Is an S-Corp the Correct Structure for this Dentist?

Hi, a newbie dentist here, I'm going to set up myself as an S-Corp (no LLC in California), my attorney wanted to know if I will be paying myself via W2. I guess I need to know this info to set up an EIN. Can you advise?

Thanks a ton!

Jason Wood (www.DentalAttorneys.com)

Before answering all of the other questions your post raises...

1. Why are you setting up an S-Corp? I.E. What is the purpose?

Right now I'm being paid on a combination of 1099s and W2s, I'm single, no children, so no real deductions. I'm setting up S-Corp so it would be a bit easier for me to run deductions and expenses.

Next questions:

1. How much are you making? If you aren't making enough, the deductions will not equal the yearly maintenance costs associated with the corporation.

2. What are your short/medium term goals as a dentist? If it is to own or do a start up in the next 2 years, then starting a corporation now is probably not in your best interest since you should abandon your "associate corporation" when you go to purchase/start up a new practice because you do not want a liability connection between your new practice and your old associate life.

Tim Lott (http://www.dentalcpas.com/)

While Jason is guiding you through all the proper questions I’ll comment on your specific questions for the benefit of others that might be considering an S-Corp:

“My attorney wanted to know if I will be paying myself via W2.”

How else does an employee of a corporation get paid for rendering services? The answer is YES, even if it's a nominal wage as the corporation will probably have employee business expenses so it's usually a good idea to show wages to acknowledge you ARE an employee.

I guess I need to know this info to set up an EIN. Can anyone advise?

S-Corp is going to have an EIN regardless of if it has employees or not.

Right now I'm being paid on a combination of 1099s and W2s. I'm single, no children, and so no real deductions. I'm setting up S-Corp so it would be a bit easier for me to run deductions and expenses.

Why will an S-Corp make it "easier" to run deductions? What deductions does an S-Corp allow that a Sole Proprietorship doesn't?

Thank you so much for the info offered, I looked at my situation a bit more and I think I'd like to get situated thus:

My primary income is coming from a practice where I'm a partner at. This practice is set up as a C-Corp. I'd like to be able to help my partner avoid paying the payroll taxes by having my compensation be a straight forward corp-to-corp expense. Would I then be able to take that lump compensation, then disperse to myself (the individual - my corporation has no other employees, no other shareholders) a W2?

This bit of advice:

However, I have also been advised to NOT give myself a W2 (so I don't have to pay the payroll taxes on that) but to simply disperse to myself as dividends and then pay the 1040 at the end of the year.

Should generate this response:

"but the answers I've received have been less than satisfactory"

Beyond that your posts are quite confusing to me....bottom line is:

If you create an S-Corp to contract with a practice to perform dentistry and if that S-Corp is relying on a dentist to perform the dentistry (After all, an S-Corp can't perform dentistry....its employees do) that employee would require a W-2 as an employee.

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 Twitter, Facebook and Pinterest

Small Business Medical Insurance Tax Credit - Is it Really Worth it for a Dentist?

You get up to 35% credit on what you pay towards medical. The only crappy thing is that your staff has to average under $50K income... But I think this could work in some parts of the country. Disappointed that it doesn't take into consideration that some areas have a higher income level and associated higher costs. Out of 15, I only have a third making less than 50,000.

We’ve had very few clients get the credit....as we suspected. For those that have, it's been at most $1,000, usually less.

The "average wage" calculation usually kills the chances. It’s generally based on full time equivalent. what that means is you could have several part-time people making $20k each & one or two full time making near or way over $50k (hygiene for example). The problem is, a 20 hour per week person making $20k is equivalent to a full time person making $40k and when you factor in the full time people making $50k or $80k (full time hygiene) your "average wage" exceeds $50k.

It’s not good for us either because it adds extra work to every business tax return we do.....

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 Twitter, Facebook and Pinterest

The Dental Independent Contractor Status Draws Scrutiny

Independent contractors are valid in various industries given the proper circumstances, including dentistry. However, the government has and will continue to look for abuses of the classification where employers attempt to use the classification to avoid employment taxes.

People who wish to be considered independent contractors (IC) should arrange their circumstances so that their case as an IC is defensible. Some of these circumstances may include: being able to perform work duties freely in the facilities of the owner, getting paid by the project or service (not hourly), paying for their own materials or supplies, using their own equipment, providing service not otherwise offered by the business owner, hiring and paying their own staff and control the result of their product or service. If these circumstances are not in place with the owner of the business, the general IC may not be an IC at all, they may be an employee.

One of our client’s is a dental specialist. They don’t own their own practice, they work in offices of other practitioners. They bring their own staff, they control their work process and the outcomes, their services are billed separately, they decide the days they work and because they’re a specialist, the owner can’t supervise their work (tell them how to do it). They also operate from their own entity so the contract is between two entities, an individual is not involved, other than the person providing the service.

Businesses must weigh the degree of the behavioral and financial relationships with workers when classifying them. The consequences for the owner who misclassifies an employee as an independent contractor could be: A) they’re assessed the employer’s portion of the social security and Medicare tax, B) federal unemployment tax, and, if the owner cannot prove the independent contractor reported the income on their return, they may also assess the employee’s portion of social security and Medicare tax, plus penalties and interest. If the owner had any employee benefit plans that should have covered the IC (health and retirement plans), there could be negative consequences there as well.

If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center on the IRS website.

You are not an independent contractor if:

• You perform services that can be controlled by the owner (what will be done and how it will be done)

• You use the owner’s equipment and supplies
• You service the owner’s patients or clients and they tell you when to work. (This applies even if you are given freedom of action). What matters is that the owner has the right to control the details of how the services are performed.

For example, a general dentist is working for another general dentist as an associate. The associate uses the dental staff, the associate is being supervised by the owner, they are told the hours they are working, they use the owner’s equipment and supplies, and this is the only office they work for. This associate would likely be classified as an employee.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor.

This is a serious issue for owners who are either intentionally or unintentionally misrepresenting relationships with workers. In cases of abuses, the owner is the party that will likely take the beating.

I recall back in the late 80's when I consulted with a stock broker who worked for a small brokerage firm where all brokers who worked for the firm were being treated as independent contractors. The IRS audited the brokerage firm for several years for the very issue being discussed. The brokers had to submit returns to prove that they were reporting their income correctly and paying the self-employment tax while the brokerage firm got slammed for hundreds of thousands of back payroll taxes, penalties, and interest. Ultimately, the brokerage went belly up, many people became unemployed and many clients had to find new brokers or move their money to a new brokerage where their broker landed.

We've had similar stories on a much smaller scale where IRS reclassified independent contractors as employees and made the client pay back-payroll taxes, interest, and penalties. I have only heard of one case where the independent contractor themselves got audited and reclassified as an employee and they got hammered income-tax wise because schedule C expenses became miscellaneous itemized deductions subject to limits and their self-employed retirement plan deduction got thrown out.

The bottom line is in just about every IRS audit of a business, one issue the agent must take a look at is the employee vs. independent contractor issue to ensure employers aren't trying to evade employment taxes.

Sign up for our dental newsletter.

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 Twitter, Facebook and Pinterest