MD will have about $30K of 1099-misc Box 7 income in 2014. This in addition to his 6 figure salary (W-2). MD will have NO exps related to the $30K. Other than reporting the $30K as Ln 21 other income, would an S-Corp give the MD a tax advantage over Other Income? MD would basically perform the same services as he currently does under his salary position.
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I would say no S Corp because he has already maxed out on SS. As far other issues, that is another question. It would seem he could spend lots of money with an SCorp that is not needed.This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content. -
I assume you are going to use the Line 21 Other Income as non-employee compensation subject to SE tax. He will max out of SS, but not Medicare. Does MD stand for doctor? Most MD's are PC's. Is the Other Income coming from another source? Is he working for this other source on a contract basis? Is it possible he could do a retirement plan contribution based on this other income?Originally posted by AZ-Tax View PostComment
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Answers to Burke's questions
Yes, box 7 of 1099-misc non-employee. MD=Doctor/PC. Yes, MD's 1099-misc income coming from different EIN on contract basis but performing basically same duties as salary position. MD is participating in retirement plan thru his employer. I started a mock 2013 tax return and entered his $30K in 1099-misc box 7 as other income and my software did not generate a SE form even after I deleted his $150K W-2. I read up more on what qualifies for Ln 21 other income and I don't think this MD will qualify since the MD has a physical contract with the issuer of the 1099-misc. If that is correct, it seems the MD's only options is Sch C for which profits are triple taxed or an S-Corp. I read on this board a while back what net profit dollar amt of an S-Corp would warrant a shareholder salary and I think the it was around $40K to $50K.Originally posted by Burke View PostComment
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Line 21 usually asks if the income is subject to SS tax, be sure to answer yes. Med tax will apply but not SS on form SE because of his other income. Does he have travel between each job on the same day? If yes, use schedule C for that expense.
Yes, as an SCorp he will pay additional ss tax as an employee/employer but the employee portion of SS w/h would be refunded on his 1040.
I still say no SCorp.Last edited by BOB W; 05-03-2014, 01:53 PM.This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content.Comment
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An S-corp would likely cost him money. He must still pay himself a "reasonable salary" through the S-corp, so only the S-corp profits would avoid the SocSec/Med tax. Additionally, he will have to withhold SocSec/Med on his SS-corp salary, and the corp must match both. So even though he gets to claim the excess SocSec as additional withholding on his personal tax return, the matching SocSec that the corp paid vanishes. Since he is the corp, that 6.2% is coming out of his pocket.Originally posted by AZ-Tax View Post"The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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1. I do not believe the retirement plan participation with his employee income will affect the 1099 income if you are looking at a SEPP. They are treated separately. He gets a 1/2 deduction for the SE tax on the Sche C. SEPP would be based on that net.Originally posted by AZ-Tax View Post
2. As for the salary guidelines, the IRS treats "reasonable" compensation based on many factors, one of which is their tendency to ask for more with SCorps and less for Corporations. It's pretty subjective and total income, profession, etc come into play.Comment
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S-Corp salary while drawing another salary
Once again, new client (Doctor) is projecting $30K of 1099-misc Box 7 income. Based on reading of post over the years on this message board regarding S-Corp salary, some preparers wouldn't even consider a salary at $30K S-Corp net profit for its to low but that was based on the single shareholder not drawing a salary from another employer. Now, due to the fact my client in addition to the $30K 1099-misc box 7, will be receiving a 6 figure salary in his other job performing basically the same work, will the IRS give my client more attention if the my client elects S-Corp status w/o salary?Originally posted by Burke View PostComment
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yes......."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Why didn't the doctor just give the SCorp EIN to the other payor so that the income would have flowed through his existing SCorp? He could still do that for future years. He is getting a 1099 because he gave them his SSN.Comment
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No S-Corp but can he w/o salary
The Doctor does not have an S-Corp and that is what he is weighing. Can he pursue an S-Corp w/o a salary given his situation and then have the issuer of the 1099-misc issue them to his S-Corp's EIN. Doctor tells me he will be able to control the total 1099-misc amt.Originally posted by Burke View PostComment
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Any S-corp without officer/shareholder salary & wages is going to attract some level of attention. Whether it is enough to get it audited is anybody's guess.
But there is little guesswork about what IRS will do if there is an examination:
1) They will reclassify some or all of the income as salary and will assess penalties & interest for late filing.
2) They might even go after the tax preparer for penalties as well.
3) The client will likely have a convenient lapse of memory concerning the warnings the tax preparer gave, and might well be looking for some relief from his own penalties.
Now, you might be able to insulate yourself from #3 by documenting the riskiness of this scheme to the client. But in doing so, you increase the likelihood of #2 happening. So choose wisely.Last edited by JohnH; 05-06-2014, 12:55 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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An S-corp without a salary for services performed will not work regardless of the level of other W-2 income from employment elsewhere. The bottom line is that the S-Corp must pay a reasonable salary. Since this is for personal services, the majority of the S-corp revenue will need to be paid in salary to the MD.
If that is the case, then the S-Corp will pay its 1/2 of SS and Medicare Taxes. Assume salary of $27,000. The S-Corp will pay $2,065.30 in SS tax on this salary. The amount the MD has withheld will equal that, but he will receive credit for this on 1040.
The SE Tax on 30000 assuming outside salary is above the SS wage base will be about $803.
Tread carefully when advising someone they do not have to pay reasonable salary in an S-Corp. He will be the only employee and the only one performing services. How can it be argued that his return is on capital or the work provided by other employees?Comment
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The net profit has nothing to do with the salary. The only factor that impacts the salary is reasonable compensation constrained only by cash flow.Originally posted by AZ-Tax View Post
e.g., Let assume S-corp owner reasonable salary is 100,000 for a fictional position; however, the corp lacks the cash flow to pay anything over $50,000. In this instance, the $50,000 is fine, but only if there are no shareholder distributions.
There exist no rules of thumb either such as 65% salary / 35% distributions that I hear some accountants use. It is based solely on reasonable comp for services rendered. Just do a tax court case search on this issue and see what does not work.
In trying to help the MD manage the tax liability, consider a SEP plan or a solo 401(k). Make sure he does not exceed the maximum annual additions for all retirement accounts in the tax year.Comment
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You might have got that from me. I have often said that when a Schedule C client starts getting into the $60,000 net income range then I will start talking to them about S-Corp. It very much depends on the type of business they are in and the amount of reasonable compensation a person doing the same type of work would receive. I only use that as a starting point to discuss the positives and negatives of being an S-Corp.
I have several clients that come to me and repeat the same thing each year, "I work with Joe, he has an LLC and/or S-Corp, he does not pay self employment taxes, can I do that?".
I then have to explain that Joe is more than likely not taking a salary and only distributions. They may not get him now but somewhere down the road he will pay.Comment
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