Tell me about setting up your own coorporation.

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sevoflurane

sevoflurane

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Say you make 400k.

Pay yourself a salary of 200k (and pay taxes on that... including medicare)
Put 200k into your coorporation account avoiding medicare taxes?

Do you need to pay the 2.9% medicare taxes when distributing bonuses to yourself? I've heard you don't. That's $5800 in savings. Is this right?

Any other advantages? My accountant said it wasn't worth it. I know people who say it's def. worth it.

Any thoughts are appreciated. Thx.
 
Hey Sevo

I am a CRNA not an MD but the taxes work the same.

Here is what I do and it was directed by my accountant who works with practically all the MDs and CRNAs i know in my area.

I have a company, LLC with an s-corp election. (or you can just have an s corp)

I get paid as a 1099 to my company and then my company pays me as a w2 for approx 50% of what my company pays

On that dividend income I dont pay medicare, unemployment etc taxes which is about 7%. So that is a direct impact on my take home right there.

Additionally, you can setup a retirement that your company matches which is alot more than you can do as a sole proprietor (i think double)

To me these are MAJOR tax advantages.
 
sevoflurane said:
Say you make 400k.

Pay yourself a salary of 200k (and pay taxes on that... including medicare)
Put 200k into your coorporation account avoiding medicare taxes?

Do you need to pay the 2.9% medicare taxes when distributing bonuses to yourself? I've heard you don't. That's $5800 in savings. Is this right?

Any other advantages? My accountant said it wasn't worth it. I know people who say it's def. worth it.

Any thoughts are appreciated. Thx.
Click to expand...

I happen to be a CPA and I work with small S corps all the time. You need to be careful here. There are lots of accountants who have been busted by the IRS for distorting their own incomes.

If you significantly understate your wages on your W-2 to save on FICA and Medicare taxes, the IRS will step in and recharacterize your financial statements and taxable income. They'll whack you with additional medicare and FICA taxes and impose interest and penalties.
 
Thank you for your comments. 👍

I do not want to deal with the IRS in any way... ever.

How do you determine the amount of income to claim on the w-2 portion of an S-corp while staying well within the boundries of the law? Seems like there is a lot of wiggle room. I've read people claming only 10-30% raise eyebrows.
I've heard 50-60% of your income, but I don't know where that number comes from. I would have thought it would be a certain percentage of the industry income standard for the region.
 
sevoflurane said:
Thank you for your comments. 👍

I do not want to deal with the IRS in any way... ever.
.
Click to expand...

Lets say you are hired into a new job that is salary based. Is it possible to setup the payment into a 1099 as opposed to having that corporation pay you W2? Or is this the control of the employer? Specifically an anesthesia employer.

Conversely.... Is there an advantage to having a standard W2 from your employer and creating a LLC with s corp. The LLC would be your own company of choosing like lets say something like Property investor. Is there more deductions available for an LLC so that it would offset your own W2?
 
sevoflurane said:
Thank you for your comments. 👍

I do not want to deal with the IRS in any way... ever.

How do you determine the amount of income to claim on the w-2 portion of an S-corp while staying well within the boundries of the law? Seems like there is a lot of wiggle room. I've read people claming only 10-30% raise eyebrows.
I've heard 50-60% of your income, but I don't know where that number comes from. I would have thought it would be a certain percentage of the industry income standard for the region.
Click to expand...

The appropriate wage level is a judgment call by the IRS. If you pay yourself something approaching the market wage for your geographic area and skill set, you should be OK. You need to ask yourself whether you would accept that wage in an arms length deal with a third party. Furthermore, you also need to determine whether there are any capital assets in the business that "deserve" a fair return. If you are clearing $200,000 per year in the business after your "wage" and all other expenses and all you have invested in the business is a cell phone and a laptop, the IRS will burn your keaster.
 
Hey OD

But isnt this exactly what owners of companies do all the time to pay low taxes?

My accountant felt it was pretty safe what we were doing.
 
My wife has an S-corp (nonphysician). She bases the W-2 portion on the low end of published local salaries for the kind of work that she does. This works out to about 40-50% of her total income.
 
lord_jeebus said:
My wife has an S-corp (nonphysician). She bases the W-2 portion on the low end of published local salaries for the kind of work that she does. This works out to about 40-50% of her total income.
Click to expand...

What does the S-corp do with the rest of the money, and how is that taxed?
 
Passed through as ordinary income. (No medicare taxes though-NO FICA if less than the limit-$110K or so)
 
RxBoy said:
Lets say you are hired into a new job that is salary based. Is it possible to setup the payment into a 1099 as opposed to having that corporation pay you W2? Or is this the control of the employer? Specifically an anesthesia employer.

Conversely.... Is there an advantage to having a standard W2 from your employer and creating a LLC with s corp. The LLC would be your own company of choosing like lets say something like Property investor. Is there more deductions available for an LLC so that it would offset your own W2?
Click to expand...
Oh my goodness, you're just as clueless as I was back in the day. Do yourself a favor, read this blog and start educating yourself...

http://whitecoatinvestor.com/incorporating-to-reduce-liability-and-to-save-taxes/
 
pgg said:
What does the S-corp do with the rest of the money, and how is that taxed?
Click to expand...

Net profits are disbursed to her as dividends which are subject to the same rate of income tax as her W-2 income, but not subject to social security or medicare tax. I think it's handled as Schedule K-1 income, but I'd have to talk to her CPA to really understand how this works.
 
Yup mine is done as a K1
 
Thank you for your replies. Looks like I'm going to be starting an S-Corp. All of you 1099'ers should look into this if you haven't already. It may save you a good amount of cash in the end and give you some other advantages like the ones mentioned above.

Most of us won't qualify for SS tax as doze mentioned... but the medicare tax is sizeable... more so if you have a working spouse.

My accountant has changed the tune to his song a little. Go this this morning:

"The new additional Medicare tax on high incomes that takes effect next year makes this even more appealing than in the past."

He also wrote:

"This is not a slam dunk due to risks which I will explain when we meet. Our firm has several hundred S corporation clients so we absolutely are qualified to advise you on the pros and cons."

Hope this helps some of you guys out there. Kinda wish I would have set one up from the begining.

Cheers and thanks again for the comments.
 
Good luck sevo and save lots of money!

sevoflurane said:
Thank you for your replies. Looks like I'm going to be starting an S-Corp. All of you 1099'ers should look into this if you haven't already. It may save you a good amount of cash in the end and give you some other advantages like the ones mentioned above.

Most of us won't qualify for SS tax as doze mentioned... but the medicare tax is sizeable... more so if you have a working spouse.

My accountant has changed the tune to his song a little. Go this this morning:

"The new additional Medicare tax on high incomes that takes effect next year makes this even more appealing than in the past."

He also wrote:

"This is not a slam dunk due to risks which I will explain when we meet. Our firm has several hundred S corporation clients so we absolutely are qualified to advise you on the pros and cons."

Hope this helps some of you guys out there. Kinda wish I would have set one up from the begining.

Cheers and thanks again for the comments.
Click to expand...
 
I still need to meet with my accountant, but this is an issue that will be brought up.

Say you make 700K (>95% MGMA) and the doc 25 min. down the highway from your BFE makes 350k... Does that mean I can get a W2 for 350K and save 3% on the other 350K?

That's over $10,000. Not chump change... especially over time.

HOWEVER, I don't know if this is legit or not. This will be discussed with my accountant with the goal being 100% compliant with the IRS.
 
http://www.amazon.com/gp/richpub/syltguides/fullview/2O30EABTTUSUO

So, You'd Like To Know How Vice Presidential Candidate John Edwards Saved $600,000 By Forming An S Corporation?

Edwards made about $26.9 million as a trial lawyer in 1995. Trial lawyers typically receive 30% to 50% of any large, legal verdict in favor of their clients. He avoided paying Medicare taxes by forming his own S corporation (also known as a subchapter S corporation). He paid himself a salary of $360,000 each year for four years and had the S corporation pay him the rest in dividends.

Salary is subject to Medicare taxation at a rate of 2.9%, but dividends escape Medicare taxation. There is no wage base for Medicare, all wages or salaries are subject to the full 2.9% tax. (Social Security does have a wage base, which means wages above some limit are exempt from the tax.)

So, calculating, Edwards saved 2.9% of $25,460,000 or $738,000 in Medicare taxation. However, sole proprietorships are allowed to deduct one half of what they pay in Social Security taxes from their income tax. Thus, had he operated as a sole proprietor, he'd get a deduction for $369,000 from his income tax. Figuring tax at a 39.6% rate, he'd reduce his income tax by about $146,124.

Thus, his net savings for forming the S corporation were about $591,000.

S corporations are useful for small business owners who want to semi-opt-out of the Social Security System. But, law requires that S-corporation owners pay themselves a reasonable salary for the work they do.
 
+1. I shadowed an oral surgeon who told me about a colleague who got greedy and paid himself only 50k in income for a few years; which, apparently ended badly for him. When assessing a "reasonable salary" I wonder if using US census data would work? It tends to be much lower than average allowing you to take a small salary; but, have the backing of some .gov data.


dr doze said:
Thus, his net savings for forming the S corporation were about $591,000.

S corporations are useful for small business owners who want to semi-opt-out of the Social Security System. But, law requires that S-corporation owners pay themselves a reasonable salary for the work they do.
Click to expand...
 
Just spoke to my accountant btw/ cases down in the cafeteria. I need more time to process the info, but in short:

1) My accountant is conservative (good thing).
2) S-corps is way easier to defend if you are NOT the ONLY shareholder. If you are married to another doc, it may be worth it to speak to your accountant about this.
3) Setting up a defined benefit plan is well worth the cost and will save you a ton once you hit 59.5 years old and come down on your income tax bracket.
4) The IRS can't touch you if you keep the money in the S-corp and don't take a dividend... at least to this date there hasn’t been a case where this has happened.
My accountant has never had a client get their S-corps audited when structured correctly. However, this does not mean that it's bullet proof. You need to be reasonable. National averages for income in anesthesia is a good number to use.

Edwards never got busted, but he should have.
 
... not just Edwards either:

Newt Gingrich released his 2010 tax returns and disclosed $444,327 in wage income from Gingrich Holdings, Inc. and Gingrich Productions, yet he reported $2.4 million of earnings from those corporations as profits or dividends. By classifying nearly all of his $3 million in earnings as profits through S corporations, Gingrich avoided paying an estimated $69,000 in Medicare payroll taxes.
 
bogatyr said:
I know we're getting more aggressive about out-of-OR cases, but I haven't done any in the cafeteria yet.
Click to expand...

Our cafeteria is closer to the main OR and supplies than our off-site locations. I may actually prefer doing cases there.
 
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