200k "reasonable" income for 800k 1099 total income

[B52slinger]

Could this get someone in trouble with the IRS? Taking 200-250k "reasonable pay" and collecting 600k+ in distributions from >800k total 1099 income?

I have not set up an S-corp yet but if I'm understanding this article correctly it would be extremely worth it.

S Corp and Self Employment Tax: What you need to know — Collective Hub

Learn about the S Corp and Self Employment Tax rules before you make the switch to an S Corp from a sole proprietorship,or any other structure.

www.collective.com

So if I'm collecting 600k as an annual distribution instead of income I don't have to pay 15.3% payroll taxes which is almost 50k of tax savings?

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[Merovinge]

IANAL and this is obviously something to talk to with a tax attorney and your CPA before doing. You would need to earn a reasonable psychiatrist salary, I could definitely see 250k qualifying for that. 200k seems harder to argue, certainly by 300k you would be bulletproof.

 

[clozareal]

You want to set a low salary so that you pay less on payroll tax. You want it to be low and "reasonable" but that's up to interpretation. You want to get paid a wage that's similar to other psychiatrists doing the same thing in your area. Just document how you're coming up with that reasonable salary (using BLS, RC reports, offer letters, salary.com, etc.). I would try not to go under the 25th percentile probably.

If you set your salary to be at least the FICA maximum ($168,600 in 2024), that is a good safe harbor because it allows the IRS to collect the maximum amount of Social Security taxes from employee and employer. If you want to make out your solo 401k deduction which is 25% of your salary, then you can increase it to $184,000 which would allow you to put $46k (employer max which is also considered an employer match and part of your compensation package) into your solo 401k, coming out to $230k in compensation. You can deduct pretax $23k for the employee side for max 401k in 2024, which gets automatically taken out of payroll which you would then remit to the 401k administrator.

You should get an accountant who is versed in S corps to help you out with this.

 

[clozareal]

So if I'm collecting 600k as an annual distribution instead of income I don't have to pay 15.3% payroll taxes which is almost 50k of tax savings?

Yes but don't forget it costs more to set up an S corp, including more expensive accounting fees, payroll, more stringent bookkeeping. Talk with an accountant to see if this makes sense for you. There are other considerations like the franchise & excise tax, a pass through entity tax deduction, and the three different levels of self-employment tax.

The first bracket of self-employment tax gets hit with the 15.3% payroll tax up to $168,600 (12.4% social security + 2.9% medicare).
The second bracket is from $168,600 to $200,000 for single and $250,000 for married filing jointly, and only gets hit with the 2.9% medicare tax and not social security.
Finally, any additional income over that $200k gets hit with both 2.9% medicare and 0.9% obamacare surtax for a total of 3.8%.

This means that if you lower your salary, you're saving that 15.3% payroll tax up to $168,600 and not the full $600k like you're saying. You're saving 3.8% on any amount over $200k single or $250k MFJ but you have to subtract any franchise & excise tax (in CA it's 1.5%) so your amount you save may be much lower than what you're expecting. You then have to compare the time and fees you'd be paying to see if that savings is worth it. This S corp analysis is something an accountant can help you with.

 

[ObsequiousAplomb]

To the OP:
I'd probably be sure to base it off of either total hours worked or some other productivity metric tied to salary, because I remember that you're working 3 full time jobs. If you're working 60 hours per week, I'd calculate the salary based on the median for 60 hours. Or, if that's hard to find, the median for 40 hours and then multiply by 1.5. that's what I'm planning to do. Obviously I'd pay more taxes. I'd feel more honest about it. There's also the benefit others have alluded to, where your W-2 income being higher can be helpful. Easier to get mortgages, car loans, etc when you can show a solid W-2 paystub.

In your example that'd be like $300k to $400k as W-2, and I'd go with $300k. You're the only one doing the work in your business, so it's weird if you're bringing in the the productivity of 2.5 doctors but salaried for much, much less than that.

 

[Merovinge]

To the OP:
I'd probably be sure to base it off of either total hours worked or some other productivity metric tied to salary, because I remember that you're working 3 full time jobs. If you're working 60 hours per week, I'd calculate the salary based on the median for 60 hours. Or, if that's hard to find, the median for 40 hours and then multiply by 1.5. that's what I'm planning to do. Obviously I'd pay more taxes. I'd feel more honest about it. In your example that'd be like $300k to $400k as W-2, and I'd go with $300k. You're the only one doing the work in your business, so it's weird if you're bringing in the the productivity of 2.5 doctors but only salaried at 25 percentilish.

To everyone:
How do I consider the fact that my wife is also a physician but she's a W-2 making $330k? We file jointly, so I'd be paying the quarterly estimated 1099 taxes based on my entire income being above $330k, right? Absolutely don't want to get boned if I paid part at 24% when I should have been paying the higher thing for all of it. Obviously I will be talking to my accountant about it in a few weeks, just curious.

We wife and I have had this problem of being underwitheld. When you both make $300k+ you will definitely need an accountant to set your deductions to keep yourself in the safe harbor and avoid penalties. We had to pay penalties last year although it far from crushing.

 

[jbomba]

I have a very skilled accountant and I pay myself about the same based on his recommendations.

@B52slinger I did the whole S corp thing last year and learned a lot about deductions, etc by way of my accountant. Feel free to message me if you want more info.

 

[clozareal]

The problem with doing something like this and limiting s corp salary to say for example 200k is that you won't be able to do something like a significant cash balance plan deduction since its based on your compensation. Yes you save 4 percent on that 600k so like 25k maybe but you could tax defer 100k for a 40 something year old and save a bunch more. You can't have a salary of 200-250k and have a cash balance ded of 100k so i think it would have to be 400k range.

You'll have to see if you can even do a cash balance plan that's that high depending on the actuarials, particularly age. This is why an accountant is necessary to do not just an S corp analysis, but thinking about tax strategy in general.

The other tax deductions outside of payroll, you don't need an S corp. You can do most of it with a sole prop.

 

[clozareal]

To everyone:
How do I consider the fact that my wife is also a physician but she's a W-2 making $330k? We file jointly, so I'd be paying the quarterly estimated 1099 taxes based on my entire income being above $330k, right? Absolutely don't want to get boned if I paid part at 24% when I should have been paying the higher thing for all of it. Obviously I will be talking to my accountant about it in a few weeks, just curious.

Yeah so your tax bracket would start at $330k so you want to be saving a higher amount. Estimated quarterly taxes take into account how much she's paying for taxes too.

 

[PsyDr]

1) Because are doing something different, and have high income, you are more interesting to the IRS.
2) The more abnormal you become, the more scrutiny you get. There is an intersection between your income and determination if a tax strategy is worth it. If you try to do the double Dutch, you’ll spend more to defend this than you’ll save. Not so for Apple.
3) IME: if you are playing it straight, the IRS is pretty reasonable. They review some things, ask some reasonable questions, and then tell you the outcome. The worst I've ever had to pay was approx $30k. The best was 7 years of errors, where they owed me low six figures.

4) I would highly encourage you to file with a tax attorney, not a CPA.
5) you’re not using enough business expenses. If you create a multi tier structure you can.

 

[psychmd03]

Yes but don't forget it costs more to set up an S corp, including more expensive accounting fees, payroll, more stringent bookkeeping. Talk with an accountant to see if this makes sense for you. There are other considerations like the franchise & excise tax, a pass through entity tax deduction, and the three different levels of self-employment tax.

The first bracket of self-employment tax gets hit with the 15.3% payroll tax up to $168,600 (12.4% social security + 2.9% medicare).
The second bracket is from $168,600 to $200,000 for single and $250,000 for married filing jointly, and only gets hit with the 2.9% medicare tax and not social security.
Finally, any additional income over that $200k gets hit with both 2.9% medicare and 0.9% obamacare surtax for a total of 3.8%.

This means that if you lower your salary, you're saving that 15.3% payroll tax up to $168,600 and not the full $600k like you're saying. You're saving 3.8% on any amount over $200k single or $250k MFJ but you have to subtract any franchise & excise tax (in CA it's 1.5%) so your amount you save may be much lower than what you're expecting. You then have to compare the time and fees you'd be paying to see if that savings is worth it. This S corp analysis is something an accountant can help you with.

This is a perfect summary. Run the numbers with a good cpa. Once you calculate all the extra costs of the set up and running books and add in cost of time or paying someone to do this I’d argue your marginal savings is barely enough for the headache. I went through this exercise with more income and it was barely saving 30-40k in the end so I just said forget it and stuck with a sole proprietor

 

[clozareal]

This is a perfect summary. Run the numbers with a good cpa. Once you calculate all the extra costs of the set up and running books and add in cost of time or paying someone to do this I’d argue your marginal savings is barely enough for the headache. I went through this exercise with more income and it was barely saving 30-40k in the end so I just said forget it and stuck with a sole proprietor

Yep and everyone will have different thresholds on what they would consider worth it for the extra administrative burden. $30-40k was worth it for my personal financial circumstances, but it might not be for others. However, I do enjoy learning about tax, accounting, business structures, and other entrepreneurial aspects of this switch. I can tell that many of my private practice colleagues' eyes glaze over when I try to bring it up.

 

[calvnandhobbs68]

This is a perfect summary. Run the numbers with a good cpa. Once you calculate all the extra costs of the set up and running books and add in cost of time or paying someone to do this I’d argue your marginal savings is barely enough for the headache. I went through this exercise with more income and it was barely saving 30-40k in the end so I just said forget it and stuck with a sole proprietor

Lol if you're making so much money that saving an extra 30-40K is "barely worth it" I'd say the reverse is actually true and you have plenty of money to pay a CPA to do this.

 

[sloh]

Lol if you're making so much money that saving an extra 30-40K is "barely worth it" I'd say the reverse is actually true and you have plenty of money to pay a CPA to do this.

Only if the CPA truly takes all of it off your hands. I haven’t found that to be the case.

 

[psychmd03]

Yep and everyone will have different thresholds on what they would consider worth it for the extra administrative burden. $30-40k was worth it for my personal financial circumstances, but it might not be for others. However, I do enjoy learning about tax, accounting, business structures, and other entrepreneurial aspects of this switch. I can tell that many of my private practice colleagues' eyes glaze over when I try to bring it up.

Agreed everyone has their own level and the only way you will know is by learning what the various routes you can take and running the numbers. So anyone who chooses to not even explore will inevitably miss some areas of optimization.

Lol if you're making so much money that saving an extra 30-40K is "barely worth it" I'd say the reverse is actually true and you have plenty of money to pay a CPA to do this.

*shrug* I just disagree(for me) the extra headache, extra audit risk, and fluctuations in possible income which can close that gap, I’d rather focus on just seeing an extra 10 patients a week which would make that money with less time, thought, and risk.

Only if the CPA truly takes all of it off your hands. I haven’t found that to be the case.

Agreed on this I have not found it either which goes to the above it takes some time which to me is worth by far the most to me

 

[finalpsychyear]

This is a perfect summary. Run the numbers with a good cpa. Once you calculate all the extra costs of the set up and running books and add in cost of time or paying someone to do this I’d argue your marginal savings is barely enough for the headache. I went through this exercise with more income and it was barely saving 30-40k in the end so I just said forget it and stuck with a sole proprietor

Only if the CPA truly takes all of it off your hands. I haven’t found that to be the case.

I honestly have not done the s-corp even though the accountant mentions it every year. I have a hard time understanding that if your doing a cash balance which has close to 100k ish range as you get to 40 how you can really beat that. In order to do that your net income has to be close to 400k ish range so the s corp helps keep your salary reasonable and saves you some medicare tax. So by doing that 200k salary on a s-corp on a 800 income is great IF you don't have the cash balance. If you have the cash balance your going to have to set your salary to 400k ish to get that 100k deduction and im not sure its worth doing in the scenario.