Very lost...Retirement account for Single Owner SCorp with second job

[poundfoolish]

Hi all, I need some help, for some reason I just can't wrap my head around the basics of retirement plans for a single owner Scorp.

Here's my situation:

Me: Employed physician. Salary 600k, W2. Roth 401k - $18,500, with aftertax contributions partially matched by employer to max at $53k. No side income. Backdoor roth $5500

Wife (two jobs): 1. Employed physician, Salary 300k, W2. 401k with $18,500 contribution and $10k matching from employer. Backdoor Roth $5500.

                         2. Owner of Scorp (medical practice, no employees): Net profit 2017 $200k. (2016 was first year, had a $16k loss)

Currently she has no Scorp retirement plan set up and has not taken a salary yet.

               - My understanding is we need to issue her a W2 following the 60:40 rule. So W2 income is $120k(?).

               - Is a SEP-IRA the best option here? Is she limited to 25% of the $120k salary for the SEP, or is there a way to max this to $53k (keep in mind she has $18k+10k in the employer provided 401k).

               - What happens to the other 40%? Does she take it all as distributions? Does the SEP contribution count as an expense off the $200k?

I have no intention of doing this all myself (unless you tell me it's quite easy), I just want to be armed with enough info to have an educated discussion with an accountant. If I'm way off, please set me straight. Thanks much!

[litovskyassetmanagement]

poundfoolish wrote:

Hi all, I need some help, for some reason I just can’t wrap my head around the basics of retirement plans for a single owner Scorp.

Here’s my situation:

Me: Employed physician. Salary 600k, W2. Roth 401k – $18,500, with aftertax contributions partially matched by employer to max at $53k. No side income. Backdoor roth $5500

Wife (two jobs): 1. Employed physician, Salary 300k, W2. 401k with $18,500 contribution and $10k matching from employer. Backdoor Roth $5500.

                         2. Owner of Scorp (medical practice, no employees): Net profit 2017 $200k. (2016 was first year, had a $16k loss)

Currently she has no Scorp retirement plan set up and has not taken a salary yet.

               – My understanding is we need to issue her a W2 following the 60:40 rule. So W2 income is $120k(?).

               – Is a SEP-IRA the best option here? Is she limited to 25% of the $120k salary for the SEP, or is there a way to max this to $53k (keep in mind she has $18k+10k in the employer provided 401k).

               – What happens to the other 40%? Does she take it all as distributions? Does the SEP contribution count as an expense off the $200k?

I have no intention of doing this all myself (unless you tell me it’s quite easy), I just want to be armed with enough info to have an educated discussion with an accountant. If I’m way off, please set me straight. Thanks much!

Click to expand...

First, I wouldn't recommend a SEP, but a solo 401k so that your wife can also do backdoor Roth.  She does not need to make salary deferrals into the solo 401k, but she can if investment options in her 401k are not very good.  At least she can contribute up to the match (if any).

If she has a stable $200k income, she might be able to also set up a Cash Balance plan (and this type of plan does not work with the SEP, so a 401k would be necessary).  Also, the way you set the W2 is to max out the solo 401k contribution, so it makes no sense to set the W2 at $120k - instead she can set it to be at $200k so that she can max out the solo 401k at $54k or so (depending on the actual W2).  Also, with $200k W2 she might be able to also max out  her Cash Balance plan contribution as well.

[spiritrider]

Ken has given you good advice on retirement plan issues. I want to address another important issue that you didn't ask about. Are there specific substantial reasons for why your wife has an S-Corp other than based on the convention wisdom that an S-Corp is always better at higher incomes, because of FICA/SE tax savings?

Conventional wisdom is often wrong. In this specific case very wrong. If she were to pay herself $127,200 in W-2 wages on $200K of net business profit. In your/her circumstances she will pay > $8,000 MORE in net W-2 payroll taxes than she would in net SE taxes as a sole proprietor.

An S-Corp is almost always counter-productive for physician supplemental small business income, because their primary W-2 wages are almost always greater than the Social Security maximum wage base 2017 = $127,200. The excess employee share of FICA is refundable on your Form 1040, the employer share is not. This is compounded in your case by the fact that at your income level, the 1/2 SE tax deduction will decrease the effective SE tax by 19.8%.

It is very likely that she should dissolve the S-Corp as soon as practical. It is beyond my knowledge when that is.

[litovskyassetmanagement]

spiritrider wrote:

Ken has given you good advice on retirement plan issues. I want to address another important issue that you didn’t ask about. Are their specific substantial reasons for why your wife has an S-Corp other than based on the convention wisdom that an S-Corp is always better at higher incomes, because of FICA/SE tax savings?

Conventional wisdom is often wrong. In this specific case very wrong. If she were to pay herself $127,200 in W-2 wages on $200K of net business profit. In your/her circumstances she will pay > $8,000 MORE in net W-2 payroll taxes than she would in net SE taxes as a sole proprietor.

An S-Corp is almost always counter-productive for physician supplemental small business income, because their primary W-2 wages are almost always greater than the Social Security maximum wage base 2017 = $127,200. The excess employee share of FICA is refundable on your Form 1040, the employer share is not. This is compounded in your case by the fact that at your income level, the 1/2 SE tax deduction will decrease the effective SE tax by 19.8%.

It is very likely that she should dissolve the S-Corp as soon as practical. It is beyond my knowledge when that is.

Click to expand...

In addition to the above concerns, I want to raise another one.  If you want to set up a CB plan, you are definitely better off doing solo proprietorship/LLC.  If you give her a W2 of $200k with a net profit of $200k, you can make a zero contribution into the 401k profit sharing and Cash Balance plan, just to correct myself above.  I'm so used to docs having enough money left in their S corps that I often forget about that one.

In order to max out the 401k and Cash Balance you will definitely benefit from NOT doing an S corp, and of course at that point S corp makes zero sense because whatever you save in payroll taxes you will spend on not being able to max out your plans (whether you do a solo 401k only or a Cash Balance), because solo 401k profit sharing also comes from 'employer' contribution, not from W2.