Allan Martin wrote:
- quote -

Ah, but it is "quite right". The only question is what is a
reasonable salary, and that's a facts and circumstances
issue. At one time, current thinking was even a minimum
salary based on state maximum unemployment benefits would be
considered by IRS as reasonable. But I haven't heard
anything on this in a while.

Cheer$,
harlan Lunsford, EA n LA

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"Gene E. Utterback, EA" <eagent[at]alliancetax.com> wrote:

- quote -

Great point. Even my extremely simple example has too many
variable to consider everything that could be done?

--
Regards,
Mark Rigotti

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"Allan Martin" <Intuit_man[at]CPA.com> wrote:

- quote -

Agreed on all points - I was attempting to present a
"simple" example for the OPs consideration & to illustrate
the "catch 22" situation with the OPs goals of Maxing SEP
and Mining Taxes. Mutually exclusive.

--
Regards,
Mark Rigotti

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- quote -

The post ahead of yours also made some assumptions about how
to take payroll from a C vs. S corporation - the dollar
amounts don't have to be different, though they can be and
often are. They also didn't factor in the new dividend rate
that might be a consideration if the OP had a C corp.

It is also worth considering that another option when payroll
is kept low to avoid FICA tax that cash can still be invested
in after-tax, tax-deferred vehicles that can provide for
retirement. You do lose the current tax deduction benefit,
but you might pick up substantially more disposable income in
retirement if your retirement money is either tax free (ROTH)
or partially tax free.

All of which just goes to prove the point that what one really
gets (or can get if they are willing to pay for it) from a good
tax pro is considerably more than just a tax return.

Gene E. Utterback, EA

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- quote -

You also have to factor in the additional administrative
costs required, as well as possible accountants fees for
filing Federal and State Corporate income tax returns. What
about minimum state income taxes. There is also the
possiblity that the 43K salary would not be considered
reasonable,

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masteroflunar[at]aol.com (Sandy Jones) wrote:
- quote -

can anyone help? thanks

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"Sandy Jones" <masteroflunar[at]aol.com> wrote:
- quote -

Lets take a look at a senerio for all three situations -
Assume that you have $100,000 profit after expenses and
before any payroll taxes or pension. Assume we use a SEP
plan here and contribute the max (25%). Further you are
single with no kids and live in Texas (no state tax issues)
or Florida or Nevada or (Dick where is that listing again?)
..... Further you can not itemize deductions.

With a Sole proprietor you could contribute $18,653 to your
SEP - your fed tax would be 13,516 and FICA of 13,466 for a
total of 26,982.

With a C corp you have a SEP of 18,847 leaving wages of
75,386 and Fica tax of 5,767 deducted by the corp. Now
since we are really talking about different pockets your
total FICA is 11,534 and your Fed tax would be 13,704 for a
total tax of 25,238 - Pretty similiar to a Sole
proprietor.

With the S corp you would have a Wage of 42,983 and a "S
Dividend of 42,983 and a SEP contribution of 10,746 and
deducted FICA of 3,288 (totals 100,000 again) Again the two
pocket issue so you total FICA is 6,576 your federal tax
would be 16,635 for a total tax of 23,211 - a saving os
2,000 to 3,500 compared to the other two alternatives.
BBUUTT - look at the SEP contributions 19,000 in the first
two and 11,000 in the third.

So I ask you what is more important - The additional 8,000
in a retirement plan or the 3,000 you could save in taxes???

Rgs,

Mark

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"Mark Rigotti, CPA" <rigotti[at]wideopenwest.com> wrote:
- quote -

well, I do plan to max out my SEP IRA, what can I do with a
S Corp> My primary concern is saving taxes for the long
term.

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smithff33[at]aol.com (Herb Smith) wrote:
- quote -

What do you think is the best scenario for me? So far all my
CPAs claim S Corp is the best option, but my friend who is
also CPA told me my savings is very minimal since the social
security tax (50%) is tax deductable so the corp pays less
taxes.

But one thing I forgot to mention is if I pay myself a
reasonable salary, I have the corp pass the rest of the
income to me as dividend. That would exclusive the SS and I
think this is what CPA want me to do?

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"Vincent Gambini" <lawyer5[at]hotmail.com> wrote:

- quote -

ok lets say I have a job already (not from my sole
proprietorship) so I won't have to pay social security tax
anyway beyond $87k. So is there even a point in forming a S
Corp assuming I make less than 100k in my sole propritorship
business anyway? I am in california and I heard francise
fees can be excessive.

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"shagnasty" <shag[at]nospam.com> wrote:
- quote -

Since the OP stated that most of his income is profit this
leads me to believe that the source of income is from
personal services rendered by the taxpayer. How can you
begin to justify paying out as distributions one half of
this income instead of salary salary. I know that this is
done all the time. My question is why does the IRS allow
this all to common tax abuse?

I see and hear this all the time. A professional goes on a
job interview and accepts a position at a company as a 1099
paid consultant. Employee? incorporates, takes S election
and takes a nonminal salary. The balance of their (payroll?)
checks are taken as distributions. Maybe its me but this
just does not seem right.

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"Sandy Jones" <masteroflunar[at]aol.com> wrote:

- quote -

Sandy,

Probably correct.

Question for you though. Is tax saving the primary concern?
Are you funding a retirement plan?

If funding a retirement plan you can only use income subject
to FICA tax to calculate the base for the plans
contribution.

You need to decide which is a more important concern. Tax
savings or tax deferred retirement contributions.

--
Regards,

Mark Rigotti

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masteroflunar[at]aol.com (Sandy Jones) wrote:

- quote -

As a sole proprietor, you are charged 15.3% in Self
Employment taxes on your net profit. You get to deduct 1/2
of this tax amount against gross income on your 1040 (but
still pay the SE tax on the back). You pay income tax on the
entire Net Profit shown on your Schedule C.

An S-Corp is a little different. First, it is a corporation
and you are an EMPLOYEE who just happens to own shares. As
an employee, the S-Corp is required to pay you a
"reasonable" salary for the work you do FOR the corporation.
What would you pay an outsider to do the same work? That's
what your corporation should be paying you.

The corporation should be withholding income tax and
employment taxes on these wages, and issue you a W-2 at the
end of the year. An equal amount of employment taxes are
also paid by the corporation to the IRS. All net income of
the S-Corp is "passed through" to the shareholders, in
proportion to their shares in the corp, and reported on
their individual 1040 returns.

Even though the corporation, per se, pays no income taxes
directly, it still must file an 1120-S form annually.
Perhaps this is why your accountant likes this idea? More
work for him?

Bottom line, your income taxes may be about the same or
less, social security taxes (between you and the S-Corp)
will be the same, you get no adjustment on your tax return
for the Corp share, the Corp also has to pay FUTA taxes on
your salary, and - finally - you have more paperwork to
contend with.

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Forming an S-Corp would give you a liability shield that you
can not have while operating as a sole-proprietor. Also,
being an S-Corp does have this tax advantage that your
accountant mentioned. I would suggest speaking with an
attorney that does business law in your state to see about
forming such an S-Corp.

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"Sandy Jones" <masteroflunar[at]aol.com> wrote:

- quote -

He is correct. However if you fail to pay yourself a
reasonable salary (with Soc Sec Withheld) the IRS could
classify the entire S Corp income as salary subject to SS.

If you make $100,000, you might be able to claim $50,000 as
a "reasonable" salary, issue yourself a W-2, File Forms 940
& 941 and pay state unemployment tax on your salary--and
still save SS on the income between $50,000 and the SS max
plus saving Medicare tax on 100% of the amount over $
50,000.

Your accountant will probably charge you less for all the
extra forms you have to file than the tax you will save.

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I make about 100k a year and I was told by my accountant
that I have to pay social security taxes 13.5% since most of
it is profits. He also told me that if I continue to make
the same income or more, I should form a S Corporation,
because I can save on social security taxes and my income
tax will be the same. Is he right? Is this the route to
take? My business has no liability ever and I just want to
save on taxes. thanks

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