Need help with small business retirement plan

[Scout]

Hi, I'm a 39 yr old ER doc and trying my hardest to create some passive income to follow me into FIRE. I have always functioned as an independent contractor while working in the emergency department utilizing a SEP to fund my retirement. I've recently opened an urgent care which is run primarily by PA's and FNP's. My problem is that now that I have employees I can no longer really use a SEP as I can't afford to fund all of my employees retirement~~~12 employees total. I'm kinda new to how retirement plans work from a small business owner's perspective. My accountant has been less than helpful. At this point all of the money I save while working in the ER as well as the money I generate from my urgent care is going into a taxable account.......any advice would be appreciated


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[samclem]

I can't offer any tips about your new urgent care endeavor, but if you will continue as an independent contractor in your ER work, I'd recommend you start using a solo 40(k) in place of your SEP. It will allow you to put away more money tax-deferred (about $17,500 more than a SEP).

A comparison of plans is here.

I think you'll want to keep the two businesses separate for purposes of your retirement plans.

 

[Scout]

Really?! Right now I can put away about 52k......how much can I with the solo?


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[dallas27]

Most accountants suck at maximizing retirement accounts. I find it unbelievable they know so little, but time after time i see it.

Depending on your structure, taking dividends could be the best way to take the cash, just invest in taxable. Now that you have employees, you have to offer them the same matches, tuition reimbursement, etc, that you give yourself. What is your business structured as?


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[Scout]

Pllc


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[samclem]

Really?! Right now I can put away about 52k......how much can I with the solo?

If you are under age 50, the 2014 cap is $52K for either a SEP or a Solo 401K, the difference is that you can reach the cap with a lower income level with a Solo 401K than with a SEP. If you are 50 or older, the total Solo 401K cap is $57,500, the SEP stays at $52K.

SEP: Max employer contribution is 25% of income, so a person would need to earn $208K to contribute $52K. No employee contribution.

Solo 401K: You contribute both as the employer and the employee. As the employee, you can contribute up to $17,500 ($23,000 if over age 50). This can be every dollar of the first dollars you earn. Then the employer contribution can be up to 25% of your total pay, too. So, you can reach the $52K max total contribution after earning just $138K.

It's not quite as simple as that for a couple of reasons (esp Self-employed tax deductions, etc), all numbers above are approximate, etc, but that's the basic idea. The impact of self-employment taxes, the 1402(a)(12) deduction, etc can be considerable. The calculator here will consider these things and show your max contribution for a SEP, Solo 401K, Simple, etc. For all income levels, the Solo 401K will allow a higher contribution amount, until you hit the cap (and, the cap is higher for the Solo 401k when you are over 50). For example, the calculator shows a 51 year old with earned income of $150K can contribute over $51K to a Solo 401K, but just $28K to a SEP. For the 51 YO at $200K earned income: Solo 401K =$57,500 (capped) , SEP = $38K

If you are earning enough to hit the $52K cap using your SEP and you are under 50, then maybe stick with that. But if you are over 50 or if you expect your earnings from the ER gig to be less than approx $275K (maybe devoting more time to the urgent care biz?), then the Solo 401K might be. . . wait for it . . . just what the doctor ordered.

Again, this just concerns you sole employee ER independent consulting business, it has nothing to do with your new business with additional employees. If you keep them separate, I think you can fully utilize the Solo 401K for your ER income. For the other biz, you'll have to do something else (or nothing at all, if you are satisfied with the amount you can put away in the Solo 401K. There's no law saying you have to offer a retirement plan to employees, though it might help you attract and keep the ones you want. Or, maybe it won't.)

I'm just a know-nothing on the interwebs, hopefully your accountant has already explored these options with you.

 

[dallas27]

Do you have a spouse you can put on the payroll? Downside, more fica. Upside, more SS payout, and up to 52k more deferred savings potential.

Otherwise, i think you are in a spot where you have to start sharing with your employees. Consider raising prices to compensate. You be surprised, many won't save much at all.


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[Scout]

If you are under age 50, the 2014 cap is $52K for either a SEP or a Solo 401K, the difference is that you can reach the cap with a lower income level with a Solo 401K than with a SEP. If you are 50 or older, the total Solo 401K cap is $57,500, the SEP stays at $52K.

SEP: Max employer contribution is 25% of income, so a person would need to earn $208K to contribute $52K. No employee contribution.

Solo 401K: You contribute both as the employer and the employee. As the employee, you can contribute up to $17,500 ($23,000 if over age 50). This can be every dollar of the first dollars you earn. Then the employer contribution can be up to 25% of your total pay, too. So, you can reach the $52K max total contribution after earning just $138K.

It's not quite as simple as that for a couple of reasons (esp Self-employed tax deductions, etc), all numbers above are approximate, etc, but that's the basic idea. The impact of self-employment taxes, the 1402(a)(12) deduction, etc can be considerable. The calculator here will consider these things and show your max contribution for a SEP, Solo 401K, Simple, etc. For all income levels, the Solo 401K will allow a higher contribution amount, until you hit the cap (and, the cap is higher for the Solo 401k when you are over 50). For example, the calculator shows a 51 year old with earned income of $150K can contribute over $51K to a Solo 401K, but just $28K to a SEP. For the 51 YO at $200K earned income: Solo 401K =$57,500 (capped) , SEP = $38K

If you are earning enough to hit the $52K cap using your SEP and you are under 50, then maybe stick with that. But if you are over 50 or if you expect your earnings from the ER gig to be less than approx $275K (maybe devoting more time to the urgent care biz?), then the Solo 401K might be. . . wait for it . . . just what the doctor ordered.

I'm just a know-nothing on the interwebs, hopefully your accountant has already explored these options with you.

Lol......thanks for the thoughtful response. Very informative. I'm afraid I've been on cruise control with my sep without looking at other options. I'm 39 so likely the SEP will be fine except now that I have employees and I don't think I can provide a retirement for them if they all contributed and maxed it out.


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[Scout]

Do you have a spouse you can put on the payroll? Downside, more fica. Upside, more SS payout, and up to 52k more deferred savings potential.

Otherwise, i think you are in a spot where you have to start sharing with your employees. Consider raising prices to compensate. You be surprised, many won't save much at all.


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I have a spouse, but she is co-owner and director (both ER docs). I think you're right.....I'm gonna have to start sharing and I also think your correct in saying they probably won't save.......kudos to the check to check employees I guess.
Thanks again


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[samclem]

Lol......thanks for the thoughtful response. Very informative. I'm afraid I've been on cruise control with my sep without looking at other options. I'm 39 so likely the SEP will be fine except now that I have employees and I don't think I can provide a retirement for them if they all contributed and maxed it out.

I revised my post later, so perhaps take another look at it. I think your ER biz will be/should be entirely separate from your new urgent care biz. You won't have employees in the ER business, so you can still use a Solo 401K. The retirement account options for your other business are a separate issue.

 

[Scout]

I revised my post later, so perhaps take another look at it. I think your ER biz will be/should be entirely separate from your new urgent care biz. You won't have employees in the ER business, so you can still use a Solo 401K. The retirement account options for your other business are a separate issue.

That's exactly what I was hoping, but my accountant insists that this is not true. Whatever retirement account I provide for myself I must provide for my employees even if it's under a completely separate business. My ER gig I'm incorporated as an s-corp with only one employee......me. Unfortunately he says it no longer can function like that since I have this other business. Please tell me he's wrong


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[someguy]

That's exactly what I was hoping, but my accountant insists that this is not true. Whatever retirement account I provide for myself I must provide for my employees even if it's under a completely separate business. My ER gig I'm incorporated as an s-corp with only one employee......me. Unfortunately he says it no longer can function like that since I have this other business. Please tell me he's wrong


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I can't answer this for you but I'm sure someone else can/will. Another idea to consider is if you put one business in your name and the other in the SO's. I don't know if that gets you enough separation or not but it might.

 

[samclem]

Please tell me he's wrong.

I'm not qualified to argue with an accountant, but I don't think he's right. What, he's saying you can't have two businesses? I know lots of people who operate multiple businesses. The type of work is entirely different, your billing/compensation is different (I assume you get a 1099 from the hospital for the ER work), etc. Set up separate banking accounts and keep separate books and I'd think you'd be good to go.

In addition to any tips you get here, I'd recommend you visit the Fairmark site--there are lots of tax experts there, and a search of their forum might turn up some useful questions that apply to your situation. Then, I'd get a second opinion from another accountant, maybe get a recommendation from a doctor friend who owns more than one business.

Good luck.

 

[someguy]

I don't think OP's accountant is telling him he can't have two businesses. He's telling him that if ANY of his businesses have employees other than himself and SO, then some of the best pre-tax savings plans (SEP and i401k) are either unavailable or he has to match his own benefits to all employees.

 

[dallas27]

If your businesses truly are separate financially and legally, you should be golden. If you are funneling money from one to the other, then the accountant is right.


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