S-Corp Salary Deferal
I have a regular day job that provides good income. I also do side work, the income of which I don't really need, but has come in useful from time-to-time. This work is currently paid through 1099-MISC to me.
I have maxed-out my 401(k) at my regular day job.
I would like to form an S-Corp and have all my side work paid to the S-Corp.
1. Can I _not_ take a salary from the S-Corp until I actually need to - say two, five, or ten years down the road? The money from the side consulting job would just accumulate in the S-Corp.
2. Can I take a minimum salary from the S-Corp, say $15,500 with a corresponding 401(k) setup through the S-Corp, with the S-Corp matching the allowable amount? My taxable income from the S-Corp would then be $0.
In the end, I would like to use the S-Corp as a "rainy-day" fund, the income of which can be deferred for several years. The idea is that if I take early retirement from my regular job, I can then draw a salary from the S-Corp at a lower tax rate than my current personal income rate. Obviously, I will need to do the "numbers" to see if the S-Corp's SE, Medicare, etc. taxes make doing this worth-while.
Thanks - excellent web site!
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When an S-Corp doesn't help you...
Hi,
Actually, this is an excellent example of when you would pay more in taxes as an S-Corp than as a 1099, sole-proprietor. The reason is the way employment taxes differ from self-employment taxes.
Let's assume that you make at least $100K in your "regular" job so you max out the social security tax which is only on the first $97,500 of salary.
If you're taxed as a sole-proprietor, normally you would pay self-employment tax in addition to income tax. However, since you already pay the maximum in social security tax through your regular job, you don't have to pay that portion of the tax, so you only end up paying 2.9%, the Medicare portion, of the self-employment tax on your business's net income.
On the other hand, if you're taxed as an S-Corporation, you are a statutory employee of the S-Corp & it should pay you a reasonable salary. Your wages from the S-Corp are subject to the full employment tax (12.4% for Social Security & 2.9% for Medicare) starting from dollar one, even though you may have already enough salary from your other job to max out your withholdings. You can recoup the excess social security that was withheld from your pay check from the S-Corp, but there's no way for your company to get back the taxes it pays. The end result is you end up paying 6.2% more in employment related taxes in this case.
Your idea with the 401(k) wouldn't work because your maximum contributions are for all 401(k) plans that you participate in. It is not a maximum per plan. Also, your 401(k) contributions are subject to social security & Medicare taxes so you'll still end up over paying those.
You'd be better off to be taxed as a sole-proprietor & just pay the 2.9% SE Tax. You can always put the extra money you earn in a tax efficient mutual fund and use that money to live on later.
Hope this helps!
L:)
Need protection for personal assets, so LLC seems right
Thanks. I will need to set something up to protect my personal assets from litigation, if any, from the side work.
Since the S-Corp pays more in employment taxes, it seems the LLC is the best way to go - provides for protection of personal assets and the income comes straight through to my personal income tax.
I now need to decide to move to a state that is small business friendly and personal income tax friendly ;)
Thanks. As my kids say, a gold star for you!
What if you are an LLC
What if you are an LLC taxed as an S*Corp? Do you still lose the 6.2% the company pays?
LLCs Taxed as S-Corps
If you've elected to have your LLC taxed as an S-Corp then the corporate tax rules apply to all types of federal taxes, income & employment. So, yes in this specific situation you would not be able to recoup the 6.2% of SS tax paid.
L:)