I think Social Security maxes out around around $108K, right? Well, if you did want to do something like this, what you would probably do is immediately form a limited liability company. Would converting myself to an S-Corp be a reasonable move given that skeleton outline? All of my borrowers report income to me on 1099-int. 33k = Blog x 25% = $8250 wages. I will definitely be looking into that more! How 401(k) contributions work is a little tricky. 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. Am I missing something? However, what if the conversion occurs in the 401(k) itself? Now just check your email to get your spreadsheet download link! Pretty cool! Note: Self-employment taxes replace the Social Security and Medicare taxes that employees pay and basically work the same way. If what a software consultant really does is programming or design, that’s probably not really per the Section 199A deductions a “consulting” activity. Since the royalties are ~2/3rds of the revenue, using 100k as an example: 67k = Royalties Additionally, the QBI deduction does not fully phase out for a single flier until about $207K. The employer match, which appears on the 1120S corporation tax return, reduces both QBI and the shareholder’s taxable income. The payroll taxes eat up the benefits from any tax deferral. The state tax laws may mean the S corporation isn’t viable. E.g., say you’re in Texas and you grab the Texas S corporation and follow its instructions. Okay, I think I see where we’re disconnecting.The above statement is incomplete. And then make that number even lower-risk by making the optics look good. Employer qualified plan contributions are a deduction to the S corp on the 1120S and therefore reduce profit. Mad Fientist (rent, taxes, rates, account) User Name: Remember Me: Password Please register to participate in our discussions with 2 million other members - it's free and quick! 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! Tip: Usually S corporations don’t work well for side hustles if you have another W-2 job. I have blog income and book royalties. Not Now. 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. And the interplay between Subchapter S and Section 199A gets complicated. We did look at ADP and Paychex as they are the largest of the payroll outsourcing companies. The paragraphs that follow go over the accounting, discuss the costs, and then point out the steps to take if you want to do this. But to really come out ahead on this, you want to save your payroll tax savings. Further, an S corporation burdens you with additional tax accounting. But what if you form an S Corp or sole proprietorship, generate income, and create a friendly Solo 401(k) that allows you to convert? Bummer… I also cannot in good conscience claim to be hiring my wife/kids (a strategy my former accountant was pushing). 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. The Mad Fientist, on your behalf, arranged for our offices to supply complimentary copies of our DIY S Corporation formation e-book. Hi Lynn, MadFIentist actually had you covered on this from the very start. Note: Boxes 3 and 5 of Diana’s W-2 report only $40K of wages because health insurance isn’t subject to FICA or Medicare. I want the business to service the loan required to pay for the business. What are the benefits that prompted me to do it? Has anyone done a t401(k) to Roth 401(k) conversion to beat the 5-year rule and make their ladder shorter? 3. Since that ‘consulting’ answer I gave you, the IRS issued proposed regs… and software programming doesn’t count as consulting. 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. 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. The kit has you set up a Texas LLC ASAP… and then you would make the S election effective for 1/1/2019. Your email address will not be published. If your business is structured as a sole proprietorship, you wouldn’t receive any Section 199a deduction because you earn too much to qualify. 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