mad fientist taxes

Join over 100,000 others on the Mad Fientist email list and get instant access to my FI Spreadsheet! 3. I also have a 25k annual mortgage payment and about 50k in normal household expenses. Pretty cool! Assuming this person doesn’t have another job, the self-employment taxes equal 15.3% of 92.35% of the $100,000 of profits. Even with the CA franchise tax, moving to a S corp saves us about $8k/year. (Read 34238 times) sol. 15,417 people follow this. Blame the brass? Create New Account. E.g., a sole proprietorship who makes $100K pays self-employment taxes on 92.35% of the $100K. Log In. And other than SEP-IRA/HSA, we don’t have any fringe benefits. Annually. Please try again. Create New Account. Beating the 5-year rule through in-plan 401(k) conversions seems too good to be true. Someone working part-time would logically earn less than someone working full-time. BTW, sort of related: People sometimes bump their S corporation compensation only to bump their pension contributions. The salary you pay yourself reduces your qualified business income. In this case, the typical S corporation by dissolving would pay $6K to $7K more in taxes. Regarding the employer 401(k) match, if this match is put into a Roth 401(k) (as opposed to a pre-tax 401k), would this still reduce QBI? In a sense, to say this another way, you now have *two* good reasons to push down shareholder-employee wages. Probably the only truly useful “rule of thumb” is to run the numbers and look at both using an S corporation and not using an S corporation. But to determine how much income tax, you need to combine the business profits with all your other deductions: self-employed health insurance, pensions, itemized or standard deductions, etc. Regarding a part-time salary, that logically works. Create New Account. That second trick? The Mad Fientist (aka Brandon Ganch) saved his money and left a career as a computer programmer in his early 30s to pursue a life of early retirement. The S corp, in other words, doesn’t reduce the cash flows to the business owner. My question is about the S Corp paying the health insurance for the single employee (and their family). The Mad Fientist analyses the tax code and looks at personal finance through the lens of early financial independence, he develops strategies and tactics to help you retire even earlier. Most personal finance advice is geared towards people retiring in their 60s or later and doesn’t apply to those pursuing early financial independence. ‎Join the Mad Fientist as he interviews personal-finance icons like Mr. Money Mustache and Vicki Robin to discover the strategies they used to achieve financial independence and retire early! The taxpayer pays too much payroll tax for the relatively modest tax deferral benefit they enjoy. There’s another benefit of having an S Corp that’s worth mentioning… If your business makes a lot of money (i.e. As someone who had never done payroll before or dealt with employer/employee payroll taxes, etc, the reasonable wage part was a bit confusing and scary. That means this person pays about $14,130 in self-employment taxes. In fact, when you add on the expense you’ll likely incur for professional tax preparation given the more complex structure, the time associated with additional filings/administration and the use of a payroll service I just don’t think this is a slam dunk decision any longer. Mad Fientist is on Facebook. Based on my analysis I believe the QBI deduction does not make it obvious to convert to a S-Corp. Just set your IP address to purine different country. (That’s 20% of the taxable income.). 15,229 people follow this. If you’re paying the average, you are pretty boring to the IRS’s computers. An important point: You need to form the LLC before the new year starts and then file the S corporation election paperwork after setting up your LLC but before March 15th of the year for which you want to use the S corporation gambit. Long story short, I recommend to just outsource it. The thing is, in a sole prop, the entirety of the income is QBI. Mad Fientist. Great article clearly explained for the tax-inept of us out there. The Section 199A deduction equals the lesser of 20% of the qualified business income or 20% of the taxable income adjusted for capital gains. Which isn’t really enough to pay the full freight. Website . We did look at ADP and Paychex as they are the largest of the payroll outsourcing companies. I will tell you this..the average S corporation generates about $90,000 of profit for an owner and calls about $40,000 of this profit “wages” (this breakdown lines up pretty neatly with the earlier example). The Mad FIentist is one of the most intriguing people in the financial independence blogging realm. (maybe the plan allows at any time, maybe employment terminated, etc.). Your email address will not be published. Taxable income in the 3xx,xxx range. Hi – I’m revisiting this article as I reflect on my decision to convert to a S-Corp and comparing rough pro-forma taxes as both a S-Corp and LLC in the State of Ohio. When I started the Mad Fientist, I didn’t do anything special to start my “business”. First, if you’re in business of hard money lending, maybe activity should be reported as a business and not as portfolio income. For example, say you were running a small S corporation that makes $100,000 and that you want to set $40,000 as your S corporation reasonable wage. The health insurance is in this case an S Corp expense, is free of FICA and FUTA taxes, but must be reported as (federal) taxable income, i.e. Obviously, the S corporation tax strategy delivers substantial tax savings. My side business profits about 50k per year, but I only spend about 5 hours per week working in it and the work that is performed is not “high level” work. You would need to be able to extract a lot of the S corporation profit as fringe benefits in order to even sort of make this work. This is a great post. Thanks for the post, Steve! To assist me with this article, I brought back the tax mastermind who helped me switch my own business over to an S Corporation – my personal accountant, Steve Nelson! See more of Mad Fientist on Facebook. However, what if the conversion occurs in the 401(k) itself? Therefore, could I pay myself $15 an hour, 5 hours a week, ~$4k per year? As someone who actually paid for one of Steve’s S Corp kits a year ago I can confirm it is well done and helped me set up my S corp in Texas. The S corporation tax strategy requires a bit of fiddling. Factors like the hours required and worker skill matter play into this. Great article, as I was just recently researching this topic – thank you! E.g., say you run a one person S corporation (maybe a super-successful realtor?) Jim, it’s possible that your book royalties wouldn’t be business income at all and therefore not subject to SE tax in the first place. Diana, you need to be careful about health insurance for s corps when you have non-shareholder-employees. I own an S-corp. more than $157,500 for a single person or $315,000 for a married couple filing jointly), having an S Corp could help you qualify for the tax break of the century when you may not have otherwise….Imagine you’re a single person and your business earns a $250,000 profit next year…If your business is structured as a sole proprietorship, you wouldn’t receive any Section 199a deduction because you earn too much to qualify…If you instead have an S-Corp, you’d be eligible to receive a Section 199a deduction on 50% of the W-2 wages paid by your business…So if you paid yourself 28.5714% of your business profits (which is the percentage that would maximize the Section 199a deductions in this case), you’d be able to get a 20% deduction on $71,428.50 of your income.”. Log In. NO Spam. His writing on tax, spending, and life optimization guided me on my own FI journey and I’m grateful to now call him a friend. But you have a big riddle to solve if you want to do this. Currently, I don’t use an Scorp. Success! I don’t think it works to say you’re not a writer and so not in the business of writing and so can report book royalty income on Schedule E (which would be where it goes… but of course I know the specifics of your situation. Furthermore, Steve misses out on roughly $8K or $9K of payroll tax savings. On Diana’s 1040 tax return, she reports $50K as her wages subject to income taxes… but she probably also takes a $10K self-employed health insurance deduction. And usually they don’t work well for businesses unless you’re making high five-figure profits or more. But wait! But what you need to do is identify a reasonable compensation amount—and then document your logic. Wouldn’t the deductions be on his tax return as well? Okay, a warning. My last article described why I think everyone should start a business and this post explains the benefits of forming an S Corp once your business becomes more profitable. All of my borrowers report income to me on 1099-int. (Read 34159 times) milesdividendmd. Throw in the savings on employment taxes described in the post and you can see why this is a great move for many profitable businesses. Second thought: If activity isn’t a business, it probably doesn’t make sense to use accounting you describe. The payroll taxes eat up the benefits from any tax deferral. (By staying a sole proprietor you maximize your QBI to $80K… ) But the answer to this question is probably “no.” Assuming you are married and take the new standard $24K deduction, as a sole proprietor, you would get a Section 199A deduction equal to roughly $5200 which would save you only about $624 in taxes. Thanks for the post, Steve! Now just check your email and start tracking! To add: the only mention of the 199a deduction in the article provides factually incorrect information. Look forward to any comments if this analysis is off base. Peanuts, ideally. Since the royalties are ~2/3rds of the revenue, using 100k as an example: 67k = Royalties You said: “If your business makes a lot of money (i.e. So, please tell me what I’m missing. Military FIRE – The Tax, Investing, and Travel Benefits of Military Service. I just wanted to provide this perspective to those evaluating their own decision – I would evalute the pros/cons of each. I am unclear on the new rules. Further, this sculpting might be especially compatible with working toward FIRE through aggressive saving and investing. View detailed profile or search site … Section 199A of the Tax Cuts and Jobs Act of 2017 is the biggest tax break of the last 50 years so find out how to take full advantage of it! To understand how an S corporation saves tax, you need to look first at the way a sole proprietor’s self-employment earnings get taxed. Accordingly, the Mad Fientist thought it made sense to cover this tax-avoidance topic before the year ends. And if the total is $10,000,000, $825,000 probably works. 4. Example: If you form an LLC in late 2018 and elect Subchapter S status for 2019, you need to have paid yourself reasonable wages by December 31, 2019. So does it matter how you pay yourself after your “responsible wages” exceed 120k a year? 6. Mad scientist juniper VPN ubuntu - Don't permit others to pursue you 64 bit - and 64 bit Pulse Connect Secure. She’s planning on contributing $19K of salary to her 401(k). or. I only have a profit of about 55,000 and so I don’t think an S corporation would work for me. It wasn’t until 5+ years after starting this site that I actually formed an LLC and started filing my taxes as an S Corporation. The big complicating issue you have with a late election is you’d need to pay Dan the employee reasonable wages between now and the end of the year. Success! To put all this together, a sole proprietorship making $100,000 a year might be able to pay a $40,000 wage, save nearly $8,000 a year in payroll costs, and then remove the risk of an audit by legitimately sculpting the tax return to bump compensation and fringe benefits and dial down the distributions. I haven’t run the numbers but this might help. Thanks for the reply. I read a comment from David Ann Arbor about his business making 55k a year and Steve mentioned that it probably wouldn’t be worth it. He breaks these concepts down so they’re easy to understand and put into practice. Why? Minimizing shareholder wages also minimizes the FICA and Medicare taxes paid directly or indirectly by the shareholder. Great article Steve! And another chunk goes to Brad the shareholder… maybe that’s the other $45K. Read more → The post Military FIRE – The Tax, Investing, and Travel Benefits of Military Service appeared first on Mad Fientist. If your business makes a lot of money (i.e. Coincidentally, his taxable income also equals $60K. If a business makes $100,000 and pays out $75,000 as compensation and benefits, that still leaves another $25,000. About See All. But if the total is $1,000,000, $82,500 may be workable. But to really come out ahead on this, you want to save your payroll tax savings. Now, that effect is usually modest if you pay yourself a reasonable wage. It cost half as much per month ($30ish) and they handle all of the tax paperwork, worker’s comp (for all non-owner employees), monthly and quarterly filings, direct deposit, etc (they have 4 levels of service, we went with the 2nd cheapest). Could a Sep IRA or Solo 401k get around the employer’s 25% limit on 401k wages Brad references above since our other income streams do not have any other retirement benefits? Thanks! 13,932 people like this. In this case, the business needs to call out a chunk of the profit as wages. If you have an S corporation making (before shareholder-employee wages) about $90K (this number distilled from your comment), you extract this profit in two ways: A chunk goes to Brad the employee… maybe that’s $45K. But we should have the “awkward talk” at this point. The Mad Fientist made it his mission to figure out how to reduce his taxes—or eliminate them altogether AND avoid penalties. The payroll tax savings for most businesses won’t make up for the “tax cost” of the reduced QBI deduction. Not Now. https://www.madfientist.com/my-portfolio/, https://www.madfientist.com/scott-young-interview/, https://www.madfientist.com/happiness-through-subtraction/, https://www.madfientist.com/safe-withdrawal-rate/, How to Pick the Ideal Location For Investment Properties – a Comprehensive Guide, How to Run the Numbers For Rental Properties – Back-of-the-Envelope Analysis, The 35 Best Niches For Real Estate Investing (& How to Choose Yours), Enroll in Free 7-Day Course – How to Get Started (or Restarted) With Real Estate Investing, The Baby Steps to Your First Rental, Flip, or Wholesale Property (6 Case Studies), 85+ Recommended Tools & Resources For Real Estate Investors. Has anyone done a t401(k) to Roth 401(k) conversion to beat the 5-year rule and make their ladder shorter? A lot of people talk about the THEORY of living off investments in early retirement, but how do early retirees actually pay their bills? Success! Note: When you make a late election, you need to invoke the correct revenue procedure and follow its rules. Regarding ‘reasonable salary’, if I determine $100K/yr is reasonable for my industry but I am only working 1/2 time, does that help my case to only claim $50K/yr as my salary? Episode 525: Happiness Through Subtraction by The Mad Fientist (Minimalist Finances & Financial Freedom). California levies a 1.5% franchise tax on the S corporation’s profit (the franchise tax also is always at least $800). Wait four to five years calendar years, depending on date of conversion (because years are counted instead of actual date, so a conversion on 1/1 is treated the same as 12/31). Same thing for HSA contributions if applicable. If you incorporate your business, elect Sub S status, and pay only $40,000 of the $100,000 as wages, you then only pay the 15.3% employment tax on the $40,000. Why did I make the change after so many years? E.g., if your business generates (say) $120K of revenues or billings and you incur (say) $20K of business expenses, your business profit equals $100K. If so, did the IRS give any pushback or try to impose the 10% penalty? If you use a Mad scientist juniper VPN ubuntu you can sometimes avoid paying taxes off amazon purchases. E.g., if the total profit equals $100K, $8250 is *probably* too low optics-wise. An S corp that also makes the same $100K but only pays out $40K in wages pay employment taxes on only the $40K. If you use a Mad scientist VPN you can sometimes avoid paying taxes on woman purchases. I think Social Security maxes out around around $108K, right? This S corp also gets about a $10K Section 199A deduction which probably saves about $1200 in income taxes. I’m currently a sole prop and the only employee. But say the S corporation provides $20,000 of health insurance and a companion health savings account. Unfortunately, given the S Corp declaration needs to occur by March 15 (and I already have an LLC – any workaround for this?! In your opinion, is that still borderline in terms of work-ability with this approach? I’m a couple years into my Sole Proprietorship, and while income is growing, *profits* after deductions are around 80-90. Most of the literature I’ve read says you can do it for health insurance, but I haven’t seen anything about the employer match. The S corporation kit uses an LLC. If I make more than that with my main job, does the drop off in savings still make S Corp good idea? Am I missing something? As I understand it, you can only put in 25% of wages on the employer side of the 401k contributions. But here’s where a second trick comes into play. Normally, we sell these for about $40. If you’re only going to one and not the other, you probably ought to do the elective deferral first. 1. Or say the reverse… that you have $20K of pension and $10K of health insurance. My deductions are well under the new standard deduction as I have virtually no business costs since I’m being hired for my skills. To maximize your savings, you want to pay yourself as little as possible. And then make that number even lower-risk by making the optics look good. Okay, I think I see where we’re disconnecting.The above statement is incomplete. yes – S corp can pay for shareholder health insurance. Would converting myself to an S-Corp be a reasonable move given that skeleton outline? So, if you leave some of that money (say $2,000 or $5,000) inside the S corporation (as your rainy-day fund or as part of your taxable portfolio), bingo…that money can’t be reclassified as wages. Your guidebook is the point. But it is only 8.25% of total income, far below even the 40% you suggest is borderline. Based on a 40 hour week, that is ~25%. The S corporation gambit only works well if you can pay yourself a wage that allows you to really save on your self-employment tax bill. The amount paid is added to W2 Box 1 compensation, but not box 3 and box 5, therefore FICA tax exempt. And then that money can’t be reclassified as wages. Form over function? So while the statute says you needed to elect by March 15 to have an S corporation for 2018, you can actually elect way, way, way later. And in that case, they avoid paying any self-employment taxes. Join over 100,000 others on the Mad Fientist email list and start tracking your progress in the FI Laboratory! If you are able to separate the royalty income from the blog income, then you can re-figure your math and the optics look a lot better. The idea is the business would pay for itself initially and we would mostly work for the retirement benefits with one employee taking a taxable annual salary of no more than $12,000 and the other no more than $4,000 until the loan is paid off. I have blog income and book royalties. If you make over $200K, would it make more sense to not have an S corp and benefit from the QBI on the entirety of your income with SS stopping at $132K? Okay, maybe that works for some taxpayers. For these states, you need to double-check your math. The Mad Fientist on specific identification of shares. The IRS audits about 12,000 S corporations a year, and nearly 6,000,000 S corporations exist. If you set your salary too low, the IRS can reclassify distributions paid to shareholders as wages and then slap you with penalties. In this case, the corp treats both the $40K and the $10K as wages and reports $50K in box 1 of Diana’s W-2. Well, if you did want to do something like this, what you would probably do is immediately form a limited liability company. I don’t think you generate a financial benefit by setting up an S corporation to create wages so you can fund a pension. If your business is structured as a sole proprietorship, you wouldn’t receive any Section 199a deduction because you earn too much to qualify. For a married couple, the 15% marginal tax bracket goes pretty damn high: $75,300 in 2016 (which would also include a $12,600 standard deduction AND $8,100 in personal exemptions). In 2019, that limit rises to $132,900. Minimizing shareholder wages maximizes the “Qualified Business Income” (or QBI) that plugs into the Section 199A formula. Note: When you make charitable contributions from an S corporation, the charitable contribution still ends up on the 1040 return. Lots of people use the S corporation gambit (maybe around six million folks but recent IRS data is sketchy). There is a special rule for Wash Sales that needs to be watched out for, but the Mad Fientist wrote a great article about harvesting capital losses that can guide us. « previous next » Print; Pages: « 1 2 3 » Author Topic: Mad Fientist nails it again: Roth IRA Horserace. E.g., say you’re in Texas and you grab the Texas S corporation and follow its instructions. I really appreciate ALL of your time replying to these comments and for writing this article! The bottomline: Your payroll tax savings in this case equal about $5300. If you've enjoyed the last 9 years of ad-free content and want to say thanks, here's how →, Why You Should Form an S Corporation (and When). Also my CPA told me I only have to file every 6 months, but I read somewhere it should be every quarter. Steve operates as a sole proprietorship. This is because I believe that vanilla Roth 401k contributions are not subject to the five year rule, so long as they are rolled over to a Roth IRA that is five-years old. Elton, sorry, I misunderstood… so you’re right that you only pay taxes on your business profit. Required fields are marked *. But the savings come with extra costs and risks. Also, the optics of 8.25% might look pretty bad. School bully type then? I just don’t see how I can pay myself some wage like 40k… because then I can’t pay my bills right. Episode 1076: Specific Identification of Shares by The Mad Fientist on How To Reduce Your Tax Burden on Taxable Investments It’s the Mad Fientist again. Jaco said, “In an S corp, the QBI deduction is 20% of profit …”. But that’s a lot of fiddling. I was confused when trying to set it up and just called their help number. But for some self-employed folks, the S corporation option easily adds a six-figure chunk to your net worth. Trigger or have ability to rollover Roth 401k to Roth IRA that was created five-years ago. Nobody stays more than five again. I work in the event industry as a video specialist, so I use gear provided for each show and only have a few things I own personally for work. Mad Fientist. However, I cannot find any confirmation that Roth 401(k) converted funds are treated the same as vanilla Roth 401(k) contributions. Ended up using Intuit Payroll. If you dissolve that S corporation to bump its qualified business income by $40K, that will bump the Section 199A deduction and increase the Section 199A savings… but not by very much. Oops, forgot to answer the other easy question I should answer. Military servicemembers have access to incredible tax, investing, and travel benefits that can accelerate the journey to FI! Community See All. It provides step-by-step and state-specific instructions for setting up an LLC, getting the LLC an EIN, and then making an S corporation election for the LLC. If I could peal that off self employment income, I might not need an S-Corp at all. If you’re someone who gives to charity (say $1,000 or $2,000 or whatever), you can use some of that $25,000 for your charitable giving. As someone who lives in CA and set up a S Corp a year and a half ago, I wanted to mention a couple things. But they aren’t more important. And here’s the other thing to keep in mind. Regarding book royalties in specific, I think the fact that an author wrote a book X years ago doesn’t mean an S corporation can pay the shareholder-employee “zero.” I get your argument there. If both of the example business owners above have a $10K self-employed health insurance deduction, a $15K pension deduction and another $25K of personal deductions–so $50K in total–that would mean $50K of income subject to income taxes. Further, an S corporation burdens you with additional tax accounting. I can expense about 10 to 15k naturally via normal operating expenses so net 85 to 90k. or. Going mad on the tut! Say she pays herself $40K in base wages and then also provides $10K of health insurance for her entire family. Convert t401k to Roth 401k within a 401k plan during periods of low income. as part of your wages. God mode on! Both are married and take the new standard deduction, $24K. If what a software consultant really does is programming or design, that’s probably not really per the Section 199A deductions a “consulting” activity. Like Brad, I too would like to learn more about the interplay between S-corp wages and deferred compensation. So no “500 hour” rule exists for S corporations. That’s too expensive. sporting set your IP address to group A different geographic area. And what the shareholder saves is $3300-ish in FICA and Medicare taxes. Why does this work? Very informative! SS stops at about $132K, however, medicare costs are ongoing. “The IRS has ruled that an individual who writes only one book as a sideline and never revises it is not regularly engaged in an occupation or profession, and the book royalties are not considered earnings from self-employment.”, https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html. Corporation accounting for state tax purposes 15,000 new posts/day with fewer ads deduction equals... 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