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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: madmax on March 11, 2017, 09:12:38 AM

Title: S-Corp vs LLC for contract role
Post by: madmax on March 11, 2017, 09:12:38 AM

So I'm going to be working as a consultant this year and am having a hard time dealing with the tax implications. My plan is to defer 53K into a solo 401k and seek to minimize taxes on the rest as well so I've started an LLC.

Should I elect to file as an S-Corp by filing form by filing form 2553 in order to save on Medicare taxes? I was planning on doing this and paying myself 140K in salary in order to maximize my 401k contributions (25%) and take the rest (120K) as a distribution. Is that a reasonable ratio to avoid an audit?

Title: Re: S-Corp vs LLC for contract role
Post by: Axecleaver on March 11, 2017, 01:44:45 PM

Yes, this is a valid strategy. For a solo 401k, your contribution limit is $18000 plus 20% of your self employment income, or 25% of your salary (see pub 560 for details). You need a salary of 140k to get there.

Popular wisdom on meeting the "reasonable compensation" test is that if you pay the FICA max of $118,500, you're relatively safe. You could also point to salary surveys for the type of job you're doing, and compare the average to what you're taking.