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What he said.........
Solo Agent: Sole Propietor, Corporation, or LLC?
- Thread starter MW Agent
- Start date
What he said.........
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Mind clarifying your definition and the difference between earnings and distributions in this context?
- 948
Earnings is the salary you pay yourself and distributions are additional monies you withdraw from your business. Maybe you should have an actual conversation with your CPA about this topic. . .
- 10,328
Base for an employee who sells insurance is different than the situation that you are in. You are a business owner who runs an insurance agency. Even if you are just a 1 man shop the IRS still looks at you as a business owner who runs an insurance agency... not an employee who sells insurance.
Every CPA and Tax Attorney who is worth a damn will tell you that the IRS definition of "reasonable salary", is what it would cost to pay someone who has similar qualifications as yourself to perform your job. So if you had to replace yourself, how much would it cost to hire someone capable of doing that? That is your answer for what a reasonable salary is.
If you are pulling in over $100k then there is no way you should take less than $50k in base salary as a SCorp. When I hit $100k my Tax Attorney told me I needed to raise my base salary up to $55k min. I asked a friend who is a CPA and he confirmed this as well and said he would have me around $60k.
But I dont care what line of business you are in or what part of the country. $20k would not be able to hire someone to perform your duties. No way no how. That is like paying someone $10/h. I would highly recommend that you consult with a Tax Attorney or CPA.
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They arent. CPAs follow the guidelines and general recommendations that are set by the AICPA (american institute of certified public accountants).
Those guidelines (they are based on IRS guidance and regs) state that "reasonable salary" for an Employee/Shareholder of a SCorp is the amount of salary it would take to hire a replacement for that Employee/Shareholder.
Now some CPAs know there guidelines better than others. Just like insurance agents, CPAs all have their area of expertise. And some are just more knowledgeable or more experienced than others.
- 648
Actually- I disagree and so do the 4 CPA's I have consulted w/ over the last couple of years. Approving a low base is quite easy in our industry. I can even bust out my own paperwork proving it. This is why CPA's get paid so much, so we don't have to conjecture.
The other thing my CPA says is that years in the business needs to be taken into consideration as well.
My only argument is whether or not renewal income is passive income or not. I think it should be, but just because I think it should be doesn't mean the IRS will agree with me. So I don't treat it as passive.
- 10,328
Fair enough. Of course all that matters is what the IRS says when you get audited. But I would disagree that approving a low base is easy in this industry if you are an experienced agent. If your CPA is not talking about your replacement value then I would step it up a notch and find a Tax Attorney. They charge more but they also can be held to a higher liability for their advice vs. a CPA. Base salary for a SCorp is based on replacement value when you are audited.. its also based on industry standards for others who hold the same job title as you (agency owner).
Now this can vary and is obviously subject to opinion... it also depends on how much you make each year... but as I said before, if you are pulling in $100k or more you are just asking for trouble if your base salary is only $20k. jmo
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A lot of CPAs stick close to what they call the 60/40 rule. That means 60% Salary and 40% Distributions. In some industries that rule can be flipped to the 40/60 rule. Insurance is likely (imo and others I have consulted with) is one of those industries.
But if you are at $100k and taking $20k, that would be 20/80. Huge red flag. Now if you are only making $50k total, then $20k base would be reasonable.
Here is more about the 60/40 rule from The Journal of Accountancy:
S Corporation Profits or Payday
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- Thread starter
- #48
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There are situations where it doesn't make sense. Typically mid-range income and some of the following applies:
1. You pay your kids a decent sized wage with the intention to get money into their tax bracket to pay for something such as college. No payroll taxes in certain situations as a sole proprietor versus corp taxation.
2. You want to make a large retirement plan contribution in respect to your income. With an S-Corp, if you take a low salary, you are limited to your W-2 income for your contribution base.
I have left the tax portion of my business to be taxed as a sole proprietor for now. My reasoning is Strategy #1 as my kids get older.
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- 10,328
So you are (or will) treat them as W2 employees?
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Great point. I have a few retirement plan clients that had to increase their salary so they could max out their plans.
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Your example would also be the same for a LLC not taking the S-election. Correct?
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To answer your questions:
1. My children are too young to put on payroll yet. However, yes, it would be a W-2. No FICA if under 18 (as a sole proprietor), no FUTA if under age 21. Not so with an S-Corp. Kiddie tax does not apply to earned income, so it allows you to get a good chunck of change to the kid tax free up to the standard deduction. Add in a full IRA contribution beyond it, and it's even better.
2. The same applies to an LLC taxed as a sole proprietor. That was not clear at one point, it is as of now.
