Comparing S-Corp vs W2..Crunching the numbers

[bulldog]

Hi,

I'm trying to get a sense of the taxation benefit in california of working as an employee getting a W2 vs an independent contractor who gets a 1099 and has incorporated himself as an s-corp. I saw a few other posts but haven't seen actual numbers crunched. Can someone share their thoughts?

Assume, Salary per year is $250,000 for single individual either given as W2 or $250,000 given as 1099 to a person who is an S-corp. What are the approximate payments of state, federal, medicare, ssi,etc in each scenario?

A) $250,000 W2 salaried employee w/o any contributions to 401k. Employee itemizes $10,000 in deductions.

B) $250,000 1099 to an independent contractor who is an S-Corp and who pays out $250,000 to himself as salary and no-dividends or other deductions

C) $250,000 1099 to an independent contractor who is an S-Corp and pays out $125,000 salary to himself, $115,000 as dividend to himself, and $10,000 for misc business expenses like payroll, legal, conferences, etc.

D) $250,000 1099 to an independent contractor who is an S-Corp and pays out $125,000 salary to himself, $15,000 to 401k, $100,000 as dividend to himself, and $10,000 for misc business expenses like payroll, legal, conferences, etc.

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[krl7044]

Great question. This is a perfect question to ask your CPA. I do similar calculations for my small business clients (I'm not an accountant - I deal primarily with setting up and managing retirement plans) to optimize their salary level vs. dividend payout given their desired retirement plan contribution. Usually they have already picked the entity, which in most cases is S-corp or an LLC taxed as an S-corp (not available in CA). I think the key to getting the right answer is to understand what the best solution is for your specific situation, though usually an independent contractor (electing an S corp) beats being an employee for the following reasons:

1) One big advantage of having an S-corp (for a typical business) is that owners typically are not personally responsible for business debts and liabilities (you might want to consult a business attorney, since medical professionals are in a different risk category vs. other businesses).

2) Once you bring in a retirement plan, being an independent contractor vs. W2 is hands down the best choice. You can not even contribute to a retirement plan of your own as a W2 employee unless your employer has one (or unless your employer is your own S corp). You can't open anything, even a SEP or a solo 401k, and you are limited to your employer's plan or an IRA.

3) Another reason for having an S-corp. Medical professionals who want to put away significantly more than $50k into their retirement plans need to pay themselves a salary. If you want to contribute $100k to a defined benefit plan, for example, you may want to give yourself a reasonable salary, anywhere from $125k - $200k depending on how much you want to contribute (and what is acceptable as a reasonable salary for your particular medical field). This is one of the best tax planning techniques for high earning medical professionals.

4) One big reason for being an independent contractor is having the ability to write off business/home office expenses. I don't believe you can do much of that as a W2 employe.

I would take your question to a good CPA who can run an analysis for you. As a medical professional having an S-corp is a definite advantage, especially if your employer does not mind dealing corp to corp (some might want to pay with a W2 or a 1099, but will not work with you corp to corp - I found this to be true with nurses). I'm not a tax expert, so please feel free to add to this and/or make corrections.

 

[The White Coat Investor]

Hi,

I'm trying to get a sense of the taxation benefit in california of working as an employee getting a W2 vs an independent contractor who gets a 1099 and has incorporated himself as an s-corp. I saw a few other posts but haven't seen actual numbers crunched. Can someone share their thoughts?

Assume, Salary per year is $250,000 for single individual either given as W2 or $250,000 given as 1099 to a person who is an S-corp. What are the approximate payments of state, federal, medicare, ssi,etc in each scenario?

A) $250,000 W2 salaried employee w/o any contributions to 401k. Employee itemizes $10,000 in deductions.

B) $250,000 1099 to an independent contractor who is an S-Corp and who pays out $250,000 to himself as salary and no-dividends or other deductions

C) $250,000 1099 to an independent contractor who is an S-Corp and pays out $125,000 salary to himself, $115,000 as dividend to himself, and $10,000 for misc business expenses like payroll, legal, conferences, etc.

D) $250,000 1099 to an independent contractor who is an S-Corp and pays out $125,000 salary to himself, $15,000 to 401k, $100,000 as dividend to himself, and $10,000 for misc business expenses like payroll, legal, conferences, etc.

Are you asking for someone to do taxes for four hypothetical people for you? I'm not sure you're going to find a taker.

I can, however, tell you that person D will have the lowest tax bill, person C will be most likely to be audited, Person B will have the highest tax bill, Persons A, B, and C will have equally miserable retirements, and all four people will consider leaving California each year at tax time.

 

[TexasPhysician]

1099 should pay more by the employer as they otherwise don't pay benefits. Assuming the 1099 pay is 20k higher (usually more than that that I've seen), 1099 has better tax benefits if you maximize them.