self-employed professional - the best way to get things started?

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Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

self-employed professional - the best way to get things started?

Post by Bones_Jones » Tue Sep 18, 2018 9:13 pm

hi guys,

total financial noob here! i posted stuff while back. fast forward 2 years later alot of things have changed.

cliff notes

1. both wife and I are self-employed. both 38.
2. we make combined 270k from home, filed jointly.
3. no home, no more mortgage payment (we plan to buy a home in 2-3 years)
4. no car payments and no other major debts
5. student loan - 500k together :x expect to pay it all off in 7 years.
6. 401k from previous employer - 65k
7. 20k emergency funds


we are living somewhat frugally now(compared to our extravagant lifestyle in the past. :( ) we are saving money for a down payment for a new home. and we have about 7k monthly to invest and finally get the retirement plan going. we both are expected to be self employed for good. we thought about going after the student loan even more aggressively, but decided to invest instead. we are way way too late in the game. so we are kinda desperate to get something going.

here are my questions -

1. i just watched interesting video about SEP IRA vs. solo 401k - https://www.youtube.com/watch?v=aJP6s04kPkI&t=531s does this apply to us? should i become an S corporation? what happens to my wife then? my employee? i like the idea of saving significant money on taxes.

2. i want to rollover existing 65k from my past employer - so should i open up solo 401k account? backdoor roth IRA? which retirement plan makes best sense for us? :confused we want to put aside about 4k monthly for our retirement accounts. i'm just not sure which one makes best sense for us... and we want to just have 1 accounts together.

3. we want to invest 3k monthly - or maybe just put all 7k to retirement plans? :confused i want something short term though. something we can look forward to 10 years later. what would you guys do with 3k?




we didn't hire any financial advisors. we don't plan to. but it's kinda hard to figure things on our own. we don't want to make a stupid noob mistakes.


any kind of help is appreciated.

:sharebeer

ChinchillaWhiplash
Posts: 524
Joined: Sat Jan 20, 2018 5:40 pm
Location: Colorado

Re: self-employed professional - the best way to get things started?

Post by ChinchillaWhiplash » Tue Sep 18, 2018 9:54 pm

Best option is to set up a solo 401k for each of you if both doing separate businesses. If wife is employed with you, she can be on your solo 401k plan. You can contribute the most this way. You can contribute $18500 for each individual and the business can contribute up to another $36500 depending on earnings. The $36500 counts as a business deduction too. The $18500 has to be paid during the tax year. The business can fund as late as September of the following year if filing an extrension. It is usually the best way to go if you run your own business. Not sure on what business structure to use, but a LLC might be best. S-corp has more paperwork involved with more complex tax filings and might not offer much more, if any tax savings. You might want to find a good CPA that is familiar with doing taxes with small business and see what works best in your situation.

Not sure what you mean by short term? You generally can't take the money out of a 401k without penalty until 59.5 years old. Some do allow loans up to 1/2 the balance or up $50k (whichever is less) for a small fee. Has to be paid back within 5 years and you pay yourself interest. The loan payments are not tax deductible.
Last edited by ChinchillaWhiplash on Tue Sep 18, 2018 10:02 pm, edited 1 time in total.

grokzilla
Posts: 78
Joined: Tue Aug 16, 2011 8:25 am

Re: self-employed professional - the best way to get things started?

Post by grokzilla » Tue Sep 18, 2018 10:00 pm

I'm sure others will chime in with suggestions and links to areas of the wiki you should consume -- it's a good resource so make sure to do so. You'll probably want to service that debt earlier too...

For my part, I can provide some anecdotal advice in relation to self-employment. I'm not a finance pro or accountant, but I've run a small business for about 15 years. Here are some thoughts:

SEP-IRA and Solo 401k: are probably the most significant retirement benefit to self-employment (aside from hours, being your own boss, etc.). The SEP allows you to put away $58,000 or 20% of business income tax free each year. The Solo 401K allows the same, but with an opportunity to contribute an additional $18,500. They both have the same limit, but the Solo 401k will allow you to put away more faster at least up to about $250k of income per year at which point they are about equal. The SEP is a bit easier to set up and manage and the Solo 401K does require some additional tax paperwork each year once you have a certain amount of money in the plan. Pretty sure you and your spouse can contribute to the same plan -- assuming same company, etc. I have both a SEP and Solo 401k, but have been primarily using the latter over the last few years -- you can contribute to both, but the cap is the same.

Home Based Business: Probably the second most notable benefit of self-employment assuming home based business is the home office deduction. The ability to write off a percentage of your mortgage interest, utilities, maintenance, etc as business expenses is very beneficial. Same issue with any work vehicles you utilize. It's important to follow the rules here and only write off what is used for the business and keep good records, but it's a great set of benefits for tax reduction.

S-Corp FICA Loophole: There's a small anomaly in the tax code that allows s-corps to avoid FICA taxes on a certain amount of income. I'm not a proponent of this one for a number of reasons, but know alot of folks use it. Congress has been "trying" to close this one for a number of years now, but it's still alive I think. Part of the reason I don't like it is you could potentially reduce your own SS work credits utilizing this one...probably not too hard to avoid that, but it's a sticky wicket in general. That said, if you're min/maxing taxes this would certainly be in the mix.

Nolo Books: The series of Nolo books were a TREMENDOUS help for me when first getting my business up and running. They are a great resource if you really want to understand the tax based nooks and crevices you can exploit as a small business. They have books that provide deep dives on organizational structures, home based biz tax deductions, small biz tax deductions, etc. I highly recommend them -- like having a pocket accountant to reference.

Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

Re: self-employed professional - the best way to get things started?

Post by Bones_Jones » Tue Sep 18, 2018 11:22 pm

thank you for the input, guys! i'm leaning towards solo 401k and i'll do some more homework.

oh by the way, i'm a family physician. i do 100% telemedicine. my wife is a graphic designer. she makes 50k.
we can basically work at anywhere, anytime. :happy

we did form an LLC (whatever name medical clinic, LLC) because my wife and i initially wanted open our own clinic. but it costs too much money and we just weren't ready. that's how i started telemedicine. it was supposed to be temporary, but it became my permanent gig. and frankly working from home is liberating. we have no kids. just 2 dogs. it's been great. i get to treat patients and live a stress free life.


if we keep an LLC, will i be paying more tax though? i know i'm paying 15.3% as a sole prop.
what should i do with LLC we created? just ditch it?

and if an LLC is created, am I an LLC if i don't get rid of it?

and if i become an s corp, i can pay a salary to myself say 80k and 140k becomes dividend right? so get to pay only 15.3% tax on just 80k and keep 140k to myself? what's the catch? what am i missing here? and how do i file tax as an s corp with my wife? :confused

thx again guys!

Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

Re: self-employed professional - the best way to get things started?

Post by Bones_Jones » Wed Sep 19, 2018 12:22 am

ChinchillaWhiplash wrote:
Tue Sep 18, 2018 9:54 pm
Best option is to set up a solo 401k for each of you if both doing separate businesses. If wife is employed with you, she can be on your solo 401k plan. You can contribute the most this way. You can contribute $18500 for each individual and the business can contribute up to another $36500 depending on earnings. The $36500 counts as a business deduction too. The $18500 has to be paid during the tax year. The business can fund as late as September of the following year if filing an extrension. It is usually the best way to go if you run your own business. Not sure on what business structure to use, but a LLC might be best. S-corp has more paperwork involved with more complex tax filings and might not offer much more, if any tax savings. You might want to find a good CPA that is familiar with doing taxes with small business and see what works best in your situation.

Not sure what you mean by short term? You generally can't take the money out of a 401k without penalty until 59.5 years old. Some do allow loans up to 1/2 the balance or up $50k (whichever is less) for a small fee. Has to be paid back within 5 years and you pay yourself interest. The loan payments are not tax deductible.

i want something that will give me returns next 7-10 years... so i thought about getting into peer to peer or start investing stocks(i opened ally account) and etc. i want to be passive about it at the same time something reasonably risky.

basically i just want to grow my wealth and be able to spend it when i'm almost 50. :D

grokzilla
Posts: 78
Joined: Tue Aug 16, 2011 8:25 am

Re: self-employed professional - the best way to get things started?

Post by grokzilla » Wed Sep 19, 2018 12:42 am

You might want to chat with the white coat investor folks for better advice on the medicine front - specifically as it relates to best biz structure, etc. I'm sure there are some particular particulars related to medical small biz, insurance, liability, etc.

There's also no reason why your wife can't also just run her own LLC for the design business. Probably best practice to keep them separate too. But again consult a professional.

As far as the IRS is concerned there are few differences between the various pass through biz structures -- partnerships, LLPs, LLCs, MLPs and even S-Corps. But they all afford varying degrees of protection and separation between the business, partners and personal assets. Read up on them and figure out what provides you with what you need.

You can actually take advantage of the S-Corp loophole as an LLC, but you need to elect to be taxed as an S-Corp. It works sorta like you suggested - you pay yourself a "reasonable" salary and then the remainder is paid out as a dividend essentially and it avoids half of the FICA tax, iirc. It's really not a tremendous tax savings, but it is an option. The IRS language on the rule is "wonky" and subject to interpretation so you'd want to exercise caution.

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

Re: self-employed professional - the best way to get things started?

Post by Spirit Rider » Wed Sep 19, 2018 1:18 am

Clarifying some incomplete and misinformation:
ChinchillaWhiplash wrote:
Tue Sep 18, 2018 9:54 pm
Best option is to set up a solo 401k for each of you if both doing separate businesses. If wife is employed with you, she can be on your solo 401k plan. You can contribute the most this way. You can contribute $18500 for each individual and the business can contribute up to another $36500 depending on earnings. The $36500 counts as a business deduction too. The $18500 has to be paid during the tax year. The business can fund as late as September of the following year if filing an extension.
The bolded items only apply to W-2 employees. For self-employed individuals:
  • Their employer contributions are not a business deduction on Schedule C, but rather personal deductions on their Form 1040.
  • They have until the tax filing deadline including extensions to make both employee elective contributions and employer contributions.
  • Their filing deadline is ~04/15 including extensions ~10/15.
grokzilla wrote:
Tue Sep 18, 2018 10:00 pm
The SEP allows you to put away $58,000 or 20% of business income tax free each year.
The maximum employer contribution is 20% of net self-employment earnings (business profit - 1/2 SE tax) up to the compensation limit (2018 = $275K). This is the same as the annual addition limit (2018 = $55K) that applies to total 401k employee + employer contributions.
S-Corp FICA Loophole: There's a small anomaly in the tax code that allows s-corps to avoid FICA taxes on a certain amount of income.
S-Corps are over-hyped and under-perform, often counter-productive and with the tax reform even more so:
  • The FICA savings on >= the SS maximum wage base (2018 = $128,400) are only 2.9%
  • The reduced W-2 wages necessary to save on FICA reduces your SS earnings.
  • The reduced W-2 wages necessary to save on FICA reduces your employer contributions.
  • The reduced W-2 wages necessary to save on FICA reduces your Qualified Business Income (QBI) available for the new Section 199A 20% deduction.
OP.

An LLC is a state chartered business entity and not a tax status. By default an LLC is considered a disregarded entity by the IRS. This means that you file a Schedule C as a sole proprietor on your personal Form 1040. Since there is no remote connection between you and your spouse's businesses. They should each be filed on separate Schedule Cs.

There is absolutely no difference in federal income taxation between a disregarded LLC and a sole proprietor, because you file exactly the same. Not only will an LLC not save you any money, it will cost you more. This could range from a small creation/annual fee to a franchise tax or other fees. For example, CA has a minimum $800 franchise tax for LLCs.

Note: Contrary to their name, LLCs provide little if any liability protection for the personal services of there owner(s). It sounds like both of your "businesses" are based on the delivery of personal services. Like S-Corps, LLCs are over-hyped and under-perform. You still should still make sure you have business and professional liability insurance and in your case malpractice insurance coverage.

With your likely MFJ taxable income, you will be eligible for the full QBI 20% deduction. The current base MFJ QBI threshold is $315K. Any pre-tax retirement plan contributions will only reduce your AGI and this your taxable income further. You could easily make an $18.5K employee deferral and up to a $36.5K employer contribution to a one participant 401k and your wife could make an $18.5K employee deferral and up to ~$9K employer contribution to a one participant 401k. Note: You will each have to adopt a separate one-participant 401k for you separate businesses.

Also, keep in mind. You can also deduct any medical, dental and/or vision insurance premiums on Form 1040 Line 29 and HSA contributions on Line 25. Combined with the Line 28 pre-tax 401k contributions, you could easily keep your AGI <= the Roth income limits to make direct Roth contributions, at least given your current income.

Ron Scott
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Joined: Tue Apr 05, 2016 5:38 am

Re: self-employed professional - the best way to get things started?

Post by Ron Scott » Wed Sep 19, 2018 7:27 am

All good comments above.

I will speak to an issue common to all who have a high income based on W-2s: It is HARDER than you think to grow high net worth.

2 reasons:

1. Taxes: you're cooked.

2. Spend: The standard trap of those with high W2-based income is to overspend, pacing their cohort, and therefore overestimate their potential to develop high net worth. Money pits, addiction to a lifestyle with unnecessary and ongoing fixed expenses, kids/colleges, and the seemingly required lux accouterments of the era will take their toll with a vengeance. (Ask any New Yorker with a fat paycheck.)


Be realistic about where you are and where you can get financially. Set goals, model, and monitor your growth in net worth, with your spouse, and “pay yourself first”, with monthly contributions to savings.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

Vanguard Fan 1367
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Re: self-employed professional - the best way to get things started?

Post by Vanguard Fan 1367 » Wed Sep 19, 2018 9:56 am

Bones_Jones wrote:
Tue Sep 18, 2018 11:22 pm
thank you for the input, guys! i'm leaning towards solo 401k and i'll do some more homework.

oh by the way, i'm a family physician. i do 100% telemedicine. my wife is a graphic designer. she makes 50k.
we can basically work at anywhere, anytime. :happy

we did form an LLC (whatever name medical clinic, LLC) because my wife and i initially wanted open our own clinic. but it costs too much money and we just weren't ready. that's how i started telemedicine. it was supposed to be temporary, but it became my permanent gig. and frankly working from home is liberating. we have no kids. just 2 dogs. it's been great. i get to treat patients and live a stress free life.


if we keep an LLC, will i be paying more tax though? i know i'm paying 15.3% as a sole prop.
what should i do with LLC we created? just ditch it?

and if an LLC is created, am I an LLC if i don't get rid of it?

and if i become an s corp, i can pay a salary to myself say 80k and 140k becomes dividend right? so get to pay only 15.3% tax on just 80k and keep 140k to myself? what's the catch? what am i missing here? and how do i file tax as an s corp with my wife? :confused

thx again guys!
I became an S-Corp a while back thinking that it might help. The catch with paying yourself 80k and paying 140K in dividend is that someone could come look at your S-Corp and ask if you could hire a physician for 80k. If your pay is too low that could cause the IRS to lay taxes and penalties on you. Supposedly you also need to have meetings with yourself and write minutes of those meetings, otherwise the powers that be might "pierce the corporate veil" and make you pay back taxes and penalties. Instead of one tax return I now have a second one that is a pain for me to deal with, even with paying the accountant 1000 dollars to do the return. That return is due March 15 rather than April 15. There are some other disadvantages of the Corporation. I don't make enough to pay enough dividend to make it worth the expense and hassle of being a corporation. But I don't want to go through the hassle of dissolving the corporation.

Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

Re: self-employed professional - the best way to get things started?

Post by Bones_Jones » Wed Sep 19, 2018 12:25 pm

oh boy this is great stuff. thx guys!

i really really appreciate kind replies and helpful tips.

i'll study the posts here and will ask more questions!


:sharebeer

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nyinvestor718
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Location: New York City

Re: self-employed professional - the best way to get things started?

Post by nyinvestor718 » Wed Sep 19, 2018 2:04 pm

Spirit Rider wrote:
Wed Sep 19, 2018 1:18 am
Clarifying some incomplete and misinformation:
ChinchillaWhiplash wrote:
Tue Sep 18, 2018 9:54 pm
Best option is to set up a solo 401k for each of you if both doing separate businesses. If wife is employed with you, she can be on your solo 401k plan. You can contribute the most this way. You can contribute $18500 for each individual and the business can contribute up to another $36500 depending on earnings. The $36500 counts as a business deduction too. The $18500 has to be paid during the tax year. The business can fund as late as September of the following year if filing an extension.
The bolded items only apply to W-2 employees. For self-employed individuals:
  • Their employer contributions are not a business deduction on Schedule C, but rather personal deductions on their Form 1040.
  • They have until the tax filing deadline including extensions to make both employee elective contributions and employer contributions.
  • Their filing deadline is ~04/15 including extensions ~10/15.
grokzilla wrote:
Tue Sep 18, 2018 10:00 pm
The SEP allows you to put away $58,000 or 20% of business income tax free each year.
The maximum employer contribution is 20% of net self-employment earnings (business profit - 1/2 SE tax) up to the compensation limit (2018 = $275K). This is the same as the annual addition limit (2018 = $55K) that applies to total 401k employee + employer contributions.
S-Corp FICA Loophole: There's a small anomaly in the tax code that allows s-corps to avoid FICA taxes on a certain amount of income.
S-Corps are over-hyped and under-perform, often counter-productive and with the tax reform even more so:
  • The FICA savings on >= the SS maximum wage base (2018 = $128,400) are only 2.9%
  • The reduced W-2 wages necessary to save on FICA reduces your SS earnings.
  • The reduced W-2 wages necessary to save on FICA reduces your employer contributions.
  • The reduced W-2 wages necessary to save on FICA reduces your Qualified Business Income (QBI) available for the new Section 199A 20% deduction.
OP.

An LLC is a state chartered business entity and not a tax status. By default an LLC is considered a disregarded entity by the IRS. This means that you file a Schedule C as a sole proprietor on your personal Form 1040. Since there is no remote connection between you and your spouse's businesses. They should each be filed on separate Schedule Cs.

There is absolutely no difference in federal income taxation between a disregarded LLC and a sole proprietor, because you file exactly the same. Not only will an LLC not save you any money, it will cost you more. This could range from a small creation/annual fee to a franchise tax or other fees. For example, CA has a minimum $800 franchise tax for LLCs.

Note: Contrary to their name, LLCs provide little if any liability protection for the personal services of there owner(s). It sounds like both of your "businesses" are based on the delivery of personal services. Like S-Corps, LLCs are over-hyped and under-perform. You still should still make sure you have business and professional liability insurance and in your case malpractice insurance coverage.

With your likely MFJ taxable income, you will be eligible for the full QBI 20% deduction. The current base MFJ QBI threshold is $315K. Any pre-tax retirement plan contributions will only reduce your AGI and this your taxable income further. You could easily make an $18.5K employee deferral and up to a $36.5K employer contribution to a one participant 401k and your wife could make an $18.5K employee deferral and up to ~$9K employer contribution to a one participant 401k. Note: You will each have to adopt a separate one-participant 401k for you separate businesses.

Also, keep in mind. You can also deduct any medical, dental and/or vision insurance premiums on Form 1040 Line 29 and HSA contributions on Line 25. Combined with the Line 28 pre-tax 401k contributions, you could easily keep your AGI <= the Roth income limits to make direct Roth contributions, at least given your current income.
W2 is not counted as QBI. It would therefor be advantageous to have an SCorp, pay yourself the following:

Solo 401k max employer contribution is 36500. 36500/.25 is 146,000. Take the reminder as a distribution which counts as QBI. There would be no impact to your SS benefits since you are beyond the 2018 taxable amount for SS.

In addition, reimburse yourself legitimate business expenses such as home office, mileage deduction, etc. This would be more advantageous over taking the distribution as the reimbursements would be 100% tax free and not count as W2 income and wpd be an expense to the business.

W2 = 146,000
Employer solo 401k = 36,500
Reminder = 1st reimbursement, 2nd distribution (counts as QBI).
All mankind is divided into three classes: those that are immovable, those that are movable, and those that move. -Benjamin Franklin

User avatar
gasdoc
Posts: 1525
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Re: self-employed professional - the best way to get things started?

Post by gasdoc » Wed Sep 19, 2018 2:39 pm

Hello, OP,
You should have a CPA calculate your tax with and without forming an s-corp. I am this year dissolving my s-corp because the new 20% business deduction was affected negatively by my s-corp (because the w2 salary you pay yourself is not discounted). And then you have to file two separate tax forms as well. My best guess is that forming an s-corp is not in your best interest.

gasdoc

Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

Re: self-employed professional - the best way to get things started?

Post by Bones_Jones » Wed Sep 19, 2018 5:42 pm

hi guys,

ok after your helpful replies we decided to

1. stay sole-prop
2. open SEP IRA and max contribute (i like the idea of less paper work)
3. don't get into stocks or anything yet, just keep saving money for home down payment


one last question - what do i do with an LLC we created? we don't want to give up the name even though we decided not to open our own clinic. can i keep the LLC name and stay being sole prop? :confused

thank you guys!!

ChinchillaWhiplash
Posts: 524
Joined: Sat Jan 20, 2018 5:40 pm
Location: Colorado

Re: self-employed professional - the best way to get things started?

Post by ChinchillaWhiplash » Wed Sep 19, 2018 6:02 pm

Just a reminder that you can only contribute 20% max of your net income. If you made $225,000 of income in your business, your business can contribute a total of $45,000. It might be more or less for a solo 401k. I would consult with a good CPA to determine the best plan.

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

Re: self-employed professional - the best way to get things started?

Post by Spirit Rider » Thu Sep 20, 2018 12:17 am

nyinvestor718 wrote:
Wed Sep 19, 2018 2:04 pm
W2 is not counted as QBI. It would therefor be advantageous to have an SCorp, pay yourself the following:
Strike 1. The fact that an S-Corps W-2 wages are not QBI means the QBI will be less, a definite disadvantage.
Solo 401k max employer contribution is 36500. 36500/.25 is 146,000. Take the reminder as a distribution which counts as QBI. There would be no impact to your SS benefits since you are beyond the 2018 taxable amount for SS.
Strike 2. The employer contribution, employer share of FICA and Unemployment Insurance also reduce the distribution., further reducing the QBI.
In addition, reimburse yourself legitimate business expenses such as home office, mileage deduction, etc. This would be more advantageous over taking the distribution as the reimbursements would be 100% tax free and not count as W2 income and wpd be an expense to the business.
Strike 3. A sole proprietor can take the exact same deductions reducing taxable income. No benefit to S-Corp.

The increased QBI deduction will mostly or even exceed any FICA tax savings. S-Corps will have far less of an advantage over a sole proprietorship with the Section 199A QBI deduction. This is not including any state fees, taxes and does not include increased the tax complexity, payroll and filing costs.

Spirit Rider
Posts: 8683
Joined: Fri Mar 02, 2007 2:39 pm

Re: self-employed professional - the best way to get things started?

Post by Spirit Rider » Thu Sep 20, 2018 12:22 am

Bones_Jones wrote:
Wed Sep 19, 2018 5:42 pm
hi guys,

ok after your helpful replies we decided to

1. stay sole-prop
2. open SEP IRA and max contribute (i like the idea of less paper work)
3. don't get into stocks or anything yet, just keep saving money for home down payment


one last question - what do i do with an LLC we created? we don't want to give up the name even though we decided not to open our own clinic. can i keep the LLC name and stay being sole prop? :confused
The one-participant 401k is a trivial amount of adoption paperwork. Even with your level of business income you would be able to contribute far more with a one-participant 401k. When you add in your spouse you are giving up $37K in retirement plan contribution space with SEP IRAs. Quite possibly pushing into being unable to make direct Roth contributions and unable to do backdoor Roths.

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nyinvestor718
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Re: self-employed professional - the best way to get things started?

Post by nyinvestor718 » Thu Sep 20, 2018 9:42 am

Spirit Rider wrote:
Thu Sep 20, 2018 12:17 am
nyinvestor718 wrote:
Wed Sep 19, 2018 2:04 pm
W2 is not counted as QBI. It would therefor be advantageous to have an SCorp, pay yourself the following:
Strike 1. The fact that an S-Corps W-2 wages are not QBI means the QBI will be less, a definite disadvantage.
Solo 401k max employer contribution is 36500. 36500/.25 is 146,000. Take the reminder as a distribution which counts as QBI. There would be no impact to your SS benefits since you are beyond the 2018 taxable amount for SS.
Strike 2. The employer contribution, employer share of FICA and Unemployment Insurance also reduce the distribution., further reducing the QBI.
In addition, reimburse yourself legitimate business expenses such as home office, mileage deduction, etc. This would be more advantageous over taking the distribution as the reimbursements would be 100% tax free and not count as W2 income and wpd be an expense to the business.
Strike 3. A sole proprietor can take the exact same deductions reducing taxable income. No benefit to S-Corp.

The increased QBI deduction will mostly or even exceed any FICA tax savings. S-Corps will have far less of an advantage over a sole proprietorship with the Section 199A QBI deduction. This is not including any state fees, taxes and does not include increased the tax complexity, payroll and filing costs.
I would reconsider these statements. The cost of getting all income to qualify (- deductions) is not trivial on the first 128k worth of 1099 SECA, taxed at 15% which would negate a good chunk of the 20% deduction.

S Corp also adds the flexibility of having W2 wages if you are not a qualified service business and are above the thresholds as the QBI would then be limited to 50% of those wages (as an example though there are more complexities here).

Being that the OP does fall under a qualified service business, this would not matter though just calling some additional benefits.
All mankind is divided into three classes: those that are immovable, those that are movable, and those that move. -Benjamin Franklin

Bones_Jones
Posts: 55
Joined: Thu Aug 11, 2016 2:27 pm

Re: self-employed professional - the best way to get things started?

Post by Bones_Jones » Thu Sep 20, 2018 12:34 pm

i was reading through whitecoat investors and many sole prop doctors seem to be on a backdoor IRA. so what's the advantage of backdoor IRA?
i did read through it, but i fail to see its advantage over SEP IRA... :confused

ChinchillaWhiplash
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Location: Colorado

Re: self-employed professional - the best way to get things started?

Post by ChinchillaWhiplash » Thu Sep 20, 2018 12:47 pm

Backdoor Roth IRA contribution can be used in addition to 401k. You can't use it if you hold money in an IRA. If you are over the limit for income, you can not directly contribute to a Roth IRA. With the back door contribution, you can make a taxable contribution of $5500 to a traditional IRA and then convert it to a Roth IRA. The funds in the Roth then grow tax free and can be taken out tax free. This would be another advantage of using a solo 401k over any type of IRA for your main retirement holdings. Some solo 401k plans have a Roth option where you can do the mega backdoor Roth conversion.

You can max out your 401k contributions, be over the limit of $197,000 of MFJ income to contribute to a Roth, and still contribute to a Roth indirectly. This would work for both you and your wife. So and extra $11,000 a year of tax free growth that can be withdrawn for retirement tax free too on top of what ever you put into a 401k.

If you are eligible, set up a HSA account too. You can invest it. 2019 limits are $7000 for family of pre-tax contributions that grow tax free and can be taken out for medical expenses tax free as well. Will reduce your taxable income.

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Re: self-employed professional - the best way to get things started?

Post by Spirit Rider » Thu Sep 20, 2018 2:41 pm

nyinvestor718 wrote:
Thu Sep 20, 2018 9:42 am
Spirit Rider wrote: The increased QBI deduction will mostly or even exceed any FICA tax savings. S-Corps will have far less of an advantage over a sole proprietorship with the Section 199A QBI deduction. This is not including any state fees, taxes and does not include increased the tax complexity, payroll and filing costs.
I would reconsider these statements. The cost of getting all income to qualify (- deductions) is not trivial on the first 128k worth of 1099 SECA, taxed at 15% which would negate a good chunk of the 20% deduction.
Do the math.

On $220K of business profit, an S-CORP paying W-2 wages of $146K saves a measly $1,658 in FICA taxes over a sole proprietorship's SE taxes. That probably doesn't even cover the cost of state fees/taxes, payroll/CPA.

With $55K in 401k contributions, the S-Corp's QBI deduction is < $6K. Where the sole proprietor's QBI will be more like $15K - $30K depending on taxable income. At a 24% marginal tax rate, that will result in several thousand more in income tax savings.

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nyinvestor718
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Re: self-employed professional - the best way to get things started?

Post by nyinvestor718 » Tue Oct 09, 2018 8:43 pm

Spirit Rider wrote:
Thu Sep 20, 2018 2:41 pm
nyinvestor718 wrote:
Thu Sep 20, 2018 9:42 am
Spirit Rider wrote: The increased QBI deduction will mostly or even exceed any FICA tax savings. S-Corps will have far less of an advantage over a sole proprietorship with the Section 199A QBI deduction. This is not including any state fees, taxes and does not include increased the tax complexity, payroll and filing costs.
I would reconsider these statements. The cost of getting all income to qualify (- deductions) is not trivial on the first 128k worth of 1099 SECA, taxed at 15% which would negate a good chunk of the 20% deduction.
Do the math.

On $220K of business profit, an S-CORP paying W-2 wages of $146K saves a measly $1,658 in FICA taxes over a sole proprietorship's SE taxes. That probably doesn't even cover the cost of state fees/taxes, payroll/CPA.

With $55K in 401k contributions, the S-Corp's QBI deduction is < $6K. Where the sole proprietor's QBI will be more like $15K - $30K depending on taxable income. At a 24% marginal tax rate, that will result in several thousand more in income tax savings.
I stand corrected, and have begun re-visiting with my CPA. The tax savings will yield around $300 per month in net gain however, not sure how much I want the headache of negotiating through the paperwork.

Also, if you are a service business (specified service business), there is no longer a benefit to being a sole prop once your taxable income exceeds the phaseouts (207k single; 314k married).

If you are not a specified service business, the S corp may be beneficial as you now have wages for the 50% W2 limitation however, being a NYC S-Corp negates this benefit.
All mankind is divided into three classes: those that are immovable, those that are movable, and those that move. -Benjamin Franklin

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Re: self-employed professional - the best way to get things started?

Post by SelfEmployed123 » Wed Oct 10, 2018 6:27 am

Bones_Jones wrote:
Tue Sep 18, 2018 9:13 pm
1. i just watched interesting video about SEP IRA vs. solo 401k - https://www.youtube.com/watch?v=aJP6s04kPkI&t=531s does this apply to us? should i become an S corporation? what happens to my wife then? my employee? i like the idea of saving significant money on taxes.
I'd definitely suggest you consult with a CPA or tax professional regarding this decision. That video uses a generic example, so your own situation may be different. With the new tax law and the pass through business deduction, which you should qualify for since your income is below the limit, you will be getting a pretty big tax deduction already (not a FICA deduction, but still an additional deduction that wasn't allowed last year). You'll need to determine whether the cost savings be worth it after considering additional record keeping/accounting fees. Others above have suggested the cost savings of doing an SCORP is not worth it. I'm inclined to agree with that assessment but you have to run your own numbers.

This self-employed plan calculator from Fidelity is really easy to use to figure out your max contributions for solo-401k and SEP IRA: https://scs.fidelity.com/products/mobil ... bile.shtml. Just using the calculator it appears regardless of income the solo 401k will give you maximal tax-advantaged space. Maybe others can chime in but IMO it's hard to see why to go with a SEP IRA when you can contribute more tax deferred to the solo 401k.

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Re: self-employed professional - the best way to get things started?

Post by SelfEmployed123 » Wed Oct 10, 2018 6:44 am

Bones_Jones wrote:
Tue Sep 18, 2018 9:13 pm
2. i want to rollover existing 65k from my past employer - so should i open up solo 401k account? backdoor roth IRA? which retirement plan makes best sense for us? :confused we want to put aside about 4k monthly for our retirement accounts. i'm just not sure which one makes best sense for us... and we want to just have 1 accounts together.
For this question you have two main decisions to make. Do you want your rollover to be pre-tax or do you want to roll it over into a Roth? For a rollover there is no need to do a backdoor Roth. Backdoor Roths are only for new contributions. You could just roll the whole thing over to a Roth IRA, but then you'll pay taxes on the $65k at your top marginal rate. Your income is pretty high so you should probably keep this money pretax for now. However, that decision depends on how long you have until retirement. You can roll over your old retirement plan into a Traditional IRA or Roth IRA with any large financial institution. I recommend Vanguard, Fidelity, or Charles Schwab. My IRAs are at Vanguard. You and your spouse cannot have any joint retirement accounts. You each have to set up individual retirement accounts no matter what you choose to do.

Another option is to roll over your old work retirement account to a SEP IRA or solo 401k. However, some solo 401k plans (e.g. Vanguard) do not allow incoming rollovers to the plan. See this article for more https://thecollegeinvestor.com/18174/co ... k-options/.

See my above post but IMO you should go with the solo 401k and just be happy with the pass through deduction. Best of luck!

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Re: self-employed professional - the best way to get things started?

Post by djpeteski » Wed Oct 10, 2018 6:56 am

The financial media has a vested interest for you to do things out of order.

Your first step, IMHO is to live very frugally and pay off those student loans. Forget about saving for a house how. Holy cow .5 million in loans. I would have a goal of making them go away in 4 years or less. You said "no other major debts", make all the debts go away. Then save for a house.

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Re: self-employed professional - the best way to get things started?

Post by SelfEmployed123 » Wed Oct 10, 2018 7:15 am

Bones_Jones wrote:
Tue Sep 18, 2018 9:13 pm
5. student loan - 500k together :x expect to pay it all off in 7 years.

we thought about going after the student loan even more aggressively, but decided to invest instead.
:sharebeer
What is the interest rate on your student loans? Graduate loans tend to be around 6-7%. I'm inclined to agree with the poster who suggested you just pay the loans off. You could also look at refinancing options to lower the interest rate.

If I were you I would still be putting some money toward retirement now, but I also don't think you should be buying a house or maxing out retirement accounts until that debt is wiped out. Even if you pay that debt off in 4 years and start saving for house/retirement at that point, if you work and save for 20 years while maxing out retirement savings that will be quite a nest egg for retirement. When you hit 50 you'll be able to make catch up contributions, so well over $100k in annual contributions at that point if you and your spouse both have solo 401ks. After 20 years the contributions alone will be more than $2 million, not including investment returns.
Bones_Jones wrote:
Tue Sep 18, 2018 9:13 pm
3. we want to invest 3k monthly - or maybe just put all 7k to retirement plans? :confused i want something short term though. something we can look forward to 10 years later. what would you guys do with 3k?
Why are you investing for the short term? If that is money you are putting aside for a house downpayment, consider a prime money market fund (VMMXX at Vanguard) or a high yield savings account. If this is retirement money you should be investing for the long haul. Look into setting up a 3 fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio. The asset allocation should be based on your age.

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Re: self-employed professional - the best way to get things started?

Post by smitcat » Wed Oct 10, 2018 9:49 am

I would definitely go with paying the student loans since they likely are at 7% or more and some may be a variable rate.
Cannot undertand your current projected 'budget' given some of your numbers....
$100K / year - proposed payoff of $500K over 7 years
$84K / year - proposed savings
$70K / year - a best guess at FICA with State and Fed taxes ($27.5 FICA alone)
That pretty much adds up to the total income and does not leave room for business costs and liability incuramce.
And nothing for housing, transportation, food, medical, etc.

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