Physician “TO-DO” list for LLC

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Phinance
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Physician “TO-DO” list for LLC

Post by Phinance » Fri Apr 12, 2019 9:31 pm

I am helping my fiancée start a small business (LLC) to capture her income $$ as an independent contractor (1099), she is a physician out of training. What is our “To-Do List”?

1) Accountant? (Do we really need an accountant or can this be done by us assuming a reasonable degree of organization/time? What are the approximate fees for an accountant to set this up?)
2) Start an LLC? (I’m assuming this is state specific and can be done easily, how do we file as an S-Corp? I heard this is advantageous but I don’t really understand why)
3) Start a SEP-IRA vs. solo 401K (My assumption is that SEP-IRA is easier, contributions can be lower, but rules out her ability to do a back-door Roth IRA, any strong feelings here? I saw Vanguard had an online filing for SEP-IRA, 401K paperwork looks slightly daunting)
4) How do we actually defer income into this SEP-IRA/solo 401K?
5) How do we “withhold” state/federal taxes?
6) Other? Any other significant to-dos?

Thank you
Last edited by Phinance on Sat Apr 13, 2019 10:27 am, edited 1 time in total.
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ResearchMed
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Re: TO DO LIST: SMALL BUSINESS

Post by ResearchMed » Fri Apr 12, 2019 11:00 pm

Phinance wrote:
Fri Apr 12, 2019 9:31 pm
I am helping my fiancée start a small business (LLC) to capture her income $$ as an independent contractor (1099), she is a physician out of training. What is our “To-Do List”?

1) Accountant? (Do we really need an accountant or can this be done by us assuming a reasonable degree of organization/time? What are the approximate fees for an accountant to set this up?)
2) Start an LLC? (I’m assuming this is state specific and can be done easily, how do we file as an S-Corp? I heard this is advantageous but I don’t really understand why)
3) Start a SEP-IRA vs. solo 401K (My assumption is that SEP-IRA is easier, contributions can be lower, but rules out her ability to do a back-door Roth IRA, any strong feelings here? I saw Vanguard had an online filing for SEP-IRA, 401K paperwork looks slightly daunting)
4) How do we actually defer income into this SEP-IRA/solo 401K?
5) How do we “withhold” state/federal taxes?
6) Other? Any other significant to-dos?

Thank you
I'd double and triple check about various insurance coverage, including *large* umbrella - or however insurance works for physicians. There's serious potential liability there, with an actual "problem" or just a disgruntled patient, etc.
Regardless of how it is structured, she (and you) need that insurance coverage just in case.

You should check out WhiteCoatInvestor's website. He is also a member here on BH.

An LLC is often used to separate liability, but when one's business is "oneself", one cannot remain totally separate from the business entity (the way a landlord could be, if structuring things properly - but even then, one should have proper liability insurance coverage, because "anyone can sue anyone else for anything", and one still needs to defend, etc.).

You might want to edit your subject header to add the word "(Physician)", to get the attention of those others here.

RM
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Re: Physician “TO-DO” list for LLC

Post by Phinance » Sat Apr 13, 2019 10:28 am

Will do, thank you RM.
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Re: Physician “TO-DO” list for LLC

Post by Spirit Rider » Sat Apr 13, 2019 2:18 pm

As @ReasearchMed pointed out, an LLC for a professional providing just personal services with no facilities and/or employees, is likely to be unnecessary, provide little to no benefit and may be counter-productive. You will receive little to no liability protection for your personal services and it is all but certain that any credit obtained will require a personal guarantee bypassing the liability protections of an LLC. In some states, by precedent there is no liability protection for single member LLCs.

Keep in mind that an LLC is a state chartered business entity not a tax status and by default the IRS considers a single member LLC as a disregarded entity and taxed as a sole proprietor anyway. It is only when you elect sub chapter S status, does an LLC become a different tax entity.

It is a persistent myth that physicians and other high income professionals should create and receive substantial benefits from an S-Corp
  • Is based on a misunderstanding of the potential S-Corp FICA tax savings over SE taxes. The sweet spot for the most FICA savings is when an individual would have self-employed (business profits * 92.35%) close to the Social Security maximum wage base (2019 MWB = $132,900). The S-Corp 2% shareholder-employee would save 15.3% on any distributions vs. salary. However, a personal services physician S-Corp shareholder-employee, must pay themselves "reasonable compensation" under IRS guidance of the "majority" if the business profits. Most such physicians would be required to pay themselves W-2 wages >= the SS MWB. This means they would only save 2.9% over the SE taxes of a sole proprietor.
  • With passage of the Section 199A qualified business income QBI deduction. S-Corps are even less beneficial and more counter-productive for taxpayers eligible for the QBI deduction. That is because the QBI of a sole proprietor is their self-employed income (business profit - 1/2 SE tax) - pre-tax employer retirement plan contributions - any self-employed health insurance deductions and the QBI of an S-Corp 2% shareholder-employee is based on only their distributions.
  • There can be significant costs and hassles to use an S-Corp. It does not really become significantly beneficial unless the taxpayer is not eligible for the QBI deduction and business profits are > $400K.
  • An S-Corp 2% shareholder-employee's employer contribution is limited to 25% of their wages. A sole proprietor's employer contribution is limited to 20% of their self-employed earned income.
  • There are little to no business deductions that an S-Corp can take that a sole proprietor can't also take.
  • All other things being equal, an S-Corp and a sole proprietor will have the same taxable income, except for potential differences in pre-tax employer contributions and QBI deduction explained above and all to the benefit of a sole proprietor.
The conventional "wisdom" is that physicians should always create at a minimum an LLC and usually an S-Corp. Well, the wisdom is typically ignorant. You need to do a detailed analysis of the actual cost/benefits of an S-Corp vs. Sole proprietor. I would be surprised if it favored the S-Corp.

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Re: Physician “TO-DO” list for LLC

Post by 6Pack » Sat Apr 13, 2019 3:01 pm

Most states do not allow corporate entities (LLCs, corporations, etc...) to shield professional liability. In other words, an accountant, lawyer, doctor, or architect who forms an LLC will not be shielded from malpractice by virtue of having the LLC. Therefore, look as to what purpose the LLC would serve. A sole proprietorship for a physician with no contractual liability (such as office rent) is not out of the question.

To do it right, you should consult with a small business lawyer, as each state has unique provisions for LLCs.

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Re: Physician “TO-DO” list for LLC

Post by Phinance » Sun Apr 14, 2019 8:57 am

SpiritRider, thank you!! Super helpful and detailed :beer
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Re: Physician “TO-DO” list for LLC

Post by neurosphere » Sun Apr 14, 2019 9:11 am

Phinance wrote:
Sun Apr 14, 2019 8:57 am
SpiritRider, thank you!! Super helpful and detailed :beer
SpiritRider's advice/education is spot on. The efforts to create/maintain an s-corp will likely swamp any financial benefits.

Regarding your other questions. Is your finacee going to also have a regular W2 job or is for a side job? What income do you expect her to have, now or eventually in this 1099-based employment?
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Re: Physician “TO-DO” list for LLC

Post by bsteiner » Sun Apr 14, 2019 9:17 am

Before she considers the accountant, she would need a lawyer to form the corporation or LLC.

Before that, she would want the lawyer to advise as to what if any entity to create, and what tax elections to make. Of course, in this case, Spirit Rider has given you a detailed explanation of her options.

She could probably learn how do the accounting work herself, but since doctors generally earn more than accountants, it might make more sense for her to have an accountant to the accounting work so she can spend more time practicing medicine, or have more free time.

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Re: Physician “TO-DO” list for LLC

Post by Phinance » Sun Apr 14, 2019 2:15 pm

She’s a plastic surgeon out of training (this gig is with another plastic surgeon and will likely be a 1099, but could potentially be a W-2, we are trying to iron out relationship based on IRS definition). My understanding is it takes 2 yrs to build a referral base, but income likely ~300K/yr eventually. A few questions have come up:

1) If she takes W-2 route and her employer doesn’t offer a retirement account, could we set one up? My understanding is only an employer can set up a 401K/SEP-IRA.
2) What happens if she breaks away from this practice and starts her own practice one day with employees? Doesn’t a solo-401k stipulate no employees? Would a SEP-IRA be better in that circumstance? (My take-home is a solo-401K is better to set up because it maintains her ability to do a Backdoor Roth and has higher contributions at lower income levels, seems like that justifies the extra hassle)

Thanks in advance.
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Re: Physician “TO-DO” list for LLC

Post by southerndoc » Sun Apr 14, 2019 3:06 pm

I'm an independent contractor (emergency physician) who has never incorporated. There are some tax benefits by cutting yourself a lower salary and taking the rest of your pay as dividends, but there has been discussion over the past few years of eliminating this. Theoretically, the IRS could audit you and compare you to non-incorporated physicians in the same specialty. If your income is less, then they may not allow you to use dividends for part of your pay.

No state allows a physician to shield him or herself from malpractice litigation through their corporation. You are personally responsible. Where it may benefit you is if you damage the hospital computers and they sue you. That's unlikely to happen, but a general liability policy would protect you as a business corporation and it could prevent them from suing you individually.

For me, it's not worth the hassle. The amount of money I saved wasn't worth all the hassle of increased regulation, filings, etc.

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Re: Physician “TO-DO” list for LLC

Post by Kennedy » Sun Apr 14, 2019 3:33 pm

If she should decide to go with a SEP-IRA, it's easy. Just call Vanguard (or whichever company you choose) and tell them you want to set up a SEP. Complete whatever easy paper-work they request. To fund it, just send a check to Vanguard whenever you want (every month, once a year, whenever) and note your SEP account number on the check. Also write the words, "Her name, 2019 SEP-IRA, Employer Contribution." She can take this amount as a deduction on her taxes.

You mentioned being able to do a backdoor Roth if she chooses the solo 401K. Why would she want to do that? The only reason I could see for a new plastic surgeon to do a backdoor Roth is if her income for the first couple of years will be less than what she expects in retirement.

As others have mentioned, there isn't any benefit for a physician to designate herself as a LLC. Some states allow a professional designation as a PLC or a PLLC, but there isn't much benefit to that either.

As far as how you withhold state/federal taxes, if she is not a W-2 earner, she needs to pay quarterly estimated tax payments every Jan 15, April 15, June 15 and Sept 15, unless one of these days is a holiday or weekend. It's easy to make these payments. She can send a check along with Form 1040-ES. You can find this form online for her first year. After that, this form (actually four of them...one for each quarter) will be generated either from her accountant or by tax software if you do taxes yourself. The Form 1040-ES is super easy to complete if you have to do it yourself the first year. Your state will have the equivalent of the Form 1040-ES. Just google it.

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Re: Physician “TO-DO” list for LLC

Post by Phinance » Sun Apr 14, 2019 3:43 pm

Thanks. I thought a backdoor Roth is generally good practice (i.e. to take after-tax income and shield it in a never taxed again account), wouldn’t we want to build her Roth IRA account for retirement? Seems like the SEP-IRA would take away that ability.
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Re: Physician “TO-DO” list for LLC

Post by neurosphere » Sun Apr 14, 2019 3:55 pm

Kennedy wrote:
Sun Apr 14, 2019 3:33 pm
You mentioned being able to do a backdoor Roth if she chooses the solo 401K. Why would she want to do that? The only reason I could see for a new plastic surgeon to do a backdoor Roth is if her income for the first couple of years will be less than what she expects in retirement.
The reason to do a backdoor Roth is to use in ADDITION to the solo 401k or other tax advantaged accounts. Not instead of. Thus, income/taxes now vs retirement doesn't come into play. Because the decision is Backdoor Roth vs taxable investing, and there are few situations (any?) where taxable investing beats Roth when balances are expected to go up over time. Although, some say the actual benefits of a Roth vs taxable are not as large as some claim. Regardless, I think avoiding the SEP IRA in order to preserve the ability to do a backdoor Roth is the way to go.
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Re: Physician “TO-DO” list for LLC

Post by Phinance » Sun Apr 14, 2019 3:59 pm

Gold, thank u. :sharebeer
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Re: Physician “TO-DO” list for LLC

Post by Spirit Rider » Sun Apr 14, 2019 9:08 pm

Phinance wrote:
Sun Apr 14, 2019 2:15 pm
She’s a plastic surgeon out of training (this gig is with another plastic surgeon and will likely be a 1099, but could potentially be a W-2, we are trying to iron out relationship based on IRS definition). My understanding is it takes 2 yrs to build a referral base, but income likely ~300K/yr eventually. A few questions have come up:
It is relatively easy for professionals, especially physicians to be classified as independent contractors IC by structuring the client/IC relationship by addressing the issues of Behavioral Control, Financial Control and Relationship of the Parties in the contract. See the IRS Fact Sheet FS-2017-09 Understanding Employee vs. Contractor Designation It is not all or nothing and do not give too much emphasis to Financial Control. The vast majority of professional ICs are paid an hourly rate.
1) If she takes W-2 route and her employer doesn’t offer a retirement account, could we set one up? My understanding is only an employer can set up a 401K/SEP-IRA.
Correct, only an employer can adopt, maintain and contribute to an employer retirement plan. Also, only earned income from the business can be used as the basis for contributions.
2) What happens if she breaks away from this practice and starts her own practice one day with employees? Doesn’t a solo-401k stipulate no employees? Would a SEP-IRA be better in that circumstance? (My take-home is a solo-401K is better to set up because it maintains her ability to do a Backdoor Roth and has higher contributions at lower income levels, seems like that justifies the extra hassle)
If she adopts a one-participant 401k other than at Vanguard she can elect employee eligibility restrictions. Eligible employees can be restricted to those >= age 21 or >= one year of service defined as >= 1,000 hours/year. So only after she has an employee > age 21 and > 1,000 hours/year for >= one year will she need to amend to a small business 401k or terminate the one-participant 401k.

A SEP IRA does allow a three year employee eligibility restriction, but a SEP IRA would limit total contributions until self-employed earned income (business profit - 1/2 SE tax) is >= the compensation limit (2019 = $280,000), interfere with a Backdoor Roth and the only contributions are employer contributions. Those employee contributions must be the same percentage of compensation for all employees including the owner.

I vote for a one-participant 401k plan.

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Re: Physician “TO-DO” list for LLC

Post by Lafder » Mon Apr 15, 2019 9:10 am

I agree with comments about a sole proprietor vs corporation. Keep it simple unless complexity is needed.

Another simplification...........open a bank account that will be used just for this income and related expenses. It can just be another account at your current bank. That way she can keep track of income and expenses separately for this aspect of her overall work.

Don't be intimidated by a solo401k, super easy to set up and you simply make deposits from this new bank account when you want to. No dealing with payroll or paychecks if a sole proprietor. You will need an EIN or employer ID number that can be applied for online. The slight extra complexity of a solo401k is worth it to keep the possibility of a back door Roth. Fidelity allows you to roll in any other IRAs to simplify, Vanguard does not.

You do not need an accountant to do everything for you, but I would at least meet with an accountant to find out anything you might not be considering. Once they get things set up/tell you what you need, you may be able to do it all on your own.

I have an accountant do my taxes, but I provide all of the numbers. They give me estimated tax payment slips that I turn in quarterly through the year with payments. I do my own gross receipts taxes monthly, you may not have to in your state.

If she is a contractor and taxes are not being taken out of the pay, an accountant can help you set up how to pay estimated tax payments or increase deductions for salaried work to make up for this income.

I was advised that incorporating would not save me on taxes when an accountant looked at my overall situation when I first started my private practice. I recently switched accountants and they showed me the savings vs extra expenses of being incorporated and it was still not worth it to me. It really does depend on how much income she is going to make on this side job.

I would do a solo401k to maximize the pretax deductions and retirement savings with this extra income.

lafder

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Phinance
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Re: Physician “TO-DO” list for LLC

Post by Phinance » Mon Apr 15, 2019 12:00 pm

Thanks. I’m sold about the solo 401K route.

My assumption from comments above is that Vanguard solo 401K has no employee restriction, so that if she ever hired an employee she would immediately be disqualified from a solo 401K and would have to roll over that pre-tax income into a SEP-IRA? Would you advise using Fidelity instead? Are expenses for set-up similar?

Good call on opening up another bank account for simplicity. So as her income trickles in (after-tax 1099) into this Checking account we can contribute that income into her solo 401K. How is this pre-tax? Seems like we’re taking after-tax money and rolling it into a pre-tax account. Sorry for the thick skull :confused

Best.
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Re: Physician “TO-DO” list for LLC

Post by yoyo6713 » Mon Apr 15, 2019 12:10 pm

Lafder wrote:
Mon Apr 15, 2019 9:10 am
I agree with comments about a sole proprietor vs corporation. Keep it simple unless complexity is needed.

Another simplification...........open a bank account that will be used just for this income and related expenses. It can just be another account at your current bank. That way she can keep track of income and expenses separately for this aspect of her overall work.

Don't be intimidated by a solo401k, super easy to set up and you simply make deposits from this new bank account when you want to. No dealing with payroll or paychecks if a sole proprietor. You will need an EIN or employer ID number that can be applied for online. The slight extra complexity of a solo401k is worth it to keep the possibility of a back door Roth. Fidelity allows you to roll in any other IRAs to simplify, Vanguard does not.

You do not need an accountant to do everything for you, but I would at least meet with an accountant to find out anything you might not be considering. Once they get things set up/tell you what you need, you may be able to do it all on your own.

I have an accountant do my taxes, but I provide all of the numbers. They give me estimated tax payment slips that I turn in quarterly through the year with payments. I do my own gross receipts taxes monthly, you may not have to in your state.

If she is a contractor and taxes are not being taken out of the pay, an accountant can help you set up how to pay estimated tax payments or increase deductions for salaried work to make up for this income.

I was advised that incorporating would not save me on taxes when an accountant looked at my overall situation when I first started my private practice. I recently switched accountants and they showed me the savings vs extra expenses of being incorporated and it was still not worth it to me. It really does depend on how much income she is going to make on this side job.

I would do a solo401k to maximize the pretax deductions and retirement savings with this extra income.

lafder
hmmm... do you need an EIN for maxing out solo401K? I thought sole proprietor means you just use your own SSN? Also do you need to file tax return based on the EIN (in addition to your own SSN)?

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Re: Physician “TO-DO” list for LLC

Post by pshonore » Mon Apr 15, 2019 12:52 pm

Phinance wrote:
Mon Apr 15, 2019 12:00 pm
Thanks. I’m sold about the solo 401K route.

My assumption from comments above is that Vanguard solo 401K has no employee restriction, so that if she ever hired an employee she would immediately be disqualified from a solo 401K and would have to roll over that pre-tax income into a SEP-IRA? Would you advise using Fidelity instead? Are expenses for set-up similar?

Good call on opening up another bank account for simplicity. So as her income trickles in (after-tax 1099) into this Checking account we can contribute that income into her solo 401K. How is this pre-tax? Seems like we’re taking after-tax money and rolling it into a pre-tax account. Sorry for the thick skull :confused

Best.
I believe the money can stay in the S401K but no further contributions allowed. Note that if her practice wants to be recognized as a good place to work, she will probably want to provide benefits for her employees, but thats all in the future. Not sure what you mean by an "after tax" 1099. 1099 MISC just reports payments to her and goes into her tax return just like a W2 or any other income document. Here's another source for lots of info on small business taxation https://evergreensmallbusiness.com/small-business-faq/ and another https://obliviousinvestor.com/llc-vs-s-corp-vs-c-corp/

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Re: Physician “TO-DO” list for LLC

Post by Spirit Rider » Mon Apr 15, 2019 1:31 pm

pshonore wrote:
Mon Apr 15, 2019 12:52 pm
Phinance wrote:
Mon Apr 15, 2019 12:00 pm
My assumption from comments above is that Vanguard solo 401K has no employee restriction, so that if she ever hired an employee she would immediately be disqualified from a solo 401K and would have to roll over that pre-tax income into a SEP-IRA? Would you advise using Fidelity instead? Are expenses for set-up similar?

Good call on opening up another bank account for simplicity. So as her income trickles in (after-tax 1099) into this Checking account we can contribute that income into her solo 401K. How is this pre-tax? Seems like we’re taking after-tax money and rolling it into a pre-tax account. Sorry for the thick skull :confused
I believe the money can stay in the S401K but no further contributions allowed. Note that if her practice wants to be recognized as a good place to work, she will probably want to provide benefits for her employees, but thats all in the future. Not sure what you mean by an "after tax" 1099. 1099 MISC just reports payments to her and goes into her tax return just like a W2 or any other income document. Here's another source for lots of info on small business taxation https://evergreensmallbusiness.com/small-business-faq/ and another https://obliviousinvestor.com/llc-vs-s-corp-vs-c-corp/
@pshonore is correct. She could "freeze" the one-participant 401k and not have to rollover the funds assuming the providers allows the amendment to a frozen plan. I was negligent in not presenting that option.

This is one case where absolute semantics does not really matter. You are correct that only contributions by payroll deduction are technically pre-tax contributions. However, convention has long regarded after-tax contributions that are then deducted as pre-tax contributions because the effect is the same. You now have pre-tax assets in the retirement account that will be taxable on withdrawal. For example, deductible traditional IRA contributions have always been considered pre-tax contributions even though they are made from after-tax funds and then deducted. The same is true for self-employed employer retirement plan contributions. While they are contributed from after-tax funds, they are deducted on Form 1040, Schedule 1, Line 28 and are pre-tax funds in the account. You are not "rolling" (the is where semantics does matter) after-tax money into a pre-tax account. You are making deductible pre-tax contributions from after-tax funds.

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Re: Physician “TO-DO” list for LLC

Post by southerndoc » Mon Apr 15, 2019 1:57 pm

Kennedy wrote:
Sun Apr 14, 2019 3:33 pm
You mentioned being able to do a backdoor Roth if she chooses the solo 401K. Why would she want to do that? The only reason I could see for a new plastic surgeon to do a backdoor Roth is if her income for the first couple of years will be less than what she expects in retirement.
It's just an additional retirement account for additional retirement savings. Who knows if her taxes will be lower when she retires? Nobody can predict that. It's best to have all options on the table.

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Re: Physician “TO-DO” list for LLC

Post by southerndoc » Mon Apr 15, 2019 2:01 pm

yoyo6713 wrote:
Mon Apr 15, 2019 12:10 pm
hmmm... do you need an EIN for maxing out solo401K? I thought sole proprietor means you just use your own SSN? Also do you need to file tax return based on the EIN (in addition to your own SSN)?
Yes, it's an employer-sponsored plan just like an employer 401(k). As such, it has to be opened by the "business." SSN isn't allowed.

When you meet filing requirements (>$250k), Fidelity has advised me that you need to obtain a separate EIN just for the 401(k) and they will change everything so you aren't reporting under your business EIN.

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Phinance
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Re: Physician “TO-DO” list for LLC

Post by Phinance » Mon Apr 15, 2019 2:52 pm

Thanks, makes sense. I was under assumption that a solo 401K @ Vanguard for example could be opened up with only a SSN (no need for EIN) because she would be a sole proprietorship, is this not the case?
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: Physician “TO-DO” list for LLC

Post by Spirit Rider » Mon Apr 15, 2019 5:31 pm

Technically, an EIN is not required by a one-participant 401k until a filing is required by the plan. Unless you commit a plan error, this is not required until plan assets are > $250K on 12/31 of any year requiring the filing of Form 5500-EZ.

Fidelity has an EIN on their adoption agreement, but it has been reported that they will accept an SSN from sole proprietors. Even if Fidelity required the EIN, it is a 5-10 minute effort online to get an EIN from the IRS.

To me that would not be a justification to use Vanguard and give up the employee eligibility restrictions.

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Re: Physician “TO-DO” list for LLC

Post by unclescrooge » Mon Apr 15, 2019 6:35 pm

Spirit Rider wrote:
Sat Apr 13, 2019 2:18 pm
As @ReasearchMed pointed out, an LLC for a professional providing just personal services with no facilities and/or employees, is likely to be unnecessary, provide little to no benefit and may be counter-productive. You will receive little to no liability protection for your personal services and it is all but certain that any credit obtained will require a personal guarantee bypassing the liability protections of an LLC. In some states, by precedent there is no liability protection for single member LLCs.

Keep in mind that an LLC is a state chartered business entity not a tax status and by default the IRS considers a single member LLC as a disregarded entity and taxed as a sole proprietor anyway. It is only when you elect sub chapter S status, does an LLC become a different tax entity.

It is a persistent myth that physicians and other high income professionals should create and receive substantial benefits from an S-Corp
  • Is based on a misunderstanding of the potential S-Corp FICA tax savings over SE taxes. The sweet spot for the most FICA savings is when an individual would have self-employed (business profits * 92.35%) close to the Social Security maximum wage base (2019 MWB = $132,900). The S-Corp 2% shareholder-employee would save 15.3% on any distributions vs. salary. However, a personal services physician S-Corp shareholder-employee, must pay themselves "reasonable compensation" under IRS guidance of the "majority" if the business profits. Most such physicians would be required to pay themselves W-2 wages >= the SS MWB. This means they would only save 2.9% over the SE taxes of a sole proprietor.
  • With passage of the Section 199A qualified business income QBI deduction. S-Corps are even less beneficial and more counter-productive for taxpayers eligible for the QBI deduction. That is because the QBI of a sole proprietor is their self-employed income (business profit - 1/2 SE tax) - pre-tax employer retirement plan contributions - any self-employed health insurance deductions and the QBI of an S-Corp 2% shareholder-employee is based on only their distributions.
  • There can be significant costs and hassles to use an S-Corp. It does not really become significantly beneficial unless the taxpayer is not eligible for the QBI deduction and business profits are > $400K.
  • An S-Corp 2% shareholder-employee's employer contribution is limited to 25% of their wages. A sole proprietor's employer contribution is limited to 20% of their self-employed earned income.
  • There are little to no business deductions that an S-Corp can take that a sole proprietor can't also take.
  • All other things being equal, an S-Corp and a sole proprietor will have the same taxable income, except for potential differences in pre-tax employer contributions and QBI deduction explained above and all to the benefit of a sole proprietor.
The conventional "wisdom" is that physicians should always create at a minimum an LLC and usually an S-Corp. Well, the wisdom is typically ignorant. You need to do a detailed analysis of the actual cost/benefits of an S-Corp vs. Sole proprietor. I would be surprised if it favored the S-Corp.
Is this just business profits, or gross household income?

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White Coat Investor
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Re: Physician “TO-DO” list for LLC

Post by White Coat Investor » Mon Apr 15, 2019 7:37 pm

Phinance wrote:
Fri Apr 12, 2019 9:31 pm
I am helping my fiancée start a small business (LLC) to capture her income $$ as an independent contractor (1099), she is a physician out of training. What is our “To-Do List”?

1) Accountant? (Do we really need an accountant or can this be done by us assuming a reasonable degree of organization/time? What are the approximate fees for an accountant to set this up?)
2) Start an LLC? (I’m assuming this is state specific and can be done easily, how do we file as an S-Corp? I heard this is advantageous but I don’t really understand why)
3) Start a SEP-IRA vs. solo 401K (My assumption is that SEP-IRA is easier, contributions can be lower, but rules out her ability to do a back-door Roth IRA, any strong feelings here? I saw Vanguard had an online filing for SEP-IRA, 401K paperwork looks slightly daunting)
4) How do we actually defer income into this SEP-IRA/solo 401K?
5) How do we “withhold” state/federal taxes?
6) Other? Any other significant to-dos?

Thank you
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Re: Physician “TO-DO” list for LLC

Post by Spirit Rider » Mon Apr 15, 2019 8:46 pm

unclescrooge wrote:
Mon Apr 15, 2019 6:35 pm
Is this just business profits, or gross household income?
The amount of the money saved by an S-Corp with W-2 wages >= the Social Security maximum wage base (2019 = $132,900). Is based on (net business profits - employer FICA) - W-2 wages.

Eligibility for the QBI deduction is based on taxable income. If eligible for the QBI deduction. A sole proprietor's QBI is their self-employed earned income (business profit - 1/2 SE tax) - any pre-tax retirement plan contribution deduction - any self-employed health insurance deduction. An S-Corp 2% shareholder-employees QBI is limited to their distributions.

Therefore, an S-Corp will have a far smaller QBI and QBI deduction than a sole proprietor. This can override any benefit from an S-Corp's reduced FICA taxes vs. a sole proprietor's SE taxes.

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Phinance
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Re: Physician “TO-DO” list for LLC

Post by Phinance » Tue Apr 16, 2019 8:18 am

Thanks WCI/Spirit Rider. She is a surgeon, this would be household income for her first few years out of training (1099). I don’t think she qualifies for QBI because she is a “specified service trade/business”, correct? I had no idea Fidelity was a good option, I will check them out assuming expenses are equal (I hate to leave Vanguard, I feel like they are our 1 stop shop :))

Best.
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Re: Physician “TO-DO” list for LLC

Post by Luckywon » Tue Apr 16, 2019 10:35 am

Spirit Rider wrote:
Mon Apr 15, 2019 8:46 pm
unclescrooge wrote:
Mon Apr 15, 2019 6:35 pm
Is this just business profits, or gross household income?
The amount of the money saved by an S-Corp with W-2 wages >= the Social Security maximum wage base (2019 = $132,900). Is based on (net business profits - employer FICA) - W-2 wages.

Eligibility for the QBI deduction is based on taxable income. If eligible for the QBI deduction. A sole proprietor's QBI is their self-employed earned income (business profit - 1/2 SE tax) - any pre-tax retirement plan contribution deduction - any self-employed health insurance deduction. An S-Corp 2% shareholder-employees QBI is limited to their distributions.

Therefore, an S-Corp will have a far smaller QBI and QBI deduction than a sole proprietor. This can override any benefit from an S-Corp's reduced FICA taxes vs. a sole proprietor's SE taxes.
Physician here with S-Corp and am trying to determine how these numbers play out for me. If it turns out that sole proprietorship is better for me, can anyone chime in on whether it too late to switch for 2019 tax year? I have not yet made any 401k deferral or profit sharing contributions this year to my individual 401k and I am holding off because I'm concerned that may limit my tax filing options this year. I have a suspicion that sole proprietorship and making some aftertax contributions in my 401k may make the most sense for me but it's rather difficult for me to figure this out exactly and my accountant does not seem to be up to speed on how the 199A issue plays in to all of this.

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