Cost Benefits of LLC vs Personal Taxes only

[TT]

Would love your feedback on this...I have asked a few accountants and the answers are always vague

background: Emergency Med MD/no loans/no mortgage

I split my time between employee status and 1099 work  (about 200k each)

I have a 401k for the max and also a SEP IRA for the 1099 work maxed

I already write off typical stuff off my personal taxes from my 1099 using turbo tax and not using an accountant...(Typical deductions such as supplies, miles, cme, phone,home office, etc related to work)

I keep debating if its worth it to become LLC and if the cost/benefits make it worth the changes

I do not have a mortgage or loans to write off

I understand the basics of paying myself a portion of my 1099 salary and some additional write off

I do not have a expensive health plan, get it via my spouse and its about 400/month including kids so does not make sense for me to do high deductible plan and write that off

 

If I were to become LLC, then I would have an accountant and fees from that (2-5k for services, bookkeeping ect)

I would be doing personal and corporate taxes yearly and those have some expenses...

Is that amount I would save (no deduct but actually save) after paying accountant and additional fees to LLC/tax paperwork worth the change?

 

 

[spiritrider]

By default an LLC is considered by the IRS to be a disregarded entity. For a single member LLC, you will file as a self-employed sole proprietor on a Schedule C and a Schedule SE. There is no difference in taxation between the two.

If you are referring to an S-Corp that has elected to be treated as an S-Corp, stop right there. In your circumstances where your Social Security (SS) wages from your current W-2 employment >= the SS maximum wage base (2017 = $127,200 and 2018 = $128,700), you will pay MORE in net FICA as an S-Corp than you would in net SE taxes as a sole proprietor.

I continue to be astounded that many CPAs do not understand this basic math and push their clients into a counter-productive S-Corp even before factoring in their additional fees.

A couple other observations:

1. You can not max a SEP IRA on $200K in 1099-MISC income. The maximum self-employed SEP IRA contribution is 20% of net self-employment earnings = net business profit from Schedule C - 1/2 SE tax from Schedule SE. Even if your net self-employment earnings after expenses and 1/2 SE tax were $200K, the maximum SEP iRA employer contribution would be $40K. The 2017 annual addition limit is $54K.


2. You can not take the Self-employed health insurance deduction if you are eligible for your spouse health insurance, whether your spouse enrolls you in it or not.

[beagler]

spiritrider wrote:

 

If you are referring to an S-Corp that has elected to be treated as an S-Corp, stop right there. In your circumstances where your Social Security (SS) wages from your current W-2 employment >= the SS maximum wage base (2017 = $127,200 and 2018 = $128,700), you will pay MORE in net FICA as an S-Corp than you would in net SE taxes as a sole proprietor.

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Can you help explain where FICA excess under s-corp comes from? Is this from the deductibility of half of SE taxes as sole prop? So 6.2% of $127,200 = $7886 deduction. Isn't the employer SS contribution from S-corp also deductible as a business expense?

[spiritrider]

The real problem is when an S-Corp is used in conjunction with other W-2 employment. You end up paying the employer's share of the Social Security taxes up to the maximum wage base that you would not have to pay with the SE tax.

Let's use a nice round number of $200K as our net business profit for both an S-Corp and a sole proprietor. The Social Security (SS) 2017 maximum wage base = $127,200. The IRS guidance on S-Corp reasonable salary, states that if the majority of the corporation's income comes from the personal services of the shareholder-employee, then the majority of the income should be paid in compensation. Let's assume a reasonable salary on $200K S-Corp net business profit is the SS maximum wage base of $127,200.

The OP doesn't mention what marginal tax bracket him and his spouse are in, but with his income close to $400K, they are at a minimum in the 33% bracket and not that far from the 35%/39.6% brackets. So we will assume 33%.

Sole Proprietor: $200K net business profit, amount subject to SE tax $200K * 92.35% = $184,700. Since the SS maximum wage base was reached in the primary W-2 employment, The SE tax is only the Medicare component. $184,700 * 2.9% ~= $5,356. The 1/2 SE tax deduction will be worth $5,356 / 2 = $2,678 * 33% = $884. The net SE tax = $5,356 - $884 = $4,472 net SE tax.

S-Corp: FICA = $127,200 * 15.3% = $19,462. The SS component of FICA (12.4%) must be deducted from every employee regardless if they have reached the SS maximum wage base in other W-2 employment. However, in this case, the employee's share of the SS component, $127,200 * 6.2% = $7,886 is refunded on Form 1040. The employer's share is never recoverable. The FICA = $19,462 - $7,886 = $11,576. The employer share of the FICA is a business expense so that saves you on your taxes. $19,462 / 2 = $9,731 * 33% = $3,211 The net FICA = 11,576 - 3,211 = $8,365

Bottom line: Sole Proprietor net SE tax = $4,472, S-Corp net FICA = $8,365.

You end up paying 6.2% on compensation up to the SS maximum wage base in order to save 2.9% on distributions.

[Ninersfan]

As someone who has a similar question to OP yet only understood 25% of what you said, bottom line is setting up llc in this situation would cost OP more then not having an LLC?
Also as someone who is planning to start to work for kaiser next year, if I was to set up an LLC I would lose out on their health insurance benefits, 401k, pension ?

[spiritrider]

Not sure exactly what you are asking with regards to working for Kaiser? Is Kaiser going to be W-2 employment or 1099 independent contracting.

First, an LLC is a state chartered business entity, not a federal tax election. So you have to be careful with terminology. By default, an LLC is treated by the IRS as a "disregarded entity".

A default single member LLC is considered the same as a sole proprietor for tax purposes. You can choose to elect an LLC to be treated as an S-Corp for tax purposes.

So for tax purposes it is irrelevant whether you have an LLC or not. The only thing that matters is whether you are treated as being self-employed or an S-Corp W-2 shareholder-employee.

The OP was referring to not only having an LLC, but having it be an S-Corp and only paying a portion of the 1099 revenue as W-2 salary. This usually done to save on payroll taxes.

Unfortunately, as I pointed out, this a very bad idea when you already have substantial W-2 employment.

It is also not clear to me what you are asking with regards to Kaiser and employee benefits. Usually, if you are an employee you receive health insurance, retirement plan benefits, etc...

If you are both. You might have W-2 employment with benefits and a second source of income as an independent contractor.

What exactly are you trying to do?

[Dreamgiver]

Ninersfan wrote:

As someone who has a similar question to OP yet only understood 25% of what you said, bottom line is setting up llc in this situation would cost OP more then not having an LLC?
Also as someone who is planning to start to work for kaiser next year, if I was to set up an LLC I would lose out on their health insurance benefits, 401k, pension ?

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I am not a Kaiser expert, but in general when you get hired you do not get to choose. If they bring you on as an employee and get a w2 there is no point really in doing an LLC or s-corp. If you come on as a 1099 contractor then it is different. Again, you do not get to choose, usually the job calls for one or the other. From what I have heard, Kaiser usually brings people on as employees on a w2 basis.

[DMFA]

Listen to spiritrider.

Folks, c'mon...an LLC has *nothing* to do with your tax filing status.  For taxes, it's either sole prop or S-corp.

Your SS taxes will be double-taxed.  You'll get the employee portion back, but an S-corp has to pay the employer tax on the SS eligible wages.  A sole prop who has reached it does not pay it.  That's 6.2% of the income up to $127,200 (about $8,000).

That's in addition to the charges for filing as an S-corp the first place.  You will not make up that tax difference by taking a corporate distribution and paying the corporate tax rate on it.

It rarely makes sense to file taxes as an S-corp as a self-employed working physician, especially when also W-2 employed.  It's possible for S-corp to be better, such as if you make revenue from things other than your own work or if you make a very high amount without any other W-2 income, but it's less common.  It is a myth that all self-employed doctors would benefit from being taxed as an S-corp.  We need to combat this common misconception; I must post "why S-corp?" on one of my Facebook groups at least once a week.

[Peds]

mollaeilaw wrote:

Its depend on state and citizenship.
If you are a foreigner then it will be different then American..

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why did you resurrect an almost 1y old thread and make that your first post?

[jacoavlu]

mollaeilaw wrote:

Its very difficult to say. But I think both cost are beneficial for us. You can try to read this information here,

https://mollaeilaw.com/blog/s-corp-vs-llc/

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@mollaeilaw can you explain further why you feel "it's very difficult to say?"

The original poster says nothing of being a foreigner so I think it's safe to presume they're a US citizen.

Please note spiririder's and DMFA's helpful comments above.

Is there something that you disagree with?

My suspicion is that you're just looking to post links to your site. But if you can provide helpful discussion I'll humbly retract my comment.

[Peds]

mollaeilaw wrote:

Its very difficult to say. But I think both cost are beneficial for us. You can try to read this information here,

https://mollaeilaw.com/blog/s-corp-vs-llc/

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ah to promote your own site....

[Peds]

jacoavlu wrote:

My suspicion is that you’re just looking to post links to your site. But if you can provide helpful discussion I’ll humbly retract my comment.

Click to expand...

nope i think thats it.