Physician Independent contractor - LLC vs S corp vs other

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Spirit Rider » Tue Jan 20, 2015 2:17 pm

Gemini wrote:Had another question:

Opting for a single owner LLC essentially means the LLC is disregarded. Assuming one goes through the IRS website and follows the prompts and selects LLC - and then gets an EIN for a single member LLC.
What happens in this case with filling out a W9 and an EIN with a single member LLC? Do I have to provide my SS# on W9 or can I use the EIN?
From IRS Form W-9 Part I Instructions

If you are a Single member LLC that is disregarded as an entity separate from its owner (see Limited Liability Company (LLC) on this page), enter the owner's SSN (EIN, if the owner has one). Do not enter the disregarded entity's EIN.
Last edited by Spirit Rider on Tue Jan 20, 2015 3:03 pm, edited 1 time in total.

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Spirit Rider » Tue Jan 20, 2015 3:03 pm

niceguy7376 wrote:A bit more clarification to other posters.
The $53K profit sharing can only be achieved if Gemini has more than $200K Income on his sole proprietor company. Since he cannot do employee contributions and all the Solo 401k contributions are profit sharing, he can reach that limit only if the side business brings in more than 4 5 times the 53K Amount (Sole Prop is 5 times and S Corp is 4 times).
pshonore wrote:I thought he was going as a sole prop which I think would be 5X the profit (4X would apply to S corp)
Actually, to have a profit sharing of $53K you need to have about the same net profit (~= $276K) whether Sole Proprietor or S-Corp. For sole proprietor it is 20% of self employment income (net profit - 1/2 SE tax) and for S-Corp it is 25% of W2 wages.

Sole proprietor: Net profit ~= $276K - 1/2 SE tax (~= $11K) = $265K * 0.20 = $53K sole proprietor maximum profit sharing contribution.
S-Corp: Net profit ~= $276K - $212K salary - Payroll deductions (~= $11K; employer FICA, UI, WC, etc...) = $53K = $212K * 0.25 S-Corp maximum profit sharing contribution.

Both sole proprietor and S-Corp are really 25% of compensation. The reason you use 20% in the case of a sole proprietor is because it is a simplified calculation that reflects the fact that the contribution itself is deducted from the compensation before applying the 25%. For example, ($265K - $53K) * 0.25 = $53K = $212K * 0.25. The simplified calculation to get the sole proprietor contribution rate is 0.25 / (1.00 + 0.25) = 0.20.

SmallSaver
Posts: 140
Joined: Mon Mar 26, 2012 11:34 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by SmallSaver » Tue Jan 20, 2015 5:04 pm

You think I really need a CPA and a lawyer?
You don't need them, but they are very cheap relative to the costs of a potential misstep. Why not pay a few hundred bucks and talk to someone who does this for a living? Good advice will pay for itself many times over. A CPA may be enough, I'd think a lawyer would mostly be to make sure your financial butt is covered.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Thu Jan 22, 2015 1:55 pm

Was reading this :" viewtopic.php?f=2&t=137366

Would it not be better if I opened a SEP IRA and then converted that to a ROTH IRA instead of going with a solo 401K?

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 8:45 am

SmallSaver wrote:
You think I really need a CPA and a lawyer?
You don't need them, but they are very cheap relative to the costs of a potential misstep. Why not pay a few hundred bucks and talk to someone who does this for a living? Good advice will pay for itself many times over. A CPA may be enough, I'd think a lawyer would mostly be to make sure your financial butt is covered.

Good advice.

I finally got around to speaking with cpa. He essentialy agreed that of NO risk of lawsuit, then no need to create any entity.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 8:48 am

In regards to getting EIN and setting up DBA - should I just use legal zoom? They charge 99 plus state fee for dBA and 79 for EIN.

I can try to do it myself but don't want to screw it up. Also, if I do it myself, I'm not sure what to get first : dBA or EIN. I think the EIN may require that the dBA be already formed so EIN can be linked but not certain.

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 9:25 am

Spirit Rider wrote:
Gemini wrote:...3 once I obtain TIN. do I still have to fill out my SS# on the box provided on W9?
3 Yes, The main reasons for obtaining an EIN even though you have no statutory employees is that you need it for the Solo 401k from most providers and to open business bank accounts
I would have guessed that the answer to 3 can be No if the OP wants it to be.

As I understand it, a sole proprietor can get an EIN that's mapped to their own name and SSN and use it for both the solo 401k and on W-9s for identity theft protection. In fact, a single member LLC owner taxed as a sole-proprietor can and should do the same thing, since a disregarded entity LLC's EIN wouldn't be recognized by the IRS.

IMO, the SS-4 EIN application form is relatively straightforward:
http://www.irs.gov/pub/irs-pdf/fss4.pdf

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 11:12 am

magellan wrote:
Spirit Rider wrote:
Gemini wrote:...3 once I obtain TIN. do I still have to fill out my SS# on the box provided on W9?
3 Yes, The main reasons for obtaining an EIN even though you have no statutory employees is that you need it for the Solo 401k from most providers and to open business bank accounts
I would have guessed that the answer to 3 can be No if the OP wants it to be.

As I understand it, a sole proprietor can get an EIN that's mapped to their own name and SSN and use it for both the solo 401k and on W-9s for identity theft protection. In fact, a single member LLC owner taxed as a sole-proprietor can and should do the same thing, since a disregarded entity LLC's EIN wouldn't be recognized by the IRS.

IMO, the SS-4 EIN application form is relatively straightforward:
http://www.irs.gov/pub/irs-pdf/fss4.pdf
It is rather straightforward and can be done online as well.

Question is whether I need to have a dBA/LLC already in place before I apply for EIN.

niceguy7376
Posts: 2522
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by niceguy7376 » Fri Jan 23, 2015 11:14 am

what did the cpa say?

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Spirit Rider » Fri Jan 23, 2015 11:19 am

magellan wrote:
Spirit Rider wrote:
Gemini wrote:...3 once I obtain TIN. do I still have to fill out my SS# on the box provided on W9?
3 Yes, The main reasons for obtaining an EIN even though you have no statutory employees is that you need it for the Solo 401k from most providers and to open business bank accounts
I would have guessed that the answer to 3 can be No if the OP wants it to be.

As I understand it, a sole proprietor can get an EIN that's mapped to their own name and SSN and use it for both the solo 401k and on W-9s for identity theft protection. In fact, a single member LLC owner taxed as a sole-proprietor can and should do the same thing, since a disregarded entity LLC's EIN wouldn't be recognized by the IRS.

IMO, the SS-4 EIN application form is relatively straightforward:
http://www.irs.gov/pub/irs-pdf/fss4.pdf
A sole proprietor can get an EIN, but they must still fill out the W-9 with their SSN.

The EIN is even easier than filling out a SS-4. You can go online to the IRS website, select more under tools and there is a link for getting an online EIN for free.

You might want to check your State/City requirements for a DBA. It might be pretty easy to do yourself. I think Legal Zoom is fine for these type of things, but might not save you any time. That is certainly true for the EIN.

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 11:21 am

Gemini wrote:Question is whether I need to have a dBA/LLC already in place before I apply for EIN.
IMO, if you're going to list a dba on the SS-4, then you should apply for that first. The state might not let you use the name you'd like (in some states, this happens often, btw).

I'm not sure if you can list an LLC name in the 'dba' field of the SS-4. It would seem logical that you could, but I don't know for sure.

in the eyes of the IRS, a disregarded entity LLC would basically look very much like a dba(eg. a state sanctioned mapping between a person who owns a business and the trade name that the business operates under).

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 11:24 am

Spirit Rider wrote:A sole proprietor can get an EIN, but they must still fill out the W-9 with their SSN.
I don't think that's correct. My reading of the instructions is that the IRS prefers sole proprietors use their SSN on a W9, but doesn't require it. Is there another reg that says sole proprietors MUST use their SSN on W9s?

Unfortunately, IRS regs don't take into account the risk of identity theft yet. Given the recent spike in tax refund fraud, I hope and expect that will change soon.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 12:07 pm

niceguy7376 wrote:what did the cpa say?
Pretty much that if there is no potential risk of a lawsuit, then no need to really bother with LLC, unless you want to. DBA or LLC would suffice and are super easy to set up. Def said to stay away from any corp. Also asked about quarterly tax filings and he said one can estimate in good faith or just withhold from my w2. He said tax rates are relatively low and I wouldn't take a big hit if I underpaid.

I forgot to ask him whether to get EIN or dBA/LLC first.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 12:09 pm

On legal zoom, there is the option of them getting EIN for you whether you do dBA or LLC. It's 79 extra but it would essentially answer my question of what to get first without sweating it out and botching it.

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 12:29 pm

Personally, I'd suggest doing the DBA yourself. It's generally pretty simple and involving a 3rd party could make things MORE complicated.

Depending on how picky your state is with naming rules, you may have to do a few rounds with them to get a name you both agree on. Some states won't let you use a name that's even remotely close to a name already registered, even in an unrelated field (eg McPherson's Plumbing can't be used if McPherson's Painting is already registered). To make things more complicated, most states now share business name information and cross-check names against the names used in other states to further prevent overlap. I volunteer as a SCORE counselor and our state has definitely gotten much more strict in the past few years about this. Years ago I never had a client get a rejection and now it seems to be much more common.

One good trick in finding a good name is to start with domain name availability. If the domain name is for sale, that's a sign that the name isn't in use (though that's not conclusive of course). Next, do a google search for the name. Finally, check your state's online business name registry if there is one.

Finally, don't go for names that are close to existing names. For example, if there's a business called "Fred's Floral Ventures" already on the books, many states will reject an application for "Fred's Flower Ventures". Some might reject "Fred's Ventures" too.

AWH_CPA
Posts: 247
Joined: Tue Jan 20, 2015 6:44 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by AWH_CPA » Fri Jan 23, 2015 1:39 pm

Get the LLC. Its maybe $100 to register it with your Secretary of State or Corporation Commission. Setup bank account with LLC name and deposit all checks to that bank account. Run all expenses associated with business through that bank account (do not commingle your money). Pay yourself a month draw to your own personal account.

Taxes are handled the same as if you were the same. Unless you're in a state that has an "LLC" tax like Cali.

This will provide you at least a little liability protection in the rare change you get sued. You should also discuss this with your malpractice provider to make sure that you are either covered under your current employer or whether you would need your own malpractice insurance. (Very expensive as you know).

Don't go S Corp or C Corp as it simply creates an added layer of tax returns that need to be created along with a payroll compliance requirement. Since you are a doc and employed via W2 in main job i assume you are already maxed at the SS wage base so the payroll taxes on your 1040 would be minimal. You would not be able to use the whole "your wife is limited partner so she doesn't have to pay payroll tax" concept in this scenario. If your business was manufacturing widgets its possible, but as a service provider the IRS will simply argue that all the profits are made off your labor and would be self employment income to you.

If you do start getting some serious coin doing this, you could look into a solo 401k as a way to get more money into qualified plans quicker than with a SEP. (Much lower income limit required compared to the 265k needed to fully max a SEP.)

Hope this helps.

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Spirit Rider » Fri Jan 23, 2015 1:43 pm

magellan wrote:
Spirit Rider wrote:A sole proprietor can get an EIN, but they must still fill out the W-9 with their SSN.
I don't think that's correct. My reading of the instructions is that the IRS prefers sole proprietors use their SSN on a W9, but doesn't require it. Is there another reg that says sole proprietors MUST use their SSN on W9s?

Unfortunately, IRS regs don't take into account the risk of identity theft yet. Given the recent spike in tax refund fraud, I hope and expect that will change soon.
You are correct and I am wrong. From the IRS Form W-9 Part I instructions: If you are a sole proprietor and you have an EIN, you may enter either your SSN or EIN. However, the IRS prefers you use your SSN.. The thing that thru me off was that it you have a single-member LLC as a disregarded entity, you cannot use the EIN and must use your SSN.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 1:52 pm

magellan wrote:Personally, I'd suggest doing the DBA yourself. It's generally pretty simple and involving a 3rd party could make things MORE complicated.

Depending on how picky your state is with naming rules, you may have to do a few rounds with them to get a name you both agree on. Some states won't let you use a name that's even remotely close to a name already registered, even in an unrelated field (eg McPherson's Plumbing can't be used if McPherson's Painting is already registered). To make things more complicated, most states now share business name information and cross-check names against the names used in other states to further prevent overlap. I volunteer as a SCORE counselor and our state has definitely gotten much more strict in the past few years about this. Years ago I never had a client get a rejection and now it seems to be much more common.

One good trick in finding a good name is to start with domain name availability. If the domain name is for sale, that's a sign that the name isn't in use (though that's not conclusive of course). Next, do a google search for the name. Finally, check your state's online business name registry if there is one.

Finally, don't go for names that are close to existing names. For example, if there's a business called "Fred's Floral Ventures" already on the books, many states will reject an application for "Fred's Flower Ventures". Some might reject "Fred's Ventures" too.
I am going to do as you suggested and investigate some names. If too much of a hassle, will just use legal zoom.

hmmm what name to use? :idea:

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 1:54 pm

AWH_CPA wrote:Get the LLC. Its maybe $100 to register it with your Secretary of State or Corporation Commission. Setup bank account with LLC name and deposit all checks to that bank account. Run all expenses associated with business through that bank account (do not commingle your money). Pay yourself a month draw to your own personal account.

Taxes are handled the same as if you were the same. Unless you're in a state that has an "LLC" tax like Cali.

This will provide you at least a little liability protection in the rare change you get sued. You should also discuss this with your malpractice provider to make sure that you are either covered under your current employer or whether you would need your own malpractice insurance. (Very expensive as you know).

Don't go S Corp or C Corp as it simply creates an added layer of tax returns that need to be created along with a payroll compliance requirement. Since you are a doc and employed via W2 in main job i assume you are already maxed at the SS wage base so the payroll taxes on your 1040 would be minimal. You would not be able to use the whole "your wife is limited partner so she doesn't have to pay payroll tax" concept in this scenario. If your business was manufacturing widgets its possible, but as a service provider the IRS will simply argue that all the profits are made off your labor and would be self employment income to you.

If you do start getting some serious coin doing this, you could look into a solo 401k as a way to get more money into qualified plans quicker than with a SEP. (Much lower income limit required compared to the 265k needed to fully max a SEP.)

Essentially the same advice I got from my CPA except the part about 401K vs SEP.

I was thinking of solo 401K because if I have SEP then I may not be able to do the backdoor Roth. But then I read about the mega backdoor Roth, so now that has me thinking to go with the SEP

Hope this helps.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 2:21 pm

Spirit Rider wrote:
magellan wrote:
Spirit Rider wrote:A sole proprietor can get an EIN, but they must still fill out the W-9 with their SSN.
I don't think that's correct. My reading of the instructions is that the IRS prefers sole proprietors use their SSN on a W9, but doesn't require it. Is there another reg that says sole proprietors MUST use their SSN on W9s?

Unfortunately, IRS regs don't take into account the risk of identity theft yet. Given the recent spike in tax refund fraud, I hope and expect that will change soon.
You are correct and I am wrong. From the IRS Form W-9 Part I instructions: If you are a sole proprietor and you have an EIN, you may enter either your SSN or EIN. However, the IRS prefers you use your SSN.. The thing that thru me off was that it you have a single-member LLC as a disregarded entity, you cannot use the EIN and must use your SSN.
Is that true? Single member LLC uses SS# over TIN?

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 2:34 pm

Gemini wrote:Is that true? Single member LLC uses SS# over TIN?
What's true is that you can't use an LLC's EIN/TIN on a W9 if the LLC doesn't file a tax return as its own entity.

I don't see why you can't complete the SS-4 without checking the 'This EIN is for an LLC'. Basically, as far as the IRS is concerned, your LLC is not an LLC at all, it's a sole-proprietorship with a DBA. I think filling out the form in that manner would be accurate and correct, but I'm not positive.

Another option is to fill out the application with your own name and don't mention the business name. Then the EIN is simply an alias that you can list with your name on the W9 instead of an SSN.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 3:11 pm

magellan wrote:
Gemini wrote:Is that true? Single member LLC uses SS# over TIN?
What's true is that you can't use an LLC's EIN/TIN on a W9 if the LLC doesn't file a tax return as its own entity.

I don't see why you can't complete the SS-4 without checking the 'This EIN is for an LLC'. Basically, as far as the IRS is concerned, your LLC is not an LLC at all, it's a sole-proprietorship with a DBA. I think filling out the form in that manner would be accurate and correct, but I'm not positive.

Another option is to fill out the application with your own name and don't mention the business name. Then the EIN is simply an alias that you can list with your name on the W9 instead of an SSN.

Did some digging.

From page 3 of W9:
If you are a sole proprietor and you have an EIN, you may enter either your SSN
or EIN. However, the IRS prefers that you use your SSN.
If you are a single-member LLC that is disregarded as an entity separate from its
owner (see Limited Liability Company (LLC) on this page), enter the owner’s SSN
(or EIN, if the owner has one). Do not enter the disregarded entity’s EIN. If the LLC
is classified as a corporation or partnership, enter the entity’s EIN.

Looks like single member LLC use TIN. agree? just wanted to confirm the above wording.

AWH_CPA
Posts: 247
Joined: Tue Jan 20, 2015 6:44 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by AWH_CPA » Fri Jan 23, 2015 3:17 pm

SMLLC should use the SSN of the member for the 1099 reporting. And really the 1099 should be reported to the individuals name with the LLC on line two of the name. But this is more of an issue for the company you are contracting with.

AWH_CPA
Posts: 247
Joined: Tue Jan 20, 2015 6:44 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by AWH_CPA » Fri Jan 23, 2015 3:22 pm

Gemini wrote:
AWH_CPA wrote:
Essentially the same advice I got from my CPA except the part about 401K vs SEP.

I was thinking of solo 401K because if I have SEP then I may not be able to do the backdoor Roth. But then I read about the mega backdoor Roth, so now that has me thinking to go with the SEP

Hope this helps.
The solo 401k is a little more expensive to setup (the SEP is virtually free to setup). Actually thinking about it, the solo 401k is probably not the correct solution since you most likely have the 401k available from your own employer. This would negate part of the benefit of the solo 401k as you would only be allowed to defer your 18k to one of the 401ks.

The benefit of the 401k though is that if you are only making 70 or 80k consulting, it allows you to stick a much larger % into the qualified plan than the 12 or 13k you could do via the SEP. And you are correct that the 401k also allows you to continue doing backdoor roths as it doesnt taint your total IRA amount like a SEP would.

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by magellan » Fri Jan 23, 2015 3:35 pm

AWH_CPA wrote:SMLLC should use the SSN of the member for the 1099 reporting.
Once again, I don't believe this is correct.

The owner can apply for an EIN that's mapped to the owner's name and SSN and not the LLC's name. They can then use that EIN on W9s instead of an SSN to to help protect against identity theft.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 3:37 pm

magellan wrote:
AWH_CPA wrote:SMLLC should use the SSN of the member for the 1099 reporting.
Once again, I don't believe this is correct.

The owner can apply for an EIN (mapped to the owner's name not the LLC's). They can then use that EIN on W9s instead of an SSN to to help protect against identity theft.
Ditto.

This is how I understood what I copied and pasted earlier from the actual W9 form.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Fri Jan 23, 2015 3:39 pm

AWH_CPA wrote:
Gemini wrote:
AWH_CPA wrote:
Essentially the same advice I got from my CPA except the part about 401K vs SEP.

I was thinking of solo 401K because if I have SEP then I may not be able to do the backdoor Roth. But then I read about the mega backdoor Roth, so now that has me thinking to go with the SEP

Hope this helps.
The solo 401k is a little more expensive to setup (the SEP is virtually free to setup). Actually thinking about it, the solo 401k is probably not the correct solution since you most likely have the 401k available from your own employer. This would negate part of the benefit of the solo 401k as you would only be allowed to defer your 18k to one of the 401ks.

The benefit of the 401k though is that if you are only making 70 or 80k consulting, it allows you to stick a much larger % into the qualified plan than the 12 or 13k you could do via the SEP. And you are correct that the 401k also allows you to continue doing backdoor roths as it doesnt taint your total IRA amount like a SEP would.
I think spirit rider and I had a discussion on this already earlier.

From what I gathered, one can do W2 $18K elective deferral, $35K W2 profit sharing, $53K Solo 401k profit sharing (with a dba or single LLC WITH EIN), and $5.5K backdoor Roth.

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Spirit Rider » Fri Jan 23, 2015 6:01 pm

Gemini wrote:
AWH_CPA wrote:
Gemini wrote:
AWH_CPA wrote:
Essentially the same advice I got from my CPA except the part about 401K vs SEP.

I was thinking of solo 401K because if I have SEP then I may not be able to do the backdoor Roth. But then I read about the mega backdoor Roth, so now that has me thinking to go with the SEP

Hope this helps.
The solo 401k is a little more expensive to setup (the SEP is virtually free to setup). Actually thinking about it, the solo 401k is probably not the correct solution since you most likely have the 401k available from your own employer. This would negate part of the benefit of the solo 401k as you would only be allowed to defer your 18k to one of the 401ks.

The benefit of the 401k though is that if you are only making 70 or 80k consulting, it allows you to stick a much larger % into the qualified plan than the 12 or 13k you could do via the SEP. And you are correct that the 401k also allows you to continue doing backdoor roths as it doesnt taint your total IRA amount like a SEP would.
I think spirit rider and I had a discussion on this already earlier.

From what I gathered, one can do W2 $18K elective deferral, $35K W2 profit sharing, $53K Solo 401k profit sharing (with a dba or single LLC WITH EIN), and $5.5K backdoor Roth.
And thus, the main reason for the Solo 401k, is to preserve the ability to do the backdoor Roth. Which the OP wants to do.

Also, I do not know of a single mainstream provider who charges a single penny to open and maintain a Solo 401k.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Thu Apr 09, 2015 5:19 pm

I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity

User avatar
avenger
Posts: 800
Joined: Mon Dec 02, 2013 12:11 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by avenger » Sat Apr 11, 2015 5:16 am

Gemini wrote:I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity
A data point for you:
I am not sure if fidelity is better, but have a vanguard i401k and am not impressed with the web interface.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Sat Apr 11, 2015 11:59 pm

avenger wrote:
Gemini wrote:I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity
A data point for you:
I am not sure if fidelity is better, but have a vanguard i401k and am not impressed with the web interface.
appreciate your input. can you clarify a bit further? i have a (backdoor) roth with vanguard and the interface has been okay.

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by White Coat Investor » Sat Apr 11, 2015 11:59 pm

avenger wrote:
Gemini wrote:I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity
A data point for you:
I am not sure if fidelity is better, but have a vanguard i401k and am not impressed with the web interface.
I'm fine with my Vanguard 401(k). Give me admiral shares and it would be perfect for my needs. As is, I'm seriously considering doing periodic rollovers into the TSP I left open when I left the military.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by Gemini » Sun Apr 12, 2015 12:01 am

EmergDoc wrote:
avenger wrote:
Gemini wrote:I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity
A data point for you:
I am not sure if fidelity is better, but have a vanguard i401k and am not impressed with the web interface.
I'm fine with my Vanguard 401(k). Give me admiral shares and it would be perfect for my needs. As is, I'm seriously considering doing periodic rollovers into the TSP I left open when I left the military.
you have a solo 401K with vanguard or via work? any comments on how you like it and comparison to fidelity? any fees, etc?

User avatar
avenger
Posts: 800
Joined: Mon Dec 02, 2013 12:11 pm

Re: Physician Independent contractor - LLC vs S corp vs othe

Post by avenger » Sun Apr 12, 2015 6:15 am

Gemini wrote:
avenger wrote:
Gemini wrote:I am going to do some research on solo 401K and try to figure out which one to go with: vanguard vs fidelity
A data point for you:
I am not sure if fidelity is better, but have a vanguard i401k and am not impressed with the web interface.
appreciate your input. can you clarify a bit further? i have a (backdoor) roth with vanguard and the interface has been okay.
I do all taxable and Roth investing with Vanguard. I like the personal investor web interface, in fact. However, the small business interface leaves much to be desired. For example, when I wanted to buy my first fund, I had to call to have it added to the menu (you can't do it electronically). Not that I am adding funds all the time... but it just seems I shouldn't have to do that.

Just my opinion. If that kind of stuff doesn't matter to you, no worries.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Gemini » Mon Jun 15, 2015 10:48 pm

An update - I ended up opening a LLC. The process was pretty streamlined and I was able to do everything online. I considered Legal Zoom, but I read some horror stories online that turned me off. Thank you all for your help.



Re: taxes - how and when do I pay taxes on this earned income? Should I hire an accountant or is this something I can tackle myself?

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Spirit Rider » Mon Jun 15, 2015 11:18 pm

Gemini wrote:An update - I ended up opening a LLC. The process was pretty streamlined and I was able to do everything online. I considered Legal Zoom, but I read some horror stories online that turned me off. Thank you all for your help.

Re: taxes - how and when do I pay taxes on this earned income? Should I hire an accountant or is this something I can tackle myself?
You have to ensure that you have met one of the safe harbors for tax payments at the end of the year. This is either 90% of your tax liability for the current tax year or 100% of the previous tax year (110% if > $150K).

This can be accomplished by withholding and/or estimated tax payments. If the secondary income is fairly regular and predictable, you could increase your W2 job's withholding to cover the total income. The advantage of this is that withholding is treated as being received evenly during the year. The other avenue is to make estimated tax payments quarterly (well almost; 4/15, 6/15, 9/15, 1/15). You have two options here, either equal payments each quarter or payments tied to actual self-employment income each quarter.

I usually recommend someone pay a professional for the first year as a template and then decide after that if they feel comfortable in subsequent years.

User avatar
magellan
Posts: 3471
Joined: Fri Mar 09, 2007 4:12 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by magellan » Tue Jun 16, 2015 6:48 am

Spirit Rider wrote:I usually recommend someone pay a professional for the first year as a template and then decide after that if they feel comfortable in subsequent years.
+1 on this unless you're very confident about your tax prep skills and willing to do a bunch of work to educate yourself on all the rules.

Also be aware that state taxes on businesses can be more complicated than federal taxes. Some states have special taxes on things like gross revenue and business enterprise value.

Finally, an accountant can often find deductible expenses in that first year that cover a big part of their fee. Even if they don't, you can think of the cost as insurance against trouble down the road.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Gemini » Wed Jun 17, 2015 4:16 pm

Is there a penalty if I pay nothing now and choose to just pay at the end of the fiscal year? I realize I will owe money, but not sure if I will get penalized for being "late" per say

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Spirit Rider » Wed Jun 17, 2015 4:41 pm

Gemini wrote:Is there a penalty if I pay nothing now and choose to just pay at the end of the fiscal year? I realize I will owe money, but not sure if I will get penalized for being "late" per say
Yes there will be a penalty.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Gemini » Wed Jun 17, 2015 4:42 pm

Spirit Rider wrote:
Gemini wrote:Is there a penalty if I pay nothing now and choose to just pay at the end of the fiscal year? I realize I will owe money, but not sure if I will get penalized for being "late" per say
Yes there will be a penalty.
A huge penalty?

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Spirit Rider » Wed Jun 17, 2015 4:44 pm

In 2015 it is 0.5%/month.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Gemini » Wed Jun 17, 2015 4:49 pm

Spirit Rider wrote:In 2015 it is 0.5%/month.

0.5% per month on the money owed?

So assume I make 100K (which ain't happening FYI haha) for the year and I owe 30K in taxes at the end of the fiscal year. I would get a 0.5% penalty x 12 on the 30k? So $150/month x 12 = 1800 in penalty for the year? I would add the 1800 to what I already owe for a total of 31,800?

Did I do above right?

User avatar
gnosis
Posts: 347
Joined: Wed Aug 13, 2008 9:05 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by gnosis » Wed Jun 17, 2015 7:19 pm

In PA if you're a Professional LLC you are required to pay an additional $500 annually just because you're a Professional LLC. I found that out after I became one. Isn't that wonderful? I googled it once before. I think it was called the "Oh, since you're a rich doctor, pay us more or else " fee.

Edit:
Yup, here it is: http://www.portal.state.pa.us/portal/se ... ees/571897

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Spirit Rider » Wed Jun 17, 2015 8:17 pm

Gemini wrote:
Spirit Rider wrote:In 2015 it is 0.5%/month.
0.5% per month on the money owed?

So assume I make 100K (which ain't happening FYI haha) for the year and I owe 30K in taxes at the end of the fiscal year. I would get a 0.5% penalty x 12 on the 30k? So $150/month x 12 = 1800 in penalty for the year? I would add the 1800 to what I already owe for a total of 31,800?

Did I do above right?
I'm not sure how the IRS calculates this, but it might be closer to $1K. However, why would you want to do that when either increasing your withholding or making estimated taxes is relatively easy.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Gemini » Wed Jun 17, 2015 10:33 pm

Spirit Rider wrote:
Gemini wrote:
Spirit Rider wrote:In 2015 it is 0.5%/month.
0.5% per month on the money owed?

So assume I make 100K (which ain't happening FYI haha) for the year and I owe 30K in taxes at the end of the fiscal year. I would get a 0.5% penalty x 12 on the 30k? So $150/month x 12 = 1800 in penalty for the year? I would add the 1800 to what I already owe for a total of 31,800?

Did I do above right?
I'm not sure how the IRS calculates this, but it might be closer to $1K. However, why would you want to do that when either increasing your withholding or making estimated taxes is relatively easy.
How do I make estimated tax payments easily? I thought you guys mentioned earlier to use an accountant? Or can I do this myself every few months? I suspect this would be federal level as the state level seems more complicated.

nolesrule
Posts: 1461
Joined: Thu Feb 26, 2015 10:59 am

Re: Physician Independent contractor - LLC vs S corp vs other

Post by nolesrule » Thu Jun 18, 2015 7:11 am

Sign up for an EFTPS.gov account to make estimated Federal payments.

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Physician Independent contractor - LLC vs S corp vs other

Post by Spirit Rider » Thu Jun 18, 2015 8:39 am

Use IRS Form 1040-ES. If you are using the regular payment method (four equal installments of the yearly estimated tax required) this is sufficient. If you are unable to project the entire year or the income is highly variable, you can use the annualized payment method. This is covered in IRS Publication 505 Tax Withholding and Estimated Tax.

Note: The regular payment method is far easier. If you were willing to pay penalties for the entire year, being off on a your projections will be far lower.

However, there is a problem. I am assuming you have not made any estimated payments yet this year. You are already late for the first (4/15) and second (6/15) payments. Since withholding is treated as having been received equally during the year, you should strongly consider increasing your withholding to cover the self-employment income.

Also, I am assuming given your profession that your W-2 wages will be >= $118.5K this year. In this case your SE tax will not include SS (12.4%), but only Medicare (2.9% + ACA surtax of 0.9% > $200K S, > $250K MFJ). Let's say you have $30K in self-employment income with a marginal tax rate of 33%. Your tax liability would be $10K income tax and ~ $1K SE tax. Your tax liability would be ~ $11K. For example, if you over withheld $3200 (usual tax refund), your tax liability would be $7800. Having an extra $300 withheld weekly would meet your total W2/SE income for the year.

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Income tax liability safe harbors

Post by Spirit Rider » Thu Jun 18, 2015 8:53 am

A follow on to my most recent post. I didn't want to confuse the issues. There are income tax liability safe harbors you could take advantage of to reduce the need for additional tax payments:
  1. Owe less than $1000.
  2. Owe less than 10% of your tax liability (or to use the IRS terminology; have paid 90% of your tax liability)
  3. Made tax payment at least equal to 100% of 2014's tax liability (110% if AGI >= $150K).
3. Might be the most useful. For example, if last year's AGI > $150K and your tax liability was $30K, you would only have to ensure that your withholding was >= $33K (I would use $35K for a safety margin). This is true even if because you had a raise this year and your $11K in additional tax liability. So let's say your total tax liability for the year will be $45K. If you made sure your withholding was $35K, you would have until 04/15 to pay the additional $10K without any penalties whatsoever.

Topic Author
Gemini
Posts: 996
Joined: Sun May 20, 2012 8:10 am

Re: Income tax liability safe harbors

Post by Gemini » Fri Jun 19, 2015 3:00 pm

Spirit Rider wrote:A follow on to my most recent post. I didn't want to confuse the issues. There are income tax liability safe harbors you could take advantage of to reduce the need for additional tax payments:
  1. Owe less than $1000.
  2. Owe less than 10% of your tax liability (or to use the IRS terminology; have paid 90% of your tax liability)
  3. Made tax payment at least equal to 100% of 2014's tax liability (110% if AGI >= $150K).
3. Might be the most useful. For example, if last year's AGI > $150K and your tax liability was $30K, you would only have to ensure that your withholding was >= $33K (I would use $35K for a safety margin). This is true even if because you had a raise this year and your $11K in additional tax liability. So let's say your total tax liability for the year will be $45K. If you made sure your withholding was $35K, you would have until 04/15 to pay the additional $10K without any penalties whatsoever.
Great!

I am assuming this applies to federal taxes only?

Also, when you say tax liability, you are referring to "Total tax" line as noted on form 8879? Or is it the "Federal Income Tax Withheld" line on Form 8879?

Spirit Rider
Posts: 12240
Joined: Fri Mar 02, 2007 2:39 pm

Re: Income tax liability safe harbors

Post by Spirit Rider » Fri Jun 19, 2015 8:31 pm

Gemini wrote:Great!

I am assuming this applies to federal taxes only?

Also, when you say tax liability, you are referring to "Total tax" line as noted on form 8879? Or is it the "Federal Income Tax Withheld" line on Form 8879?
Yes, this is for federal taxes only. You will have to research your particular state.

Nothing with the IRS is ever that simple. Refer to Form 1040 instructions for Estimated Tax Penalty (2014 = line 79). The adjustments to Total Tax (2014 = line 63) seem involved, but many do not apply to most people.

Post Reply