Author Topic: Self-Employed S Corp Question  (Read 1403 times)

REIgal

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Self-Employed S Corp Question
« on: April 26, 2018, 09:04:30 AM »
Hi, everyone.  I found this blog a few weeks ago and have blasted through every article.  I'm totally hooked and excited to have found this community!  I'm in the process of restructuring just about everything in my life in order to reach FI in seven years.

With that being said, I am self-employed and have an S Corp that was set up last year.  I W2 myself out of that S Corp but there are a good amount of profits left in the business that are just sitting there.  I would obviously like to invest with those profits.  Once I max out the tax deferred vehicles what is the best course of action?  Investing corporate profits in an index fund?  I'm a real estate investor and would love to use those funds for that purpose but I've read that I don't want to hold rentals in a corporation.  Does anyone out there also have an S Corp?  I'd love feedback and advice.

Thank you all!

TVRodriguez

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Re: Self-Employed S Corp Question
« Reply #1 on: April 26, 2018, 09:37:35 AM »
I suggest you speak with a CPA.  An S-corp is a flow-through entity, meaning the net profits flow through to you and are taxable income.  So whether you keep them in the business account or move them to your personal account, they are still already taxed to you.  You say that the profits are "left in the business" which leads me to believe that you have them in the business account.

REIgal

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Re: Self-Employed S Corp Question
« Reply #2 on: April 26, 2018, 11:47:45 AM »
Correct, I have them in a business account.  Setting up my business this way was suggested to me by my CPA.  Since I'm paying myself a monthly paycheck I am being taxed on the money I take out of the business, not what's being left in the business.  At least that's my understanding according to what my CPA has told me.

REIgal

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Re: Self-Employed S Corp Question
« Reply #3 on: April 26, 2018, 11:49:21 AM »
So, basically, what do I do with the rest of it to make sure it's not just sitting in the bank?

oldmannickels

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Re: Self-Employed S Corp Question
« Reply #4 on: April 26, 2018, 12:02:44 PM »
Correct, I have them in a business account.  Setting up my business this way was suggested to me by my CPA.  Since I'm paying myself a monthly paycheck I am being taxed on the money I take out of the business, not what's being left in the business.  At least that's my understanding according to what my CPA has told me.

No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.

Rocketman

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Re: Self-Employed S Corp Question
« Reply #5 on: April 26, 2018, 12:20:34 PM »
Talk to your accountant BEFORE investing in the S-Corp. I recommend to my clients to do distributions into their personal account - and then invest personally. It just works better! 

You can pull out you AAA anytime, you have already been taxed on it.


tralfamadorian

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Re: Self-Employed S Corp Question
« Reply #6 on: April 26, 2018, 12:25:44 PM »
Correct, I have them in a business account.  Setting up my business this way was suggested to me by my CPA.  Since I'm paying myself a monthly paycheck I am being taxed on the money I take out of the business, not what's being left in the business.  At least that's my understanding according to what my CPA has told me.

No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.

+1

If you had a C corp, then there would be a tax division between you and the corp. For an S corp, it's all the owner(s)' taxable income.

I do a monthly distribution from my S corp of funds in excess of my preferred monthly cash float.

woopwoop

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Re: Self-Employed S Corp Question
« Reply #7 on: April 26, 2018, 12:27:24 PM »
No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.
There's no self employment tax on profits above the reasonable salary for an S corp, is probably what he's talking about. It's still taxed as ordinary income, just no extra self employment tax or payroll tax.

I set up a solo 401k that helped shelter a ton of money from taxes, since you can contribute both as an employer and an employee. The limit is $55k so it's really nice if you're making a bunch of money and can save a lot of it.

REIgal

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Re: Self-Employed S Corp Question
« Reply #8 on: April 26, 2018, 01:03:25 PM »
Goooot it.  Thanks MrsWhipple!  This makes sense and is probably why he wanted me to set one up.  Thank you!

If there's a surplus beyond the 55k solo 401k contribution what do you do?  Do you take dividends?  Or invest the money inside the corporation?

REIgal

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Re: Self-Employed S Corp Question
« Reply #9 on: April 26, 2018, 01:07:30 PM »
Correct, I have them in a business account.  Setting up my business this way was suggested to me by my CPA.  Since I'm paying myself a monthly paycheck I am being taxed on the money I take out of the business, not what's being left in the business.  At least that's my understanding according to what my CPA has told me.

No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.

+1

If you had a C corp, then there would be a tax division between you and the corp. For an S corp, it's all the owner(s)' taxable income.

I do a monthly distribution from my S corp of funds in excess of my preferred monthly cash float.

Thanks for the reply.  You opt to take the distribution rather than investing as the business?  I'm looking for pros/cons to both.  If I keep the business operational even when I'm retired I can continue to fund my healthcare, etc out of it.  That's why I'm looking at keeping funds in it and investing that way.  But if it makes more sense to just issue dividends I can do that too.  I'm new to all of this so I'm trying to wrap my brain around it.

REIgal

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Re: Self-Employed S Corp Question
« Reply #10 on: April 26, 2018, 01:08:38 PM »
Talk to your accountant BEFORE investing in the S-Corp. I recommend to my clients to do distributions into their personal account - and then invest personally. It just works better! 

You can pull out you AAA anytime, you have already been taxed on it.

My accountant was the one who set up the corporation.  Do you think I should seek a second opinion?

TVRodriguez

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Re: Self-Employed S Corp Question
« Reply #11 on: April 26, 2018, 01:10:13 PM »
No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.
There's no self employment tax on profits above the reasonable salary for an S corp, is probably what he's talking about. It's still taxed as ordinary income, just no extra self employment tax or payroll tax.

I set up a solo 401k that helped shelter a ton of money from taxes, since you can contribute both as an employer and an employee. The limit is $55k so it's really nice if you're making a bunch of money and can save a lot of it.

What s/he said. 

Another retirement account option for a self-employed person with an S-corp is a SEP-IRA, which allows you to put up to 25% of your W-2 income into a retirement investment account.  But if you have other employees besides yourself, you'll have to consider them for either a 401k or SEP-IRA.  Also, the deadline already passed for setting up either one to use for last year's income.

tralfamadorian

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Re: Self-Employed S Corp Question
« Reply #12 on: April 26, 2018, 01:20:22 PM »
Thanks for the reply.  You opt to take the distribution rather than investing as the business?  I'm looking for pros/cons to both.  If I keep the business operational even when I'm retired I can continue to fund my healthcare, etc out of it.  That's why I'm looking at keeping funds in it and investing that way.  But if it makes more sense to just issue dividends I can do that too.  I'm new to all of this so I'm trying to wrap my brain around it.

Distributions are made after all expenses are accounted for including expansion spending or funds being set aside for future expansion expenses. It's not an either/or.

REIgal

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Re: Self-Employed S Corp Question
« Reply #13 on: April 26, 2018, 01:22:47 PM »
No you are taxed on all income irregardless of whether or not you take it out of the business. Taking a distribution from a S-Corp is normally not a taxable event.
There's no self employment tax on profits above the reasonable salary for an S corp, is probably what he's talking about. It's still taxed as ordinary income, just no extra self employment tax or payroll tax.

I set up a solo 401k that helped shelter a ton of money from taxes, since you can contribute both as an employer and an employee. The limit is $55k so it's really nice if you're making a bunch of money and can save a lot of it.

What s/he said. 

Another retirement account option for a self-employed person with an S-corp is a SEP-IRA, which allows you to put up to 25% of your W-2 income into a retirement investment account.  But if you have other employees besides yourself, you'll have to consider them for either a 401k or SEP-IRA.  Also, the deadline already passed for setting up either one to use for last year's income.

Awesome, thank you.  So max out retirement funds is the way to go.  I know there was an MMM blog about how to access those funds without penalty when you reach FI but I'm going to have to do more research on that.  I don't want to be super set up for 59 and 1/2 but not able to be FI sooner.  Can anyone link me to info on that subject?

Also, you guys are awesome. 

woopwoop

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Re: Self-Employed S Corp Question
« Reply #14 on: April 26, 2018, 05:37:34 PM »
SEPIRA is a lot easier to set up than a solo 401k but also has lower limits depending on your income (and I seem to remember SIMPLE IRAs are a decent alternative to SEP but I don't remember the reasons). Honestly, I wouldn't worry too much about withdrawal regulations as they stand now because legislation can change in the future but there will always be loopholes to access your funds, including rolling over your 401k into an IRA once your business is finished. Just try to keep a good mix of IRA/401k/taxable funds and you'll be fine. Whitecoatinvestor has a good blog that applies a lot to entrepreneurs even if you're not a doctor, so I'd check that out if you want some extra fun reading.


REIgal

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Re: Self-Employed S Corp Question
« Reply #15 on: April 27, 2018, 08:38:19 AM »
SEPIRA is a lot easier to set up than a solo 401k but also has lower limits depending on your income (and I seem to remember SIMPLE IRAs are a decent alternative to SEP but I don't remember the reasons). Honestly, I wouldn't worry too much about withdrawal regulations as they stand now because legislation can change in the future but there will always be loopholes to access your funds, including rolling over your 401k into an IRA once your business is finished. Just try to keep a good mix of IRA/401k/taxable funds and you'll be fine. Whitecoatinvestor has a good blog that applies a lot to entrepreneurs even if you're not a doctor, so I'd check that out if you want some extra fun reading.

Thanks so much!  Very helpful.

Proud Foot

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Re: Self-Employed S Corp Question
« Reply #16 on: April 27, 2018, 08:53:40 AM »
@REIgal you might try to PM your question to @SeattleCPA. They are the most knowledgeable on this forum (that I am aware of) in the area of S-Corps and taxes as that is their specialty. (Although they may respond here since I tagged them

Finallyunderstand

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Re: Self-Employed S Corp Question
« Reply #17 on: April 27, 2018, 09:13:08 AM »
I have an S-Corp set up for my real estate endeavors as well.  As many have mentioned, you are taxed regardless.  Take your income as planned throughout the year and then do one lump-sum distribution to yourself per year to put the money into your personal account and invest like normal. 

REIgal

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Re: Self-Employed S Corp Question
« Reply #18 on: April 27, 2018, 06:32:08 PM »
I have an S-Corp set up for my real estate endeavors as well.  As many have mentioned, you are taxed regardless.  Take your income as planned throughout the year and then do one lump-sum distribution to yourself per year to put the money into your personal account and invest like normal.

Fantastic, thank you!

REIgal

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Re: Self-Employed S Corp Question
« Reply #19 on: April 27, 2018, 06:32:46 PM »
@REIgal you might try to PM your question to @SeattleCPA. They are the most knowledgeable on this forum (that I am aware of) in the area of S-Corps and taxes as that is their specialty. (Although they may respond here since I tagged them

Thanks so much!

tralfamadorian

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Re: Self-Employed S Corp Question
« Reply #20 on: April 27, 2018, 06:58:14 PM »
To throw in my two cents on SepIRA vs SE401k, I have a SE401k and the paperwork took maybe a couple of hours including a phone call to Fidelity with a question. If you decide that a SepIRA meets your needs better than a SE401k, great but don't let difficulty to set up be part of the decision process.

evme

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Re: Self-Employed S Corp Question
« Reply #21 on: April 28, 2018, 02:45:21 AM »
To throw in my two cents on SepIRA vs SE401k, I have a SE401k and the paperwork took maybe a couple of hours including a phone call to Fidelity with a question. If you decide that a SepIRA meets your needs better than a SE401k, great but don't let difficulty to set up be part of the decision process.

Agree with this. SE401k is not difficult at all to setup, and the only tax filing requirement is when the account exceeds $250k.