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What to do now that I am K1 partner?

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  • What to do now that I am K1 partner?

    Hi all,

    So my private physician owned group dumped some news on me a couple days ago stating that they are selling our EM contract to a CMG that will now pay me as K1 partner. I was previously a W2 employee w/ this group making around 220K w/ side hustle at different hospital as a sole prop. making another 70K. Wife is paid as W2 employee making 400K. She also makes around 20K per year as sole prop. side hustle. All jobs in California where we live.

    Now that I am K1, I don't expect my income to change much, still making around 220-250K per year on K1, and continuing my other job as 1099 independent contractor making 70K.

    Been trying to read the blog to figure out how to go about this, do I incorporate or not, LLC or S corp, etc., but it has left me even more confused. I have been comfortable doing my estimated taxes and deductions in the past as I have been using quickbooks and turbotax with ease for the past couple years due to my independent contractor work. I am just nervous now as a K1 seems much more complex and I have no experience with this. Any advice on what to do going forward? Or do I just need to bite the bullet and hire a tax professional at this point? Thanks in advance for any advice!

  • #2
    You don't need to incorporate (and it definitely sounds like not an S Corp in your position). You'll no longer have taxes withheld from your paychecks. If you're filing jointly, you'll either need your wife to withhold taxes from her W2 job for both of you or pay quarterly estimated taxes (federal and state). If you pay 110% of last year's federal tax or 90% of the current federal tax year's liability then you'll meet the safe harbor requirements and won't owe any penalties. Keep a close eye on your tax projections so you don't run into any issues in April.

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    • #3
      So I had been doing all my own withholding and estimated taxes prior. No issues there, have been using quickbooks, working well. What is the reasoning as to why not to form S corp or LLC?

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      • #4
        Originally posted by GorillaDO View Post
        So I had been doing all my own withholding and estimated taxes prior. No issues there, have been using quickbooks, working well. What is the reasoning as to why not to form S corp or LLC?
        Because it doesn't add any layers of protection (only adds work) in your situation and given the income you're expecting, the S Corp will likely cost you more money. Alternatively, why do you think you need an S Corp or LLC?

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        • #5
          Yes, this is the time to bite the bullet and hire a tax professional. Preferably a true “professional”. 100% agree with Cord that the S-corp w/b counterproductive at your income level (the LLC w/just be a nothing burger).
          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            If you are being paid the same amount on K1 as you were as a W2 employee, I hope you realize that you are taking a huge pay cut!

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            • #7
              fwiw, some groups in CA require you to be an s-corp once you become partner, so you need to check on that. Otherwise, I agree you should avoid it.
              Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                If you are being paid the same amount on K1 as you were as a W2 employee, I hope you realize that you are taking a huge pay cut!
                I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.

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                • #9
                  Originally posted by GorillaDO View Post

                  I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.
                  OT, but every time you post, I imagine you with a big bottle of Gorilla Glue on your desk...
                  Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    Originally posted by GorillaDO View Post

                    I'm aware, but really have no choice in the matter, this was sprung on me a few days ago by our medical director, and very few shops hiring in the area at the moment so not much I can do about it in the short term.
                    $220K sounded low for EM even before the paycut though right? Is this the norm in HCOL CA areas?
                    Otherwise agree with above, no need for s-corp.

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                    • #11
                      Originally posted by jfoxcpacfp View Post
                      Yes, this is the time to bite the bullet and hire a tax professional. Preferably a true “professional”. 100% agree with Cord that the S-corp w/b counterproductive at your income level (the LLC w/just be a nothing burger).
                      This is interesting. My mixed-speciality practice is set up where the partners of the practice LLC (taxed as partnership) are their own individual LLCs. I have a simple pass through LLC. I recently became partner, but my understanding is that this allows us to take deductions for business expenses (nothing crazy) on a Schedule C that wouldn't otherwise be deductible if we were just K1 partners.

                      For example, Doc A does a lot of travel to conferences, etc. for business, but the partnership doesn't want to reimburse that travel, so he can claim that as an expense on his schedule C. Doc B does a ton of driving to different facilities, but the partnership doesn't want to pay for part of his car or mileage, so he can write that off. Doc C needs a new computer because she does a lot of remote radiology work, so she can write that off through her LLC. Is that not a reason to incorporate if possible in a state where you don't have onerous fees/taxes like California?

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                      • #12
                        Originally posted by SadlerMDInvestor View Post

                        This is interesting. My mixed-speciality practice is set up where the partners of the practice LLC (taxed as partnership) are their own individual LLCs. I have a simple pass through LLC. I recently became partner, but my understanding is that this allows us to take deductions for business expenses (nothing crazy) on a Schedule C that wouldn't otherwise be deductible if we were just K1 partners.

                        For example, Doc A does a lot of travel to conferences, etc. for business, but the partnership doesn't want to reimburse that travel, so he can claim that as an expense on his schedule C. Doc B does a ton of driving to different facilities, but the partnership doesn't want to pay for part of his car or mileage, so he can write that off. Doc C needs a new computer because she does a lot of remote radiology work, so she can write that off through her LLC. Is that not a reason to incorporate if possible in a state where you don't have onerous fees/taxes like California?
                        • First of all, if you are filing a schedule C, you are not incorporated.
                        • Second, there is no purpose to your individual LLC, that I can determine, which leads to
                        • Third, a business is able to deduct the same expenses whether you are set up as an s-corp, an LLC, or a sole proprietorship
                        • Finally, all of the business expenses the partnership does not choose to reimburse are deductible as UPE (Unreimbursed Partnership Expenses) on pg 2 of sch E as long as the partnership agreement has the appropriate verbiage
                        Hope that helps and welcome to the forum!
                        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          Originally posted by jfoxcpacfp View Post
                          • First of all, if you are filing a schedule C, you are not incorporated.
                          • Second, there is no purpose to your individual LLC, that I can determine, which leads to
                          • Third, a business is able to deduct the same expenses whether you are set up as an s-corp, an LLC, or a sole proprietorship
                          • Finally, all of the business expenses the partnership does not choose to reimburse are deductible as UPE (Unreimbursed Partnership Expenses) on pg 2 of sch E as long as the partnership agreement has the appropriate verbiage
                          Hope that helps and welcome to the forum!
                          Thanks for insight and taking the time for the reply! I may be completely misunderstanding why our practice does this (I hope not...). I was told the IRS frowned upon UPEs, which is why the other partners did the single member LLC. This way, each doc could have a separate LLC bank account and credit card they could use for their expenses that weren't paid at the partnership level or reimbursed. And instead of Dr. A getting a K1 from the practice, Dr. A, LLC would get a K1.

                          I haven't been partner long enough to file my yearly taxes, but is this something that is possible? If Dr. A, LLC (not an S-Corp) receives the K1, does that K1 still get reported directly on Dr. A's schedule E as if Dr. A had received the K1 directly? And where would the expenses paid from Dr. A, LLC's bank account get reported on their tax return? This is all assuming the single member LLC is not an S-Corp and the only income it receives is from Dr. A's participation in the practice (and nothing else).

                          I'm starting to think I got some pretty sloppy tax advice.

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                          • #14
                            Originally posted by SadlerMDInvestor View Post

                            Thanks for insight and taking the time for the reply! I may be completely misunderstanding why our practice does this (I hope not...). I was told the IRS frowned upon UPEs, which is why the other partners did the single member LLC. This way, each doc could have a separate LLC bank account and credit card they could use for their expenses that weren't paid at the partnership level or reimbursed. And instead of Dr. A getting a K1 from the practice, Dr. A, LLC would get a K1.

                            I haven't been partner long enough to file my yearly taxes, but is this something that is possible? If Dr. A, LLC (not an S-Corp) receives the K1, does that K1 still get reported directly on Dr. A's schedule E as if Dr. A had received the K1 directly? And where would the expenses paid from Dr. A, LLC's bank account get reported on their tax return? This is all assuming the single member LLC is not an S-Corp and the only income it receives is from Dr. A's participation in the practice (and nothing else).

                            I'm starting to think I got some pretty sloppy tax advice.
                            Single Member Limited Liability Companies | Internal Revenue Service (irs.gov)

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                            • #15
                              An LLC is a state chartered business entity. The IRS considers an LLC that has not elected to be an S-Corp a disregarded entity for tax purposes. A single member LLC is considered a sole proprietorship and a multimember LLC a partnership. They file as their respective IRS entity types.

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