Situation-
W2 income is greater than 170 K - so FICA is maxed there, deductible 401K is maxed there as well
Now there is additional 250K Self employed as LLC
CA resident
Things to consider :
1. Pass through tax credit - is it availabe for Schedule C filer ? or you need S-corp
2. Solo 401k deduction as employer contribution - For LLC (sole prop) - total putaway can by ~50K ( 20% of income),assuming no salary is taken in S-corp can i still put away 50K as employer contribution
3. State fee for LLC fee - $1700 , for S-Corp it is 1.5% ( $3750)
4. LLC Medicare tax paid 3.8% - $9500, S- Corp - None as it is pass thru
Does it make sense to be S-corp? With zero or minimal salary
1. Pass through tax credit requires pass-through income. You can't get that from a schedule C, you'd have to do S-corp or partnership.
2. Solo 401k maxes out at $66,000 for 2023. You can put that in either from your individual return or through the S-corp.
3. That's correct. SO it is $2000 more expensive to be an S-Corp.
4. Also correct. Through the S-corp it is required to pay yourself a reasonable salary. "Reasonable" is one you can back up with evidence. You can't pay yourself a dollar and you shouldn't pay yourself 100% of the net profits. Try and find a job listing for your area on the lowest side of what you do and pay yourself that amount. The difference between that salary's medicare cost and the medicare cost of the entire thing is the savings for the S-corp. Decide once you've done that math whether it is worth it.
1. Pass through tax credit requires pass-through income. You can't get that from a schedule C, you'd have to do S-corp or partnership.
2. Solo 401k maxes out at $66,000 for 2023. You can put that in either from your individual return or through the S-corp.
3. That's correct. SO it is $2000 more expensive to be an S-Corp.
4. Also correct. Through the S-corp it is required to pay yourself a reasonable salary. "Reasonable" is one you can back up with evidence. You can't pay yourself a dollar and you shouldn't pay yourself 100% of the net profits. Try and find a job listing for your area on the lowest side of what you do and pay yourself that amount. The difference between that salary's medicare cost and the medicare cost of the entire thing is the savings for the S-corp. Decide once you've done that math whether it is worth it.
Thank you !!
For clarity can you please opine - In LLC (C - schedule ) you can put away more in solo 401k -that is 25% of entire profit , as all profit is subject to SE tax, But if you have S-corp you can put away only 25% of wages paid as employer match. No additional money can be contributed out of K1 profits pretax -- IRS intent is only income subject to SE taxes can be put away pretax in 401k.
Also is LLC or S-Corp more audit prone ( Statistically), if you may know
Your math is correct. There are lots of alternatives for retirement planning that you can work within. Take a look at additional IRAs and retirement vehicles beyond those solo 401ks.
Audits these days tend to be about the amount that you make vs what type of company you are. Make more money and the world pays attention to you.