"Reasonable" Salary for S-corp and is it worth starting in Pennsylvania?

[JK]

Just finished up residency (derm) and will be starting a job as an independent contractor. After hearing a WCI podcast and doing some research on my own, I was hoping to learn a little bit more about whether it makes sense to start an S-Corp. The gist I got is that you don't get any additional liability protection (that would be the malpractice) but the main benefit is to save money on Medicare taxes for the money you decided to receive as a distribution/dividend instead of salary. Social Security won't matter b/c that would be maxed out either way on a doctor's salary. A few questions I had though:

1-What is considered reasonable salary to pay yourself? The goal of course is to max solo 401k and then pay the most possible in dividends to save on that Medicare tax while not running into problems with IRS.

-Do you just go on Medscape salaries and use your specialty and region as an average and take everything above that as a dividend?

-Or is distribution only on work that is quasi passive for a doctor (midlevel supervision, products sales, etc...) - which would only be a small fraction of the overall salary and probably not worth it as much?

-Or is there a certain ratio of salary to distributions that should be followed. For instance, if someone does exceedingly well and pays a salary based upon reasonable for that specialty (whatever that is) but then has massive distributions b/c they worked incredibly hard and were way above the average, is that frowned upon?

-So...what would the collective minds think as a "reasonable" salary for derm in the mid-Atlantic?

2-I currently have a CPA do my taxes. Although I know everyone charges differently, what additional forms and more importantly, cost, would it require to set up this new entity?

3-Along the lines of #1, #2 - how much do you realistically need to make on the dividend portion to make it worthwhile (difference saved on Medicare taxes vs paying for additional tax prep and hassle). While saving money is always a good things, a lot of extra work for a couple hundred dollars just isn't worth it. I thought I can recall WCI saying ~100k as a minimum, but was curious other people's thoughts.

4-Are there any special considerations based upon the state you live in (Pennsylvania for me) that comes into play?

Thanks.

[jacoavlu]

Derm, S Corp salary I’ve only a wild guess, you’re brand new, I’d guess minimum $200, perhaps up to $400. I’ve nothing to say about PA. There is a lot of salary data out there from which to derive a number. Have colleagues in your area you can ask?

Know that S Corp doesn’t always save tax. Yes you save Medicare tax 2.9% on distribution. But the S Corp has to pay half of the social security tax 6.2% on salary, even above the $128,700 wage base. So you need to run those numbers and see if the Medicare tax savings outweigh the extra SS tax paid and of course it depends on total income level and where you set salary.

[orthodoc2018]

If he (or she) is being paid as an indecent contractor, aren’t they responsible for paying the 6.2% SS tax anyway? So not really losing anything on that front

[jacoavlu]

By default the OP is a sole proprietorship. OP could form an S Corp and have the 1099 income paid to the S Corp.

This adds a layer of complexity and tax reporting and sometimes is counterproductive depending on income level. I learned this from spirit rider and it comes up often.

[Molar Mechanic]

We use an advisor for help with some of these things and their opinion (for 2017/18) is that there is no reason to go over $270k.  There are no hard and fast rules, and so long as your number is defensible then you'll be ok.  Remember, if the IRS doesn't provide a hard and fast rule, then use your judgement to find a solution that is advantageous for you.  Even if you are wrong, the audit isn't the end of the world, and is generally very unlikely.  You could end up paying a small fine and a little interest.

[Hawkeye225]

jacoavlu wrote:

Derm, S Corp salary I’ve only a wild guess, you’re brand new, I’d guess minimum $200, perhaps up to $400. I’ve nothing to say about PA. There is a lot of salary data out there from which to derive a number. Have colleagues in your area you can ask?

Know that S Corp doesn’t always save tax. Yes you save Medicare tax 2.9% on distribution. But the S Corp has to pay half of the social security tax 6.2% on salary, even above the $128,700 wage base. So you need to run those numbers and see if the Medicare tax savings outweigh the extra SS tax paid and of course it depends on total income level and where you set salary.

Click to expand...

The S corp pays 6.2% on salary of $128,400 (but that additional amount if you have a side gig either W2 or 1099 is refunded on your tax return).  If you have a payroll company for your 1099 and a separate one for your W2, they are both required to pay the FICA until $128,700 salary is reached.  You only pay the FICA on the $128,700 essentially one time/year because the overage is refunded.

If you pay yourself a distribution if a 1099, then FICA is not paid on that.

This is a common misconception and has been confirmed with my tax attorney/CPA.

As for complexity if one has both W2 and 1099 income, it's a simple separate return for the S corp that flows onto the 1040.  Costs maybe $600 but there is nothing to it.

[jacoavlu]

I think you may be right and I wrong with SS tax and an S Corp as the sole source of income, where employee withholding and employer contribution for SS will be capped at the wage base.

It is the situation of having two jobs, one main W2 position and then additional 1099 income where an S Corp for 1099 income may be counterproductive because in this case it is where the wage base is already met in the W2 job but the S Corp is mandated to withhold and contribute payroll tax. The employee portion will be refunded on the return but the employer contribution (excess social security) will not be recoverable.

Always learning...

[cgossage]

Typically, you should be paying yourself between 40-60% of the profits in salary if you structure your entity as an S-Corp and you are the only member.

It does take a rather high amount of income to make an S-Corp worth it.  Because of the cost of an extra tax return and payroll costs it doesn't typically make sense to use an S-Corp structure unless your gross earnings are $500,000 or more.

Because of the Tax Cuts and Jobs Act passed at the end of last year, any entity structure conversation should start with looking at maximizing your 20% QBI deduction.  S-Corp's are counterproductive for this because anything you pay yourself in wages isn't eligible for the deduction.  If you taxable income is greater than the phaseout for specified service businesses, ($207,500 single or $415,000 jointly) then the S-Corp starts to become more attractive.