a community of practitioners

How is your business set up?

Hi all,

I've been in practice for several years, and I've always just been an LLC and my taxes are filed as a sole proprietor, with all appropriate schedules. It was recently suggested that I look into switching my business over to an S-Corp so I can pay myself an actual salary (he recommended on the low end of what the average is) and then I can give myself bonuses "for whenever you need extra cash, but you are only taxed on the base salary, and you still count all of your expenses".

I have two therapists who are working as independent contractors and they get a 1099, but I'm confused as to which way to go. How it is right now, I have a business and personal bank account. All expenses for my business come out of my business account, but I split up my deposits between my business and personal accounts, and basically whatever bills are coming up next, I pay. I am often transferring money from my business account to my personal, but I've never had anyone sit down and say "no, this is the best way to do it", so just wondering if anyone here has some advice.

Thanks in advance!

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Permalink Reply by Relax & Rejuvenate on February 6, 2013 at 10:59am

Yes and No.

As an S-Corp, you can make yourself an employee and pay yourself a salary, BUT

You need to set up separate accounts and keep them that way
Your salary has to be "reasonable" given the revenue of the business -- being on the low end may strain this. YOu have to take on the hassle of being an "employer" whjich means monthly payroll tax filings etc.
The "bonuses" you pay yourself are actually "shareholder distributions" which are taxed as income, but are exempt from FICA, FUTA and other payroll taxes. But your distributions have to be "reasonable" in relation to your salary -- meaning certainly not MORE than your salary, but there is no set rule to what "reasonable" is
You can also pay dividends to yourself as a shareholder instead of or in addition to the distributions. These are taxed at the dividend rate (15% for most income brackets...FYI this is how Warren Buffett and Mitt Romney get paid, which makes their tax rate lower than their secretary's)
MAJOR RED FLAG -- since you are an MT, you can't subcontract massage work to other MTs if you are an employee (which is different than your role as a sole proprietor). You have to make them employees. Sub contractors can only do work you are not licensed/qualified to do -- which is why your handyman subs out electrical work and General Contractors sub out almost everything, If you are just having someone tak more of your same kind of work, then you have an employer-employee relationship, and are now responsible for half of their FICA, FUTA, all of UI taxes and WC insurance, which means you will need to restructure your pay scale to others to account for these higher costs.

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Permalink Reply by reba627 on February 6, 2013 at 11:30am

Thanks for the tips. I spoke with my accountant and he suggested I keep myself as an LLC, mainly for most of the reasons you listed.