Tuesday, September 1, 2009

Is an S-Corp the Correct Structure for this Dentist? Probably Not.

I formed an S-corp as I was encouraged by my tax accountant to do so. My question is, is it really saving me money?

Based on the info below I bet it's costing you money!

Here's my info:

I'm one year removed from school. I'm making about 95K annually at the moment, working as an associate at one office 4 days a week. My boss is treating me as an Independent Contractor. I'm giving myself a salary of 72K as suggested by my accountant.

Ok, so lets stop right there. BEST case the $23k difference is being spent on your professional expenses and your payroll taxes and MAYBE a retirement plan. On a $72k salary the MOST you might be contributing is $18k AND you'd be able to get close to that with a sole proprietorship (or single member LLC if CA allows them) so don't think for a moment that the s-corp is allowing you have a retirement plan. You could also be deducting the same professional expenses as a sole prop (self employed), so again, it's not like the s-corp is allowing you to deduct items you couldn't deduct as a self employed person.

Best case, you have very little professional expenses and maybe $17k is flowing thru as s-corp div saving you approx. $1,300. Sounds like the annual fee & tax prep fee is eating that up. However, you're paying the employer's tax on the $72k, which is $5,500 and IF the owner would have paid you the same $95k as an employee, THEY would have paid the employers tax saving you $7,300 AND you could have asked them to reimburse you for any professional expenses in lieu of W-2 comp, getting the exact same tax benefit as though you paid them yourself.

As I see it I'm paying an addition $800 to have a corp in California every year in addition to the $600 he's charging me for a corporate tax return plus 150 a month for payroll.

$150/mnth payroll? OUCH! Using an outside payroll service would likely be 20% of that figure if you do your paycheck once per month.
That comes out to an extra $3200 dollars a year. Am I saving that much tax wise from having an S-corp? Should I lower my salary even more?

You could lower your salary, then you run the risk of getting an audit for unreasonably low W-2 comp.

If I decide to stick with it, I'm thinking of outsourcing my payroll as I've heard this can save me some money. What's the cost involved with abolishing a corporation? Thanks for your help, I'm not that great when it comes to crunching numbers so any honest advice would be greatly appreciated.

As a VERY general rule, I believe one needs to NET (that's after expenses) $150k per year to warrant an s-corp here in MD. Sounds like CA is a little more expensive with their annual fee & that would raise the bar.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

No comments: