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Hello,
Current medical resident who will be graduating this year. In the course of asking a lawyer to review an employment contract, he brought up that I should form an S corp for the liability protection and tax benefits. Unfortunately, I am a California resident, and from the research I have been doing the tax benefits seem pretty weak. Here is a breakdown of the calculations I have been doing:
Gross income: $400,000
Medicare tax: $11,600 (2.9%)
Social security: $14,694 (12.4% of first $118,500)
Obamacare: $1,350 (0.9% of every dollar after $250,000)
Total: $27,644
Comparing this with an S corp, and assuming I pay myself $200,000 as salary and $200,000 as a distribution:
Medicare: $5,800 (2.9% of $200,000)
Social security: $14,694 (12.4% of first $118,500)
Obamacare: $0
California Franchise Tax Board: $6,000 (1.5% of $400,000, the total income of the S corp)
Total: $26,494
Total savings: $1,150
The real kicker in this situation seems to be the California Franchise Tax Board tax, which takes away $6,000 of the benefit of the S corp and leaves only $1,150 behind. To be honest, I don't think $1,150 is enough savings for the hassle, and will likely pay an accountant and lawyer more to set up and maintain the S corp than benefit I will get.
However, there is also the consideration of the liability benefit. I know as a physician I gain no protection from incorporating when it comes to malpractice, which is my single greatest liability. However, the lawyer was arguing that the S corp could provide additional personal liability protection in the unlikely event that the partnership has a large judgement against it. I find this to be very unlikely, and without a significant tax benefit in the state of California, I am hesitant to put a lot of time into maintaining an S corp. I have also read that the S corp provides very limited personal liability protection if the court decides to "pierce the corporate veil", which it is more likely to do if the corporation is not deemed to be substantively different than the individual (in this case, me providing services as an independent contractor).
This is my understanding of the S corp based on my discussion with others and internet reading. It seems that if the tax benefits and personal liability benefits are this weak, why would I bother to set one up? I hope some of you reading this are much more educated in the subject and can steer me in the right direction.
Current medical resident who will be graduating this year. In the course of asking a lawyer to review an employment contract, he brought up that I should form an S corp for the liability protection and tax benefits. Unfortunately, I am a California resident, and from the research I have been doing the tax benefits seem pretty weak. Here is a breakdown of the calculations I have been doing:
Gross income: $400,000
Medicare tax: $11,600 (2.9%)
Social security: $14,694 (12.4% of first $118,500)
Obamacare: $1,350 (0.9% of every dollar after $250,000)
Total: $27,644
Comparing this with an S corp, and assuming I pay myself $200,000 as salary and $200,000 as a distribution:
Medicare: $5,800 (2.9% of $200,000)
Social security: $14,694 (12.4% of first $118,500)
Obamacare: $0
California Franchise Tax Board: $6,000 (1.5% of $400,000, the total income of the S corp)
Total: $26,494
Total savings: $1,150
The real kicker in this situation seems to be the California Franchise Tax Board tax, which takes away $6,000 of the benefit of the S corp and leaves only $1,150 behind. To be honest, I don't think $1,150 is enough savings for the hassle, and will likely pay an accountant and lawyer more to set up and maintain the S corp than benefit I will get.
However, there is also the consideration of the liability benefit. I know as a physician I gain no protection from incorporating when it comes to malpractice, which is my single greatest liability. However, the lawyer was arguing that the S corp could provide additional personal liability protection in the unlikely event that the partnership has a large judgement against it. I find this to be very unlikely, and without a significant tax benefit in the state of California, I am hesitant to put a lot of time into maintaining an S corp. I have also read that the S corp provides very limited personal liability protection if the court decides to "pierce the corporate veil", which it is more likely to do if the corporation is not deemed to be substantively different than the individual (in this case, me providing services as an independent contractor).
This is my understanding of the S corp based on my discussion with others and internet reading. It seems that if the tax benefits and personal liability benefits are this weak, why would I bother to set one up? I hope some of you reading this are much more educated in the subject and can steer me in the right direction.
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