Setting My Own Salary

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TMMB
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Setting My Own Salary

Post by TMMB »

In 2020, my total compensation was around $365k, based on a $200k base salary and the rest came from productively and bonus from the net profit of the practice. I’m a partner is such practice and expect my total compensation to increase as I gain more shares. I expect to earn around $400k in 2021. At the same time, I have to flexibility of setting my own salary to any amount I want, as long as I can generate such revenue after deducting costs.

I would like to raise my salary to at least $300k and collect the rest at the end of the year as bonuses. Are there any disadvantages by raising from $200k-$300k in salary?
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StevieG72
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Re: Setting My Own Salary

Post by StevieG72 »

If you are structured as a pass through entity, you will pay less tax by taking a lower salary and the remainder as a draw.

A higher salary will earn more S.S. benefits, but you will pay more taxes yearly.
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Topic Author
TMMB
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Re: Setting My Own Salary

Post by TMMB »

Can you elaborate further about pass through entity? Is this
Something I can establish as a a w2 employee? I’ll
Research further as well.
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TinyElvis
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Re: Setting My Own Salary

Post by TinyElvis »

StevieG72 wrote: Tue Jan 12, 2021 10:39 pm If you are structured as a pass through entity, you will pay less tax by taking a lower salary and the remainder as a draw.

A higher salary will earn more S.S. benefits, but you will pay more taxes yearly.
What he said.

I only pay half my salary as W2; the rest is a distribution in January based on the prior year profit.
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
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StevieG72
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Re: Setting My Own Salary

Post by StevieG72 »

TMMB wrote: Tue Jan 12, 2021 10:42 pm Can you elaborate further about pass through entity? Is this
Something I can establish as a a w2 employee? I’ll
Research further as well.
I am referring to the corporate structure if any, for example I own an S Corp and pay myself a reasonable salary for the work performed and take the rest of my income as a draw. My S Corp files an information only return ( no taxes due) and any income or loss passes through to my personal tax return. ( S Corp is a pass thru entity) There are other pass thru entities besides an S Corp.
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Katietsu
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Re: Setting My Own Salary

Post by Katietsu »

I want to make sure that there is not any confusion with word choice. Does all your compensation show up on your W-2? If so, then the previous comments are not relevant. You described part of your compensation as salary and part of it as coming from the net profit of the business. So it seemed like only the salary part was reported on a W-2 and the rest would be qualified business income.
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MP123
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Re: Setting My Own Salary

Post by MP123 »

TMMB wrote: Tue Jan 12, 2021 10:32 pm I would like to raise my salary to at least $300k and collect the rest at the end of the year as bonuses. Are there any disadvantages by raising from $200k-$300k in salary?
I'm not clear on the structure of your business, but this would probably reduce your Sec 199a QBI deduction (due to lower business profit, because of higher wages), and also increase the amount of Medicare tax you'd pay. However, there might be some advantage in higher allowable 401k contributions.
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TMMB
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Re: Setting My Own Salary

Post by TMMB »

The practice I work for is a PC. I am one of many partners in the practice. All $365k is reported on W2. In addition to receiving my base salary bi-weekly, I receive two distributions, middle and end of the year. When these two distributions occur, the amount of taxes deducted is high in my opinion, around 40% to 42%. When I receive the w2, it would include by base salary and all bonuses distributions.
Based on this, will I still be able to set up a pass through?
Luckywon
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Re: Setting My Own Salary

Post by Luckywon »

MP123 wrote: Tue Jan 12, 2021 11:12 pm
TMMB wrote: Tue Jan 12, 2021 10:32 pm I would like to raise my salary to at least $300k and collect the rest at the end of the year as bonuses. Are there any disadvantages by raising from $200k-$300k in salary?
I'm not clear on the structure of your business, but this would probably reduce your Sec 199a QBI deduction (due to lower business profit, because of higher wages), and also increase the amount of Medicare tax you'd pay. However, there might be some advantage in higher allowable 401k contributions.
OP does not say whether OP files single or jointly, but in the better case scenario filing jointly, and assuming OP has some dividend or other income apart from the business, OP is probably completely or almost completely phased out for QBI deduction.
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MP123
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Re: Setting My Own Salary

Post by MP123 »

TMMB wrote: Tue Jan 12, 2021 11:20 pm The practice I work for is a PC. I am one of many partners in the practice. All $365k is reported on W2. In addition to receiving my base salary bi-weekly, I receive two distributions, middle and end of the year. When these two distributions occur, the amount of taxes deducted is high in my opinion, around 40% to 42%. When I receive the w2, it would include by base salary and all bonuses distributions.
Based on this, will I still be able to set up a pass through?
Generally, income from a partnership will be reported on a K-1 form, and won't be subject to withholding tax.

So, I'm not sure what these taxable distributions on your W-2 are. It sounds like they might be bonuses not related to your ownership in the partnership. Or perhaps something isn't set up properly?

It would probably be worth talking with a CPA.
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TMMB
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Re: Setting My Own Salary

Post by TMMB »

I do receive k1 in addition to w2.
The practice is set up like this:

1) each partner generates revenue for himself/herself then the practice takes out all associated cost, including partner’s base salary. If revenue exceed cost, the net income is counted as bonus to the partner. This bonus gets distributed twice in a year and taxes are immediately deducted from the bonuses.

Example, $50k revenue - $30k in expense - $10k partner’s base salary = $10k. Assume $10k monthly for 6 months is $60k, which gets distributed to me with a 40% tax.

2) the practice owns a lab business, which generates income for the practice. The net income from this lab business gets distributed to all partners according to their shares twice a year and taxes are also immediately taking out.

3) As stated previously, item 1, 2, and base salary are included in w2

Based on this, I’m not sure if there are strategies for tax efficiency and if not, I don’t see any reasons not to increase my salary. Either way I’m paying taxes. By increasing my salary, I’m just getting “bonus” sooner.
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MP123
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Re: Setting My Own Salary

Post by MP123 »

TMMB wrote: Wed Jan 13, 2021 12:06 am Example, $50k revenue - $30k in expense - $10k partner’s base salary = $10k. Assume $10k monthly for 6 months is $60k, which gets distributed to me with a 40% tax.
As a partner in a partnership I would have expected this to be distributed to you on a K-1 without tax withheld, rather than as W2 income, as you indicate.

I'm not sure if this approach is common in the medical field, perhaps others here will know.

It certainly sounds like you might benefit from a pass through structure, the goal would be to keep your salary lower and increase the amount on K-1.
HootingSloth
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Re: Setting My Own Salary

Post by HootingSloth »

If your entity is a professional corporation (PC), then you are not a partner in a partnership for tax purposes. A PC is not an eligible entity for partnership treatment.

If you are receiving a K-1 from a PC, it likely means that the PC has elected to be treated as an S Corporation. The CPA that prepares the entity's tax return should be able to confirm that it is an S corp.

These articles should give you some insight into your question: https://www.thetaxadviser.com/issues/20 ... g2011.html

https://jberryjohnson.com/s-corp-bonus- ... -paycheck/
robphoto
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Re: Setting My Own Salary

Post by robphoto »

I strongly advise talking to a good accountant with expertise in tax planning, both to optimize the current setup and to consider changes to the arrangement. This has a big effect on your net income.
H-Town
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Re: Setting My Own Salary

Post by H-Town »

TMMB wrote: Wed Jan 13, 2021 12:06 am I do receive k1 in addition to w2.
The practice is set up like this:

1) each partner generates revenue for himself/herself then the practice takes out all associated cost, including partner’s base salary. If revenue exceed cost, the net income is counted as bonus to the partner. This bonus gets distributed twice in a year and taxes are immediately deducted from the bonuses.

Example, $50k revenue - $30k in expense - $10k partner’s base salary = $10k. Assume $10k monthly for 6 months is $60k, which gets distributed to me with a 40% tax.

2) the practice owns a lab business, which generates income for the practice. The net income from this lab business gets distributed to all partners according to their shares twice a year and taxes are also immediately taking out.

3) As stated previously, item 1, 2, and base salary are included in w2

Based on this, I’m not sure if there are strategies for tax efficiency and if not, I don’t see any reasons not to increase my salary. Either way I’m paying taxes. By increasing my salary, I’m just getting “bonus” sooner.
From what you described, my understanding is:
1) All of your comp (base salary + bonus + net income from lab) are reported on W-2.
2) K-1 doesn't report any comp.

Is that correct? If so, it seems like you should get the bonus sooner by setting a high base salary. What latitude do you have in setting your salary? Is there a clause in partnership agreement addressing this issue?

On another note: we typically see a more tax efficient set-up through partnership (LLP, LLC, PC) structure. I'm not sure if there's anything you can do to change the structure of the partnership if you're a new partner. But maybe you can talk to senior partners and get some more info?
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