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S Corporation vs. LLC Partnership Logistics

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  • S Corporation vs. LLC Partnership Logistics

    Thanks for your post ( on why you decided to file as an S-corp in 2017. I am following in your footsteps and doing the same for 2019, but looking to get some advice on the logistics of payroll mostly.

    I am looking for advice on several things. I am anticipating net revenue of around 150k for a health policy consulting business. I will pay myself a salary of $75k (median for an economist on BLS) while deferring 19k as an employee to a solo 401k. I am also planning to contribute on the employer side the max amount, given the salary of 75k, I believe it is 25%, so another 18,750 as profit sharing (and avoiding FICA). I would also like to purchase health/dental for myself, which I am estimating at another $5k for high deductible plans.

    By my accounting, I will have the following tax liability on the employee side

    W2 wages: 75,000

    Pre-tax deferral: 19,000

    FICA: 5,737.50

    Federal (56,000 taxable @ 24%): 13,440

    Total Tax: $19,177.50


    And on the employer side.

    Net Income: $150,000

    Wages: 75,000

    401k Profit Sharing: $18,750

    Health Benefits: 5,000

    Employer paid FICA: 5,737.50

    Net distribution to shareholders: $45,512.50

    When I add the marginal tax on the distribution, I get another 10,923 in tax (assuming 24% marginal rate).

    Total Tax paid from 150,000 Net Income: 5,737.50 Employee FICA, 5,737.50 Employer FICA, 13,440 Federal Tax on wages, 10,923 Federal Tax on distributions= $35,838 or  23.89%

    If I didn't elect to be treated as an s corp and earned all of this as an LLC partnership. I believe the taxes would be as follows:

    150,000 Wages

    Social Security (Max taxable 128,700): 15,958.80

    Medicare: $4,350

    Employee 401k contributions: 19,000

    Profit Sharing 401k contributions: 37,000

    Can't deduct Health Insurance because eligible through wife's work

    Deductible half of self employed: 10,154.40

    Federal Tax (Taxable Income= 83,854.6) @24% marginal= 20,122.94

    Total Tax= FICA 20,208.8 + Federal Tax 20,122.94= 40,331.74

    Tax Savings= 40,331.74 (LLC Partnership)- 35,838 (S Corp)= $4,493.74


    However, I would like a really simple way to do payroll. I don't really want to have a payroll service to force myself to learn how this works. Any recommendations for payroll on your S-Corp? I am planning to pay myself 4 times a year for my salary and distributions as needed (elected to be s corp in 2019). It should be really simple, but I am going to also pay for dental/medical as an employer paid benefit and the profit sharing component of the solo 401k to avoid FICA on as much as I can. Any recommendations? I’d prefer to do it myself to learn, but not sure if I am over my head here. What records would I need in the event of an audit? Thanks for any advice.

  • #2
    You forgot to factor in how the new QBI deduction plays into your calculations.

    I would be very surprised if an S Corp saves you money over a simple sole proprietorship. Do some research, re-run your numbers, and report back.


    • #3
      My wife and I will be over the taxable income threshold for the 199A deduction and consulting is a specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.


      • #4
        MFJ taxable income >415k ?


        • #5
          Yes we are.


          • #6
            Even if over the threshold so no QBI deduction. You should factor added accounting cost for prep of the 1120S if you’re not going to do that yourself. Ditto payroll. Also some states have added taxes/fees for an S Corp.


            • #7
              I was planning to do 1120S myself and no taxes/fees in FL on S corps.


              • #8
                I don't follow how your taxable income is over $415,000, but you're using a 24% marginal rate.  Those are mutually exclusive.  If you're 24%, then you're under $315,000.  If you're over $415,000, then you're 35% marginal or above.

                Maybe a 24% effective rate?  That would make sense for the mid-400K range.


                • #9
                  You're right, should be 35% marginal.


                  • #10
                    As a 2% shareholder, your Health Insurance Premiums are deductible for your S-Corp but you do not qualify for a HSA account even if your plan is a HDHP. That is what I got from my CPA and I would love to be wrong on this one.


                    • #11
                      WCICON24 EarlyBird

                      As a 2% shareholder, your Health Insurance Premiums are deductible for your S-Corp but you do not qualify for a HSA account even if your plan is a HDHP. That is what I got from my CPA and I would love to be wrong on this one.
                      Click to expand...

                      Well you are in love, because your CPA is most definitely wrong on this. I just don't understand how some CPAs can get this stuff wrong. There is no prohibition on an otherwise HSA eligible S-Corp 2% shareholder-employee from contributing to an HSA.

                      Under IRS Notice 2005-8, just like health insurance premiums, the HSA contributions can be FICA/Income tax exempt if:

                      1. The S-Corp pays directly or reimburses the HSA contributions.

                      2. The S-Corp deducts the contributions as compensation on Form 1120S Line 7 Compensation of officers and on the 2% shareholder-employee's W-2 Box 1:wages, but not Boxes 3:Social Security wages and 5:Medicare wages.

                      3. The 2% shareholder-employee claims the Health Savings Account deduction on their Form 1040 Line 25.