Should I consider and S Corp?

[Rich_in_Tampa]

One of my favorite scenarios for when I semi-FIRE is to do locum tenens - short, temporary coverage work all over the country. I'd probably do it about .3 to .5 time, with my income designated to live off of while my nest egg grows (hopefully) for a few more years. The hourly wages are mediocre for my field, but all expenses are covered.

It occured to me that this will be self-employed income, and I assume I'd thus pay my usual federal tax plus the 15.x% self-employment tax. Yikes. And maybe even have to pay out-of-state state income tax if the work is done elsewhere. I could easily end up in the 35-40% range, if I am understanding this right.

So, I'm thinking about an S corporation. Since I'll likely be pulling out pretty close to what I'll be earning (I'll need it, plus it would be hard to justify a salary much lower than what I'm actually going to get paid hourly) there won't be much nonwage "distributive" income in the corp. I understand that my wages will be subjecti to self-employment tax even via an S corp.

Before I go see my accountant and lawyer about this, I'm trying to get a sanity check on whether it makes sense, what questions to ask, and so on. Is an S corp reasonable in this situation? Other ideas? With a 35% tax hit, it may not be worth my trouble - might be better off just getting part-time employment, though that doesn't sound half as much fun.

[Arc]

Not sure about Florida laws - a Limited Liability Company (LLC) may be worth considering as well.

[Rich_in_Tampa]

Oh, yeah -- one more reason I'm considering an S corp - hoping to pay my continuation health insurance policy as a deductible benefit provided me by the S corp....

[Brat]

In Alaska, and probably other communities with seasonal population peaks, there are 'traveling nurses'. There may be professional corporations that do that kind of staffing for physicians.

[Rich_in_Tampa]

Originally Posted by Brat

In Alaska, and probably other communities with seasonal population peaks, there are 'traveling nurses'. There may be professional corporations that do that kind of staffing for physicians.

Yes, it's a big business in health care. The locums company finds the assignment, and pays me by the hour, takes care of much of the paperwork, etc. I get paid by them.

They, in turn, take a percent of my charges at the assigned clinic and work all that out with them. Basically, I show up, do my work, and become an hourly independent contractor of the locums company.

[Gumby]

Look into a single member LLC. You get the same pass-through taxation and the same limitation on liability, but the administrative/bookkeeping/reporting hassle is somewhat reduced.

[Rich_in_Tampa]

Originally Posted by Gumby

Look into a single member LLC. You get the same pass-through taxation and the same limitation on liability, but the administrative/bookkeeping/reporting hassle is somewhat reduced.

Liability protection is not an issue - in medical practice the LLC provides none at all. I also think it does not provide a means for deferring or reducing self-employment tax nor the ability to structure benefits unavailable to independent contractors.

So for my purposes, I am guessing (well, educated guessing) that it's an S corp or nothing since these are my biggest issues. I think LLCs work very well for holding investment property and similar deals where you want to limit your personal exposure to the liabilities of the property, etc.

But I may be wrong. Maybe an LLC offers advantages I'm unaware of? Just didn't seem like it from my homework.

[Gumby]

The liability issue is the same in the legal profession -- you are always personally liable for any malpractice. The S Corp or the LLC merely limit your liability for contract-type claims (like rent, equipment leases and the like) and, I believe, are the same in that respect. I also suspect that the rules regarding self-employment taxation and benefits are probably the same (because in both cases you are taking a salary from the entity). I don't know enough about tax to determine whether you can simply retain the earnings at the entity level so that you can realize the income at some later, more advantageous date.

[ESRBob]

Rich,
Nolo has some decent books on the topic: LLC or Business? and Incorporate Your Business by Anthony Mancuso. Being a professional makes a difference. You can have any company pay for your health insurance, though, up to the limit of your profits, so in your case you should be fine on that front no matter which form you choose. (Though you should be sure to use the "company checkbook" --it may be a personal account that you use just for company stuff, or that you slip a "DBA" into the second line of the address-- to write your insurance premiums if you are a sole proprietor. There was a recent IRS Headliner which is leading accountants to interpret things in this way -- real hair splitting, but that's the world we live in)

[Martha]

Gumby, most lawyers believe that all income from an LLC that provides personal services will be subject to income tax and self employment tax and you can't distribute earnings as a dividend.

Frankly, for Rich's situation I would treat all the earnings as income from employment no matter what the entity, so for either entity or no entity at all he would have to pay income tax on earnings and self employment tax.

Rich probably wouldn't get any advantage from a liability standpoint in having a LLC or S Corp.

So, the last issue is whether he would get to deduct any expense as an entity that he couldn't deduct as a sole proprietor. Business expenses you can deduct no matter what kind of entity. I don't know where things are at with health insurance premiums-- though it looks like from what Bob says that so long as you use a business account or dba you should be fine. I don't know if there are restrictions on the type of policy and whether premiums on retiree policies from previous employment would be deductible as a business expense. I would check that out with an accountant on the insurance issues.

[Rich_in_Tampa]

Sounds like the benefits of an S corp are minimal in my situation, probably not worth the startup and accounting expense.

I'm gathering that the only substantial advantage would be if a) it would allow greater deductibility of health insurance - unlikely it seems, b) I planned a defined-benefit retirement plan within the S-corp, which I don't or c) the corporation would accumulate assets/profit well above my 'reasonable' wages, which could be distributed more favorably than salary (which it won't).

I guess I have to count on giving back 35% of every post-FIRE dollar to the IRS. Even more, since much of this income would be earned in states with state income tax, unlike Fla or Tx.

One angle I hadn't considered before: is it legal and plausible to set up a 401k in the S corp, contribute virtually all of my earnings to the 401k (leaving little or no income behind), and live off of other savings (ordinary income to me from my IRA, or even post-tax savings for example) and thus avoid the self-employment tax? When I finally tap that s corp's 401k (after full retirment) would it still be subject to the self-employment tax or will I have avoided it?

Hmm... the issue of SE tax on top of outside state income tax is big enough to make me rethink what I do in semi-FIRE. For example, taking part-time employment within Fla saves me 7.x% SE tax plus an estimated 5-7% state income tax, for a total of 12-15% out-of-pocket savings compared to independent contractor work as a locum tenens. That ain't chicken feed.

[Martha]

We need an accountant online. When you have a solo 401k for your business, part of the contribution is employer contributions and a part is employee contributions. It is possible that they are treated differently for purposes of determining self employment income and self employment tax, but I really don't know.

You might want to post that quesion on the forums at Tax Guide for Investors.

One thing you could do is work through the worksheets starting on page 20 of this publication:
http://www.irs.gov/pub/irs-pdf/p560.pdf

[millerjwm]

An accountant that I work with thinks it would be a good idea for me to form an S-Corp for my small one-person computer consulting practice just on the grounds that the IRS likes to audit self employed individuals that use Schedule C. He thinks that there is a lower probability of audit when deductions are taken on a corporate return instead of on Schedule C.

Due to intertia, I have not formed a corporation.

Jim

[OAG]

If the liability aspect can be covered through insurance or by the contract provider I would think the Schedule C is the way to go. I would not worry about deductions unless you do not document or inflate them (no $5,000 side fishing trips up in Alaska while you work a week or so in Fairbanks). Besides, you stated expenses are paid by the contract provider. You will pay both sides of the SS/MC (employee and employer), all net income (income less expenses) is taxed at your individual rate. Setting up a schedule C company is pretty simple (see the IRS for getting a EIN (if necessary)) and with the State of FL about getting a SIN for any employee employment taxes you will have to send them (believe the current rate is about .08% of net income with about the first $8K excluded).

[Rich_in_Tampa]

Originally Posted by R Wood

If the liability aspect can be covered through insurance or by the contract provider I would think the Schedule C is the way to go. ...

Thanks. Not sure I see the advantage of incorporating at all (C or S) if neither helps with self-employment tax, the more I learn (assuming the corp won't retain significant assets). Audit risk is one, but I play it pretty safe and can likely survive that event.

Any other serious benefits you can think of?

[MikeD]

My wife incorporated in the late '90s to become a software consultant. Her accountant and an incorporation lawyer both reccommended being an S corp so that she could open pension plan and profit sharing funds as tax deferred retirement plans. These have much larger upper limits than 401Ks and IRAs. Vanguard was very helpful in setting them up.

Also, the fact that it "is" an S corp is "too the best of our recollection" as we both can't remember exactly. I know this may not appear to help much, but back then there were distinct differences between two kinds of corps and these tax deferred plans swayed us one way over the other.

Mike D.

[Brat]

Originally Posted by Rich_in_Tampa

Even more, since much of this income would be earned in states with state income tax, unlike Fla or Tx.
....

Hmm... the issue of SE tax on top of outside state income tax is big enough to make me rethink what I do in semi-FIRE. For example, taking part-time employment within Fla saves me 7.x% SE tax plus an estimated 5-7% state income tax, for a total of 12-15% out-of-pocket savings compared to independent contractor work as a locum tenens. That ain't chicken feed.

WA has no income tax. I don't think Alaska or Wyoming does either. These areas are a looooog way from your stomping grounds but the summers can't be beat. Watch out for sneaky business taxes on service providers (based on my theory that nothing comes from nothing). I think that Wyoming is still living off natural resource severance taxes.

[eridanus]

Yes, 100% of health insurance premiums are income tax deductible whether it's an LLC, S-Corp, or just a plain ol' 1099.

If you're travelling, you can take advantage of per diem.

I think it's easiest to just increase your rate by 7.5% to pay for the "employer" side of the SE tax.

Also, at least in my profession, some employers don't like dealing with 1099 employees, but they will do a corp-to-corp deal. You may want to establish a company for this type of situation.

[SecondCor521]

Have you asked the locum tenens company whether it will be SE income or not?

My Dad did that work for about five years after he retired from his practice and really enjoyed it. He worked for an LT company that basically did all the administrivia, paid for the malpractice insurance, set up the hotel, the rental car, everything. I don't know if he was paid as an employee or as a contractor. Based on what little I know about IRS rules on the subject, I think you would be treated more like an employee than a contractor.

It seems like you may be putting the cart before the horse.

2Cor521