Let’s Discuss Filing as S Corp vs SP

I'd think she'd need a higher income but I'm far from an expert.

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she takes an $80K salary

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lower salary if need be just make sure it is justified

regardless youa re paying no payroll tax on the dividend side AND with all the deductions the employee side can apply to the dividend side you might have no tax period on that distribution. so no payroll or fed or state if she keeps that salary and that dividend money is correct. I have had down years and filing S -corp has always been worth it and saved me a ton in taxes on dividend side.

and to top it off tell her to get a solo401k and max it out and it will lower your income tax on the employee side as well.

just get a payroll company to do the work. easy to do. write your salary, make damn sure her employee contributions are in for your last payroll and are on the W-2 the payroll company will give you. you have until 3-15 for the employer profit sharing contribution side.

I am about to run my last payroll of the year myself. whatever i get from now til end of year will be added to my dividends.

yeah you really need to look at all the payroll and income tax you save on the dividend side because of all your employee deductions since you are the owner. That 40k will be basically tax free. the 80k taxable salary(income tax) can be severely lowered IF she throws a nice employee contribution at it. WIN-WIN.

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but it’s still subject to federal and state income tax.

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never said it was not. you need to lookup what is DEDUCTIBLE towards the BUSINESS SIDE. Those deductions alone can WIPE OUT me owing any INCOME taxes on the dividend distribution side. THEN you will see what i am talking about. you will be amazed. I already laid it out for you. Has your CPA not filled you in on what is DEDUCTIBLE on the business side?

Jeeez you are getting screwed royally if not.

your wife's salary ALONE would wipe out any taxes on her dividend based on your numbers that is without the employer side payroll deduction, employee mileage reimbursement, cell phone, internet, home office, and on and on and on.

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Has your CPA not filled you in on what is DEDUCTIBLE on the business side? Jeeez you are getting screwed royally if not.

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This here. If your CPA has not walked you through this already, you may need to consider finding a new CPA. Not a tax person, but there is a lot of extra deductions you can consider when SE. different setups will give you different benefits. Knowing all the ins and outs before starting can really help set you up for some significant savings, but you need a CPA that has the knowledge and the ability to explain it to you. This could be outside your current CPA’s comfort area

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Is our new CPA just being too conservative

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If the IRS actually hires 87K new employees (I have some doubt as to how quickly / if at all this will happen, considering they have tons of unfilled jobs now and a huge wave of retirements is about to hit the service) then there are clear signals that they are going to start looking much harder at reasonable compensation in an S Corp.

The reasonable compensation / distribtuion concept is simple: In an S Corp, a owner wears two hats - owner and employee. What represents the return on an owner's investment and overhead - over and above what she would have as an employee - and her role as managing the company.

The reality is this: Your wife has a contract job. Her risk is the same as that of an employee. She is not (I assume, correct me if I am wrong) investing anything in this business. She won't have any employees.

She's getting 120K and not 80K becausw she's not getting benefits, the company doesn't have to pay payroll tax on her, and her expenses won't be reimbursed - she can write them off instead.

The correct amount that should be allocated to distributions is approximately zero.

The single member, no employee, professional services S Corp is one of the biggest tax cheats around. (It's not tax avoidance... it's cheating). The IRS has basically ignored this for 30 years because they didn't have the resources to go after it. This isn't something you can do by computer or by mail... the IRS actually has to audit - good ole fashioned in office audit - to deal with this.

And they don't have the current resources to deal with that to collect 6K a year.

But... as the number of CPAs has gone down over the years, they are in more demand... which means they can charge more and be more risk-adverse.

I'm sure you can find a CPA out there who will take this own. But those numbers are going down.

By the way... my S Corp fees start at $2,500 for federal and one state return. A full service payroll firm is going to prob charge $100/month for payroll and payroll tax returns. (She can save money on that by using an assisted, not full service, such as what QuickBooks payroll offers). That's still $2,300 a year to the good - so I understand the desire.

My professional reccomendation has always been, S Corp makes sense once net income before owner compensation is $100K. Your wife would pass that requirement.

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Has your CPA not filled you in on what is DEDUCTIBLE on the business side?

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She gets the same business deductions whether she is an S Corp or filing a Schedule C.

ummm no. there is no salary to deduct from a SP. it is just above the line deductions to get to your net income. then of course contributions thereafter. there was no dividend side when i was a SP like now. But i can with S-corp filing. you are thinking of mileage deduction for SP or employee mileage reimbursement in the S-corp or the same half of payroll tax deduction for SP and s-corp, in that case that is correct.

LINK

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Using draws is the only option for sole proprietors — you cannot legally pay yourself a W-2 salary. That’s because paying yourself a salary isn’t a deductible expense for tax purposes when you’re a sole proprietor.

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The good news is that your salary and the 7.65% of FICA tax the S-corp pays on your salary is tax deductible and will reduce the company’s taxable income.

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FWIW OP my information from my CPA's is very much in line with LSUFanhouston and his advice on here has always been solid. He's clearly a CPA and maybe conservative, but FB is not either of those.

I have ran into the same issues with CPA's being ultra conservative. I've never pushed the issue myself though or sought out others, it does seem as though a lot of advice online is in line with FB's thoughts here.

As mentioned you should consider the retirement savings of both, what fits you better. YOu should also know that banks don't like to loan to Self Employed. So filing as an S corp increases your W-2 salary and makes you "look" better to banks and loan officers. Just something to consider.

The reality is if you are just talking $4000-5000 in tax savings by having to jump through a lot of hoops and do a bunch of work, I don't think CPA's think its worth their time or effort even if they bring in $2500+ more in work.

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you have until 3-15 for the employer profit sharing contribution side.

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pretty sure as an s corp its based on a % of her salary. So while yes, they have until then to make it you want to run enough payroll before year end to give yourself the ability to truly maximize it

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it does seem as though a lot of advice online is in line with FB's thoughts here.

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No doubt. Written by a lot of people who don't have to sign a tax return with a license.

A lot of the info online tends to be incomplete... just like the with the backdoor Roth (totally legal but online forgets about the pro-rata rule).

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Ou should also know that banks don't like to loan to Self Employed. So filing as an S corp increases your W-2 salary and makes you "look" better to banks and loan officers. Just something to consider

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10 years ago I would 100 percent agree with this. But lately, this young grouof of bank officers don't have any concept of what a K-1 / S Corp return is, either. A person getting distributions AND salary is not something they understand.