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Max out salary from S-corp or take K-1 distribution?

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  • Max out salary from S-corp or take K-1 distribution?

    So I've been racking my brain over this for some time and now that there's a forum or place for me to bounce ideas off people, I was hoping I could get some feedback and have people weigh in on their experiences with an S-Corp and the associated 1099 income.

    My current situation is I have a regular 9-5 job that pays $200,00/year (of which I defer 18k into a 401k).  I also have a consulting job and I I lecture occasionally, which provides approximately $200,000 of 1099 income that goes into my S-corp. Since I'm setup as an S-corp, all the 1099 income gets deposited in the S-corp, and I pay myself a reasonable salary every year (120,000/year).  Since I have a Solo 401K setup as part of the S-corp, my understanding is that I can only contribute a maximum of 25% of my salary into that 401k (which I'm currently contributing at $30,000/year as part of profit-sharing).

    Now that the financials are laid out, here's the question.  Is it better to:

    A.  Increase my salary (from 120k to 150k) from my S-corp so that I can contribute a higher amount into my solo 401k (but also will be forced to pay more in self employment/payroll taxes) i.e - Retirement contribution goes from profit sharing of $30,000/yr to $37,500/yr, but taxes also increase because I'm making more


    B.  Take less salary (say $50,000), contribute only $12,500 to the profit sharing portion of the 401k, and take the rest of the money as a distribution. i.e - pay less self employment taxes, contribute less to a 401k, but take more money home as a K-1 distribution

    I've tried working out the numbers and the way I calculated it, I believe it was better to pay myself the higher salary, but for some reason, I keep doubting this because it just doesn't seem right to me. Is anyone else in a similar situation?  What do you think would be the best way to handle this so that you pay the least amount of taxes in the long run.


  • #2
    You have to take your marginal tax rate into account, as that is what you will not be paying on the increased 401k.  Of course this doesn't take into account your rate at retirement, but that aside in our case we took as much as salary as possible in order to defer more into the retirement account.


    • #3
      Probably better off maxing out salary to be able to increase tax deferred pool.


      • #4
        More than taxes to consider. Getting more money into your solo-k to grow tax deferred would be a bigger priority, imo. As for taxes on the additional salary, remember it's "just" Medicare, not SS.

        You are solidly in the 33% bracket (2015 tables), so here goes:

        • With the salary of $150k, you are paying income tax on $162,500 + Medicare tax on 150,000 of $4,860

        • With the salary of $50k, you are paying tax on $170,000 + Medicare tax on $50,000 of $1,620 (extra $2,475 income tax over scenario 1

        • With the current salary of $120k, you are paying tax on $187.500 + Medicare tax on $120,000 of $3,888 (extra $8,250 over scenario 1 and $5,775 over scenario 2)

        Of course, I have no idea about state and local taxes.

        Might want to double-ck my calculations, I dashed this off. Hope it helps.
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