LLC or Sub S, Or...?

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May 13, 2009 9:53 am
I'm thrilled and terrified. Final preparations are underway, and my CPA says form a Sub S corp with me a sole share holder when I leave to go Indy. We pass the first 90m income through as wages; everything else as S Corp income to avoid the self employment tax.
What advice do some of you vet Indys have?
 
Thanks in advance for your help!
May 13, 2009 10:02 am

Is your CPA willing to participate in your future tax penalties if the IRS determines you actually do earn your entire paycheck?

May 13, 2009 11:29 am

Notwithstanding the previous post, your CPA sounds like he/she has a pretty good handle on things.  The only thing I would add is to consider using a percentage of gross rather than an arbitrary number so your payout varies with your level of success just as it does when you are an employee.

 
I believe that the previous poster is alluding to the fact that the strategy you reference is coming under increased scrutiny even with a proposal out there to tax ALL sub-S distributions as earnings for social security purposes.  It hasn't happened yet, but they are thinking about it.  Even without such legislation, it seems that auditors are getting much more aggressive about reclassifying distributions as wages.  My latest counterpunch to that is to buy an office building to occupy and pay myself rent.  At some point, Obama may try to legislate that benefit away in an effort to shore up social security.
 
Congratulations on your upcoming move.  I remember the same feelings of excitement and terror as I planned my move.  I'm now approaching my fourth anniversary and not once have I regretted the change.
May 13, 2009 6:36 pm

Hey Indyone, can you PM me where you ended up? I've had it with my wire house and have decided to leave within the month.

May 13, 2009 6:53 pm
Indyone:

Notwithstanding the previous post, your CPA sounds like he/she has a pretty good handle on things.  The only thing I would add is to consider using a percentage of gross rather than an arbitrary number so your payout varies with your level of success just as it does when you are an employee.

 
I believe that the previous poster is alluding to the fact that the strategy you reference is coming under increased scrutiny even with a proposal out there to tax ALL sub-S distributions as earnings for social security purposes.  It hasn't happened yet, but they are thinking about it.  Even without such legislation, it seems that auditors are getting much more aggressive about reclassifying distributions as wages.  My latest counterpunch to that is to buy an office building to occupy and pay myself rent.  At some point, Obama may try to legislate that benefit away in an effort to shore up social security.
 
Congratulations on your upcoming move.  I remember the same feelings of excitement and terror as I planned my move.  I'm now approaching my fourth anniversary and not once have I regretted the change.
 
I was just talking to my CPA about this last night at our seminar.  I personally have been getting KILLED on taxes and have been slow to get the S corp going.  He thinks if Obama does go after it, everyone will move to a C corp.  We'll see.  F'ing taxes. 
May 13, 2009 10:31 pm

One CPA I have been talking to suggested an LLC with more than one owner. Suggested i consider giving some one in my family 1% of the LLC. Says this will avoid the scrutiny that normally comes with filing a schedule c on my return.

May 13, 2009 10:50 pm
bluetoon:

Hey Indyone, can you PM me where you ended up? I've had it with my wire house and have decided to leave within the month.

 
Sure thing...I've not been bashful about where I went.  I affiliated with LPL.  While they are not for everyone, if you do a lot of fee-based and/or variable annuities, they would (IMO) be a good choice for affiliation.  Raymond James and Commonwealth are also strong players in the indy arena and your best bet would be to take AT LEAST two due diligence trips before you make a decision.  Best wishes for your transition to freedom!
May 27, 2009 3:20 pm
Effay:
I'm thrilled and terrified. Final preparations are underway, and my CPA says form a Sub S corp with me a sole share holder when I leave to go Indy. We pass the first 90m income through as wages; everything else as S Corp income to avoid the self employment tax.
What advice do some of you vet Indys have?
 
Thanks in advance for your help!
 
Here's the way my CPA explained the math to me: If you are passing through 90k, and not 16.8k that is up to the FICA max, you are saving $2570/yr in tax. His claim is that you will have more expense and hassle in the SCorp because of accounting, payroll, and tax preparation than you will save in FICA tax by just paying it. Income above 106,800 isn't FICA taxed anyway...
 
 
May 27, 2009 11:36 pm

Thank you gentlemen!

May 28, 2009 2:31 am
LuvIndy:
Effay:
I'm thrilled and terrified. Final preparations are underway, and my CPA says form a Sub S corp with me a sole share holder when I leave to go Indy. We pass the first 90m income through as wages; everything else as S Corp income to avoid the self employment tax.
What advice do some of you vet Indys have?
 
Thanks in advance for your help!
 
Here's the way my CPA explained the math to me: If you are passing through 90k, and not 16.8k that is up to the FICA max, you are saving $2570/yr in tax. His claim is that you will have more expense and hassle in the SCorp because of accounting, payroll, and tax preparation than you will save in FICA tax by just paying it. Income above 106,800 isn't FICA taxed anyway...
 
That's technically correct, but misleading as it covers only one tax angle.  Above $106,800, an UNLIMITED amount is subject to medicare tax (2.9%).  the FICA ceiling only applies to employer/employee FICA tax (12.4%).  If you have another $100K in income (above the FICA limit), that's an additional tax savings of $2,900 for just medicare taxes.  That doesn't comtemplate additional savings from renting real estate to your corporation and a whole host of other corporate tax benefits.
 
I think you have a lazy CPA.
May 28, 2009 10:19 am
Indyone:
LuvIndy:
Effay:
I'm thrilled and terrified. Final preparations are underway, and my CPA says form a Sub S corp with me a sole share holder when I leave to go Indy. We pass the first 90m income through as wages; everything else as S Corp income to avoid the self employment tax.
What advice do some of you vet Indys have?
 
Thanks in advance for your help!
 
Here's the way my CPA explained the math to me: If you are passing through 90k, and not 16.8k that is up to the FICA max, you are saving $2570/yr in tax. His claim is that you will have more expense and hassle in the SCorp because of accounting, payroll, and tax preparation than you will save in FICA tax by just paying it. Income above 106,800 isn't FICA taxed anyway...
 
That's technically correct, but misleading as it covers only one tax angle.  Above $106,800, an UNLIMITED amount is subject to medicare tax (2.9%).  the FICA ceiling only applies to employer/employee FICA tax (12.4%).  If you have another $100K in income (above the FICA limit), that's an additional tax savings of $2,900 for just medicare taxes.  That doesn't comtemplate additional savings from renting real estate to your corporation and a whole host of other corporate tax benefits.
 
I think you have a lazy CPA.
 
I think he would agree with you. His point was that there are a lot of people out there in the 110k-125k range of income (which let's face it is the majority of higher income people, even in our business) that dink around with an S Corp for all of the tax benefits. In many ways they are just doing it to glorify themselves as business owners rather than really saving any money. Once you get into the higher income ranges I think there's mutual agreement it's easier to justify the expense as well as the non-operater/owner driven compensation from an audit point of view.
 
 
 
 
May 28, 2009 10:27 am
iceco1d:

At what level of production do you think you need to "pay" yourself $90K?  What if you are established, doing $500K, and only spending 25 hours a week "working?" 

 
Not my particular situation, just wondering what some of you Sub S guys are (ballpark) "paying yourself."
 
I've said for awhile that it makes sense to pay yourself similarly to what you were paid as an employee (35-40% of gross).  If you're pulling down 60-70%, that leaves quite a bit of income to withdraw as dividends not subject to FICA and medicare taxes.  If you use 40% as your benchmark, you would pay yourseld $90K on $225K gross.
May 28, 2009 10:37 am
LuvIndy:

I think he would agree with you. His point was that there are a lot of people out there in the 110k-125k range of income (which let's face it is the majority of higher income people, even in our business) that dink around with an S Corp for all of the tax benefits. In many ways they are just doing it to glorify themselves as business owners rather than really saving any money. Once you get into the higher income ranges I think there's mutual agreement it's easier to justify the expense as well as the non-operater/owner driven compensation from an audit point of view.

 
I guess I hadn't thought about many people being relatively small producers, and without any stats in hand to refute that, I won't argue your numbers.  I don't consider myself a high-end producer at all and I netted over $180K last year between profit and wages.  As far as accounting costs go, I do all my own work so I don't feel that pain like most would.  If a person can't justify an S-corp for tax purposes, they should at least consider an LLC for liability purposes.  There are bound to be things that your E&O doesn't cover and some form of liability protection is a very good idea, IMO.
May 28, 2009 11:03 am

Agreed, and that is exactly why I have an LLC. My evidence is anecdotal, but it seems once people hit 10k/mo they tend to plateau in general. Looking at the production table of my b/d I think the 80/20 rule is prevailing mighty strong.