interpreting your explanation correctly?

        Comment


        • #5
          You reached right answer with the wrong process/terminology.

          As DMFA stated in an S-Corp, the maximum employer contribution is 25% of a shareholder employee's wages. However, since the S-Corp must makes the contribution. The maximum salary would be $40K* ($50K - $10K), therefore the employer contribution would be $10K.

          * It actually would be a little less than this, because the S-Corp would have to pay the employer's share of FICA, FUTA and maybe Worker's Compensation Insurance.

          P.S. The above is why as pointed out by Johanna, white coats should normally never set up an S-Corp for moonlighting income. If a accounting/tax professional advised to do this you should fire them.

          Comment


          • #6
            Because of S-Corp, you will not be able to recover your employer portion of payroll taxes .

            Comment


            • #7


              P.S. The above is why as pointed out by Johanna, white coats should normally never set up an S-Corp for moonlighting income. If a accounting/tax professional advised to do this you should fire them.
              Click to expand...


              I appreciate your making that point. For once, I didn't say what I was thinking. Hopefully, there is more to the story.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                Yeah, I was gonna ask why you're an S-corp in the first place since it's an additional layer of cost and complexity. But I figured we'd cross one bridge before getting to another one

                Comment


                • #9
                  My S-corp is not for patient care/moonlighting. It is purely for health care consulting to start up pharma and for big pharma speaker's bureau.

                  Comment


                  • #10




                    My S-corp is not for patient care/moonlighting. It is purely for health care consulting to start up pharma and for big pharma speaker’s bureau.
                    Click to expand...


                    If you are responding to @DMFA, I presume he made the comment not to wonder why you formed a business entity, but wondering why you chose S-corp over sole proprietorship or SMLLC.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11







                      My S-corp is not for patient care/moonlighting. It is purely for health care consulting to start up pharma and for big pharma speaker’s bureau.
                      Click to expand…


                      If you are responding to @dmfa, I presume he made the comment not to wonder why you formed a business entity, but wondering why you chose S-corp over sole proprietorship or SMLLC.
                      Click to expand...


                      I actually don't know what sole proprietorship or SMLLC is.  I started the S-corp under the advice of my CPA.

                      Comment


                      • #12


                        I actually don’t know what sole proprietorship or SMLLC is.  I started the S-corp under the advice of my CPA.
                        Click to expand...


                        I apologize for using abbreviations that weren't familiar to you - I've been faced with many myself on this website and realize it can be frustrating.

                        • A "sole proprietorship" is the default business entity for your earnings. There is no separate entity, such as an S-corporation or an LLC (Limited Liability Co). There is also no liability protection, which doesn't matter for many physicians who are protected adequately by their malpractice insurance. The entity and the owner are considered one and the same.

                        • A SMLLC is a "Single Member LLC". The sole purpose of this entity is to provide liability protection for the owner from any acts of the business. The business is considered a separate entity for legal purposes but does not require a separate income tax return to be filed. The owner of the business takes "withdrawals" from the business and all profit and loss passes directly to a Schedule C that is included with the owner's Form 1040. Administration of a SMLLC is simple and inexpensive.

                        • An S-corporation is what you have now. You have the separation of the LLC but, because you own a corporation, you are considered both "shareholder" and "employee". You are required to file a separate income tax return and subject to all payroll responsibilities. Unless you have other employees and are subject to payroll reporting already, you must pay an extra fee for both payroll compliance and filing a separate corporate income tax return. You, the employee, are paid via paycheck with withholding, etc. and you, the owner, get "distributions" that are not subject to FICA taxes.


                        S-corporations are typically encouraged as a way to save taxes because the corporation/owner can avoid FICA taxes. But because of the additional cost to file an additional income tax return and payroll reporting (monthly/quarterly/annually), you will probably pay much more to the CPA than you will save in FICA taxes. The sweet spot, depending on what you pay your CPA, is around $300k - $350k in gross receipts to make the s-corp. feasible.

                        Hope that helps! Any questions?
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13
                          You have received a lot of good information from everyone. Let me put it all together.

                          DMFA and I both pointed out that your CPA has not served you well. First they incorrectly told you that you could not contribute to a 401k. Then they advised you to create an S-Corp, which as I stated, is totally counter-productive when your primary income is thru a W-2 employer and you have moonlighting income. In this context moonlighting refers to any non-employee income. It doesn't matter whether it is the same occupation as your W-2 employment.

                          AlexDDS pointed out the basic reason that an S-Corp is counter-productive in your situation. Almost all W-2 white coats providing health, dental, vision, etc... care will have Social Security (SS) wages (W-2 box 5) >= the SS maximum wage base (2017 = $127,200). However, ALL employers including an S-Corp must deduct the full FICA including the SS component up to the SS maximum wage base.

                          jfoxcpacfp has provided more detail on the S-Corp disadvantages and the limited circumstances where they might provide a benefit in a moonlighting situation.

                          An example will show why that is counter productive in such a moonlighting situation as yours. Hopefully, I will get the math correctly and the others can double check me.

                          The major benefit of an S-Corp is the ability to pay yourself a "reasonable salary" that is not the entire net business income (before that salary and employment taxes). This "supposedly" allows you to pay "less" in FICA.  Assume a net business profit of $50K in both cases and an S-Corp shareholder-employee W-2 wages of $30K.

                          An S-Corp employment taxes (FICA):  $30K * 15.3% (7.65% employee and 7.65% employer). Since you have already reached the SS maximum wage base, the employee share of the SS component (6.2%)  is refundable on your personal 1040. However, the employer share is not recoverable. This means the net employment taxes are $30K * (15.3% - 6.2% = 9.1%) = $2,730.

                          A sole proprietor employment taxes (SE tax):  Since you have already reached the SS maximum wage base, the 12.4% SS component is not applied. This means the net employment taxes are $50K * (15.3% - 12.4% = 2.9%) = $1,450.

                          The bottom line is that in these circumstances you will pay "more" in employment taxes with the S-Corp not "less". Significantly greater ($2,730 vs. $1,450) and that is before S-Corp state filing and annual fees, maybe franchise or similar fees, not to mention higher fees to the CPA for filing S-Corp tax return in addition to your personal return.

                          Finally, since the the employer contribution is directly tied to the shareholder-employee's W-2 wages, lowering those wages to save FICA will reduce your contribution and raising those wages to increase your contribution will only increase the S-Corp employment tax disadvantage.

                          Comment


                          • #14
                            okay, my head is now spinning.  I talked to a CPA.  He agrees on closing S corporation.  He advised the following for tax year 2017.  However, I admit I got confused when talking to him and may mess up the conclusion

                             

                            S corp gross: $180k

                            wages (non W2): $115k

                            9.1% employment tax:  $1200

                            SEP IRA = 20% = $22760

                            Then, close the S corp

                             

                             

                            correct?

                            Comment


                            • #15




                              okay, my head is now spinning.  I talked to a CPA.  He agrees on closing S corporation.  He advised the following for tax year 2017.  However, I admit I got confused when talking to him and may mess up the conclusion

                               

                              S corp gross: $180k

                              wages (non W2): $115k

                              9.1% employment tax:  $1200

                              SEP IRA = 20% = $22760

                              Then, close the S corp

                               

                               

                              correct?
                              Click to expand...


                              I still don't understand why SEP-IRA and not individual 401(k).

                              So you grossed $180,000, gave yourself $115,000 on a W-2, right...

                              • 6.2% employer SS and 2.9% employer/employee MCR: .091 * 115,000 = $10,465

                              • 25% of your S-corp W-2 wage to your retirement: 0.25 * 115,000  = you could do $28,750, right?


                              Adds up to $154,215.  Where's the rest?  Is that your income tax burden? 14.3% seems low...what are we missing here?

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