Assigning income to subchaper S corp

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Dec 10, 2009 12:47 pm

First, I'm hopefully about 60 days out from running my own show, and I'm trying to get all the pieces in place.  So doubtless more questions will follow. 

 
The BD I am moving to has told me that income cannot be signed over from me to my sub S corp.  I was told they had a rep trying to do this on advice of his attorney and accountant, and got a letter ruling from the SEC that it is not permissible. 
 
I know that several of you are essentially assigning your 1099 income to your LLC or Sub S.  Is this a gray area, or is there some definite safe harbor of how to do this? 
 
Thanks.
Dec 10, 2009 1:37 pm

I believe anyone who is using a b/d must be paid individually and not to the company.

It is the RIAs who are allowed to be paid into their business accounts.

Dec 10, 2009 1:45 pm
CALI123:

I believe anyone who is using a b/d must be paid individually and not to the company.

It is the RIAs who are allowed to be paid into their business accounts.

 
Yep..
Dec 10, 2009 2:46 pm

+1 to being RIA.

Dec 10, 2009 6:39 pm

Ice is correct. The B/D pays you personally. What you do with the money after it goes into your account, is your business, and you can do whatever you want. I know of one person who was questioned by the IRS and when they were given the explanation that the only reason the $$ was paid to the broker personally was because of FINRA rules, that explanation was accepted

Dec 10, 2009 9:47 pm

I would agree with the others here though.

Dec 10, 2009 10:29 pm

I thought that is what he was asking, can $$ be paid to a S corp...

Dec 11, 2009 1:33 pm
EDJ4now:

First, I'm hopefully about 60 days out from running my own show, and I'm trying to get all the pieces in place.  So doubtless more questions will follow. 

 
The BD I am moving to has told me that income cannot be signed over from me to my sub S corp.  I was told they had a rep trying to do this on advice of his attorney and accountant, and got a letter ruling from the SEC that it is not permissible. 
 
I know that several of you are essentially assigning your 1099 income to your LLC or Sub S.  Is this a gray area, or is there some definite safe harbor of how to do this? 
 
Thanks.
 
Dude, my only advice to you is to set up your S Corp ASAP and pay your taxes quarterly or at least have your B/D direct deposit 20%, 25%, 30% or whatever you think you'll need into a side savings account that you don't touch.  Sock away money into a SEP for the tax-deduction too.
 
I flat out F'd myself over in 2009.  I will be paying a sh*t ton of taxes by October 2010...it's not fun.
Dec 11, 2009 2:33 pm

What is the purpose of the S corp? You're liable as an individual RR, how could it offer legal protection?

 
As far as taking a salary/bonus from there, to avoid SS taxes, no business was done by the S corp, so isn't that a "sham"? Sure, no one cares how you file, except the IRS when you get audited. A few consultants around here have S corps but offer services separate from their RR practice revenues. Maybe they play a few tax games under those conditions.
Dec 11, 2009 2:38 pm

You really need to find a good accountant and explain to him that the b/d has to pay you directly. That a 1099 will be generated at tax time. Then see if you can do an S Corp. (not sure how it works in this case)


Dec 11, 2009 3:06 pm

The fact that you paid a 1099 as an individual defines the relationship between you and your b/d. You're personally liable for your actions.

 
My wife contracts in a different industry. They won't do business with her personally, only with a corp or LLC.
 
There's no personal liability. The whole RIA business is wrapped in the LLC.
 
Next time an RIA brags about objectivity and accountability, ask their clients who is more accountable (you personally and then your b/d), or the RIA? How much recourse do they have if something goes wrong? How many RIAs even bother to carry E & O insurance?
Dec 11, 2009 4:01 pm
Milyunair:

What is the purpose of the S corp? You're liable as an individual RR, how could it offer legal protection?

 
As far as taking a salary/bonus from there, to avoid SS taxes, no business was done by the S corp, so isn't that a "sham"? Sure, no one cares how you file, except the IRS when you get audited. A few consultants around here have S corps but offer services separate from their RR practice revenues. Maybe they play a few tax games under those conditions.
 
It's all to reduce FICA taxes (I think)...as of now.  It's front-end loaded, so for your first $40k or $50k of income, you get the break where I think it's taxed at like 15%, then 2% after a certain amount.  Can't quite remember what my CPA had said.
 
It's for playing tax games.  BUT, if Obama, Pelosi, and Reid have their way, they will start cracking down on the S Corps, at which point in time, we'd find a new game to play. 
Dec 11, 2009 4:15 pm
Milyunair:

The fact that you paid a 1099 as an individual defines the relationship between you and your b/d. You're personally liable for your actions.

 
My wife contracts in a different industry. They won't do business with her personally, only with a corp or LLC.
 
There's no personal liability. The whole RIA business is wrapped in the LLC.
 
Next time an RIA brags about objectivity and accountability, ask their clients who is more accountable (you personally and then your b/d), or the RIA? How much recourse do they have if something goes wrong? How many RIAs even bother to carry E & O insurance?



I would guess more than 90% carry E&O.  Every client gets disclosure documents that shows what their recourse is along with a number to call to confirm insurance.

I PRAY that someone tries what you just said, so the client can show them the docs.

Also, every time there is a review, they get these documents again.

Who is more accountable?


Dec 11, 2009 4:28 pm

I remember reading somewhere this year that bonusing to avoid SS taxes has become a bigger audit trigger recently. If you're earning the $$ outside the S corp, assigning money to the S corp, do the bonus, and get audited, I imagine the penalties could be pretty nasty if you lose the audit.

 
For example, if you manage thirty million and you net $150,00 and report a $100,000 salary and take a $50,000 bonus, and I manage the same amount of money and just report $150,000, the IRS can ask, what's the substantial difference between us? How do you justify your position?
 
The SS breakpoint is $107,000 anyway. You don't pay SS above this level.
 
I don't really know much about taxes, but if I was getting audited, I would rather debate (personal) business expenses than tax law.
 
As a financial advisor, doesn't it make sense to do your own taxes and learn where it makes the most  sense to be "aggressive"?
 
 
Dec 11, 2009 4:38 pm

So if I understand, the maximum the client could get is the E & O amount. Fidelity told me a lot of (smaller) RIAs opt no coverage. The premiums are not cheap. Obviously the custodian is completely out of the picture.


A small RIA would just go out of business, a large RIA would strive to use E & O to protect the business.
 
How much coverage do you carry, I'm just asking, I don't know all the answers.
 
Compare that to broker dealers.
 
You have a problem with Merrill Lynch. Big problems would be class action suits, against a firm with deep pockets. As for goodwill, there is a brand to be protected and deep pockets.
The custodian is in the picture.
 
A complaint against Flyfishing Financial gets named in the papers and the firm just goes out of business. Not a benefit to the client.
 
Am I wrong?
Dec 11, 2009 4:40 pm
Milyunair:

I remember reading somewhere this year that bonusing to avoid SS taxes has become a bigger audit trigger recently. If you're earning the $$ outside the S corp, assigning money to the S corp, do the bonus, and get audited, I imagine the penalties could be pretty nasty if you lose the audit.

 
For example, if you manage thirty million and you net $150,00 and report a $100,000 salary and take a $50,000 bonus, and I manage the same amount of money and just report $150,000, the IRS can ask, what's the substantial difference between us? How do you justify your position?
 
The SS breakpoint is $107,000 anyway. You don't pay SS above this level.
 
I don't really know much about taxes, but if I was getting audited, I would rather debate (personal) business expenses than tax law.
 
As a financial advisor, doesn't it make sense to do your own taxes and learn where it makes the most  sense to be "aggressive"?
 
 
 
Yeah, you're right about the SS taxes and the breakpoint.  I think that's what I meant to say.

And you're also right that they are cracking down on it.  But for the common advisor that is filing, I don't think it's a glaring thing to the IRS.  If you were making HUGE money and not reporting a large amount of income, it might trigger an audit. 
 
Right now, it's a chance I'm willing to take.  And there is no way in hell I'm ever doing my own taxes.  I hate taxes, I hate gathering the info for my taxes, I hate doing taxes, I hate it all.
Dec 11, 2009 4:51 pm
Milyunair:

So if I understand, the maximum the client could get is the E & O amount. Fidelity told me a lot of (smaller) RIAs opt no coverage. The premiums are not cheap. Obviously the custodian is completely out of the picture.

A small RIA would just go out of business, a large RIA would strive to use E & O to protect the business.
 
How much coverage do you carry, I'm just asking, I don't know all the answers.
 
Compare that to broker dealers.
 
You have a problem with Merrill Lynch. Big problems would be class action suits, against a firm with deep pockets. As for goodwill, there is a brand to be protected and deep pockets.
The custodian is in the picture.
 
A complaint against Flyfishing Financial gets named in the papers and the firm just goes out of business. Not a benefit to the client.
 
Am I wrong?



No you're not wrong, but there is a difference. There was a study a few years ago. If I can dig it out, I'll scan it and post it. But the majority (something like 98%) of complaints are for commission based brokers.

RIA's get very few complaints. Most of the money is managed on a discretionary level. No unsuitable trades, etc. E&O will cover the mistakes from overbuying in someones account - but not fraudulent activity.

In some cases at the wirehouses, fraud is not covered. In the 90's there was a guy who legally changed his name to Dean Witter. He kept all the checks and made up bogus statements. Dean Witter did  not get in trouble because the money was never in their posession.

If you want to really rip off a person, there are ways you can do it and the client will have no recourse.

But for most of the minor issues, it seems that its the guys that sell a stock to a 90 year old lady who get a compliant, not the guy who is managing money under a specific strategy where the client buys into the startegy.

With all this said - I don't think we should be focusing on indy b/d vs RIA. It really should be indy vs wirehouse!

edit- you're right - there are some firms that do not use e&o. E&O is really to protect the firm - not the client. However, big firms don't like to write checks either. They will fight it to the bitter end if it is a big error.




Dec 11, 2009 4:52 pm

Yep, I hate doing taxes, it is like being in high school. This is a good topic, because Americans need to figure out how to have an economy that is less taxed. A more modest lifestyle that flys a little lower under the radar.

Dec 12, 2009 8:12 pm

To add to what Ice posted above, the "dividend" is not taxed as a dividend you would get from owning a stock, at 15%. Its taxed as ordinary income. But you dont pay FICA or medicare on it.

Also, i believe, and I;m sure someone will correct me if i am wrong, that the dividend doesnt count towards the number on which you calculate how much you put into a 401k or SEP. Thats only on w-2 money