S Corp taxes

[New Guy]

I am a new partner in a physician practice set up as an S corp.  We are currently trying to determine a "reasonable income" for our W2, and I know all about the incentive to make your "reasonable" income as low as possible and distributions as high as possible.

My accountant has told us the main difference is savings on Medicare taxes.  From what I have been told, the W2 vs. distribution amount has no impact on federal/state/local taxes.

However, on other forums, I have seen people discussing that under the new tax code, federal is capped at 25% for S Corps.  Is this true?

Sorry if this has been discussed elsewhere, but the new tax code has a lot of details, and I am confused about the changes to business income and how this would affect a physician practice set up as an S Corp

[jfoxcpacfp]

Your accountant has given you the correct advice under the law as it stands today. Under tax "reform", it's complicated:

• The House version imposes a 25% income tax rate on pass-through business income


• The Senate version allows a 23% deduction for owners of pass-through businesses

Under both of the above, professionals (such as doctors and financial planners) are prohibited from getting the tax benefits except under the Senate version which allows the 23% deduction for professionals whose AGI is < $500k for MFJ or $250k for Singles.

Got it?  

I'm not making any recommendations or trying to parse the planning until the bill is signed.

[pistolpete]

How rapid is the proposed phaseout above 250k for single filers?

[spiritrider]

pistolpete wrote:

How rapid is the proposed phaseout above 250k for single filers?

Click to expand...

Very rapid. $500K + $100K phase out for married filing jointly and $250K + $50K phase out for all others.

[Dreamgiver]

So, if I understand this correctly, no difference compared to the present rules if your income is >$600K married?

Any reason, assuming this goes through, to go the C-Corp way?

[spiritrider]

The problem with a C-Corp as always is that your profits are taxed twice. Assume the 20% corporate rate sticks. At a taxable income > $600K you are going to be in both the 20% qualified dividend rate and subject to the 3.8% net investment income tax. Making the total corporate/personal tax rate on the C-Corp's profits at 43.8%.

[jfoxcpacfp]

Dreamgiver wrote:

So, if I understand this correctly, no difference compared to the present rules if your income is >$600K married?

Any reason, assuming this goes through, to go the C-Corp way?

Click to expand...

It will for some businesses, but not for most physicians. There are some benefits to C-corps, such as deductions for health insurance and other benefits not available to s-corp owners but, as @spiritrider points out, you'll have to bonus out profits left in the business or pay an extra 15% - 20% on dividends that are not deductible to the corporation.

Businesses will have to make that decision based upon specific facts and circumstances but, in general, I would say that it still would not benefit physicians, at least in the higher-paying specialties, to go the C-corp route.

[Judge]

Johanna, first off thank you for sharing your "wealth" of knowledge with us. Truly appreciated. I have a few questions about my taxes and hoping you can shed some light for me, as my current CPA has a hard time explaining it to me in a way i understand or I am just having trouble grasping it.

 

From Jan '17 - April '17 My wife and I were W2 employees in NYC. We both quit our jobs at the end of April and took 2 months off prior to starting our current jobs in FL. Beginning mid June I started at my current job were I am now an independent contractor filing as an S corp. My wife is still a W2 employee. I met with my CPA in August and I explained to him that my Gross salary from Mid June to Dec 31st would be approx. 200K. His response was as follows......

 

"based on my income tax projections your salary should be 20K gross minus 1530 SS and medicare minus14000 fed withholding...so the net check will be $4470 each month which will be directly deposited into the personal back account. The Payroll taxes will be $17060 each month and will be deducted on the 15th of each month, the first payroll tax pmt will out of the business account on 9/15/17.."

 

So fast forward to today. I have had that $17060 deducted each month including december ($68,240). I guess what confuses me is that when I first researched forming an S corp and paying taxes as an IC, I read that you pay taxes on a quarterly basis. Each time I asked him about this he states that we must first "catch up" so we are not short for the year. Initially we had stated that of the 200k...100k would be salary and the other 100k distribution, but I still can wrap my head around the large amount being deducted each month. He states that all this will change come Jan 1st, but I am still not understanding this completely.

 

Hope your wisdom can offer some help here! Thanks

[jfoxcpacfp]

(Groan) Why did you set up an S-corp this year?

I guess flattery will get you anywhere...

There are 2 components to your income as an S-corp because you are both employer/investor and employee.

• As an employee, you will get a paycheck and have taxes withheld.


• As an employer/investor, you will pay yourself a "distribution" of profits. The distribution represents the profits remaining in the company after you pay the employee. It is similar to a dividend, which is the distribution of profits made by C-corps, but it is not double-taxed, like dividends are.

Because you don't have tax withholdings on distributions, you have to make estimated payments on that income. If you (or your CPA) don't want to bother with estimated payments, you can just have more withheld from your paycheck. It sounds as if this is what your CPA is doing. Surely you are putting more into your bank account than the $4,470/mo - should be getting distributions, too. Right?

I cannot comment on the amount he is having you withhold because I don't know about your wife's salary and withholding and what you had withheld from your pay in the 1st 4 months of the year. It all gets added together on your joint tax return so if you're short in one area, he will make it up with the s-corp withholding. So maybe he is catching up on under withholding as an employee? Most likely, though, is that he is keeping you abreast of your tax liability for the profits of the corporation. Profits = $200k - your salary - your payroll taxes - CPA fees - other expenses (malpractice, CME, travel, licenses, home office, etc.)

It sounds as if he needs to run a tax projection and show you the results. Just ask for one and tell him you'd like to see the actual printout - should be fairly simple to do. We begin doing them for physicians in July along with a second one this month. (If he tells you he does not use tax projection software, I have no response.)