Anyone incorporate and Elect S Corp to Save on Self Employment taxes

[steve3752]

I am an individual independent agent. Paid a lot in tax last year. At what point in income has anyone figured it makes sense to incorporate and elect S corp status and pay some of profit as income to avoid paying some self employment tax.

 

[sshafran]

I've set up an S-Corp. Without getting too much into the weeds, you still must be an employee of the corporation getting W2 income.

The beauty of it is you can also take distributions from the S-Corp, and the distributions aren't subject to some of the withholdings.

The downside is, higher CPA cost (unless you do your own taxes - not easy w/ S-Corp) and when you get licensed/appointed, there are more fees (usually) because YOU are getting licensed/appointed, and often your CORP (the business entity) is also getting licensed/appointed.

Rule of thumb somewhere, at least when I started my S-Corp, is once you are close to $100,000 the extra savings make up for the extra costs.

I don't know exactly how much I save yearly, but it's significant.

 

[marindependent]

I would say that the only rule of thumb on this one is to ask several accountants and agents in your state.

Why ask other agents or business owners in your state? Not all states are created equal with regard to ease and cost of setting up a business entity. Trust me when I say its a LOT more complicated that it should be. Not only do you have to set up the name with Sec of State, but you may need to get the name approved by your DOI. Then you have to pay fees to both the Sec of State and the DOI [at least in my state]. After you have completed all of that you then have to go back and get some of the commissions payments paid to your Corporation and not just your name. Does your State DOI require an entity license?

Why should you pay several accountants to check on this for you? Because State Incorporation may save you money in some ways and cost you more in taxes in other ways. Example here in CA you must pay a minimum entity tax each year.

Rough Guess though I would NOT consider it if your business was not growing, not over the $100K income mark [and more in CA, NY, etc], and you were not planning on doing this for another 10 plus years. If you are considering hiring employees I would be more likely to suggest it.

Yes incorporating may increase your accountant costs, but if you are filing as an LLC or S Corp your expenses are really typically tied into your personal return and those expenses will be written off to some extent.

Lastly I really would encourage you to find some agents in your state that have done this and they can give you the lowdown.

Best of Luck!

 

[LostDollar]

I would say that the only rule of thumb on this one is to ask several accountants and agents in your state.

Why ask other agents or business owners in your state? Not all states are created equal with regard to ease and cost of setting up a business entity. Trust me when I say its a LOT more complicated that it should be. Not only do you have to set up the name with Sec of State, but you may need to get the name approved by your DOI. Then you have to pay fees to both the Sec of State and the DOI [at least in my state]. After you have completed all of that you then have to go back and get some of the commissions payments paid to your Corporation and not just your name. Does your State DOI require an entity license?

Why should you pay several accountants to check on this for you? Because State Incorporation may save you money in some ways and cost you more in taxes in other ways. Example here in CA you must pay a minimum entity tax each year.

Rough Guess though I would consider it if your business was not growing, not over the $100K income mark [and more in CA, NY, etc], and you were not planning on doing this for another 10 plus years. If you are considering hiring employees I would be more likely to suggest it.

Yes incorporating may increase your accountant costs, but if you are filing as an LLC or S Corp your expenses are really typically tied into your personal return and those expenses will be written off to some extent.

Lastly I really would encourage you to find some agents in your state that have done this and they can give you the lowdown.

Best of Luck!

Please forgive me if this is a wrong question-will delete the post if you ask.

I'm having trouble with the following sentence-did you mean to say "not consider"?

Rough Guess though I would consider it if your business was not growing, not over the $100K income mark [and more in CA, NY, etc], and you were not planning on doing this for another 10 plus years.

 

[policywunk]

I am an individual independent agent. Paid a lot in tax last year. At what point in income has anyone figured it makes sense to incorporate and elect S corp status and pay some of profit as income to avoid paying some self employment tax.

I looked at doing this but didn't because of the CPA cost, the fact that I was told if you pay yourself a lot less then you were making as a sole proprietor it can raise flags and the lower income you pay yourself can affect your Social Security amount.I am 61 so the SS issue is starting to get real for me.What I did instead to lower taxes was open a Defined Benefit Pension plan that allows me to contribute and deduct much more than a solo 401k or SEP IRA.Right off the bat it allowed me to be under the qualified business income deduction (QBI) threshold so I could get that pass through deduction and even though my AGI is much lower now its not affecting my Social Security.The downside is I do have to pay taxes on the contributions when I start taking RMD at age 72 and I did have to pay a third party administrator to set up the plan. Increase contributions and tax savings with Defined Benefit plans

 

[marindependent]

Please forgive me if this is a wrong question-will delete the post if you ask.

I'm having trouble with the following sentence-did you mean to say "not consider"?

Yes...! Thanks Ill edit it.

 

[UKTX]

I am an individual independent agent. Paid a lot in tax last year. At what point in income has anyone figured it makes sense to incorporate and elect S corp status and pay some of profit as income to avoid paying some self employment tax.

Its not that difficult to do and doesn't take much more than you are doing for Schedule C....

I do my own and have not needed a CPA to do it..........

One major benefit is that you now have a W2 on your 1040 and is a big help if you want to get mortgages etc, plus I never had much discipline "saving for may taxes" so there are no suprises now either, which I much prefer than how I was doing it on Sch C.

 

[sman]

I am an individual independent agent. Paid a lot in tax last year. At what point in income has anyone figured it makes sense to incorporate and elect S corp status and pay some of profit as income to avoid paying some self employment tax.

I did this many years ago. As has been mentioned, there are some additional costs, but at a certain income level, it's a net gain. One downside is, if you get to the point where you are maxing out your W2 income (to where you no longer pay SS tax), there is no longer a real savings. For 2022, that's $147,000. Let's say you made $150,000 total. Pay yourself a salary of $75k and take $75k in distributions. That's $72k that you don't pay FICA taxes on. That's just over $11,000 (15.3% for SS and medicare tax - this is your portion plus the employers portion - you being the employer). Subtract from that the added expenses of being set up this way to determine if it's worthwhile. Again, if and when your W2 income gets closer to the max limit, the savings decrease.

 

[marindependent]

Its not that difficult to do

Says the agent from Texas, [I think.]

Your State's DOI, Sec of State, and Tax laws matter a ton here - what state are you in @steve3752 ?