Author Topic: Can brokerages help me with small business tax and retirement?  (Read 1402 times)

misterno

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Can brokerages help me with small business tax and retirement?
« on: September 11, 2015, 08:26:13 AM »
Income from 9-5 job: 110K

Income from side business: 35K (sole proprietorship)

401k : 120K (empower which was Putnam) All in Putnam 500 SP Index fund

Regular IRA : ~30K (Vanguard) All in VSGAX

No mortgage, house is all paid for.

Spouse not working and have 1 child.
----------------------------------------------------------

I wish I can find a one shop solution where my

1-checking account
2-IRA
3-Small business structure ( I want to convert my business from sole proprietorship to S-corp)
4-Small business tax (should I add my wife to the business as partner? and annual tax filing)
5-Business 401k or SEP IRA (I don't have it yet but I want to establish one)

all in the same place.
------------------------

So who or which brokerage can give me all this?

I went to Fidelity last month to ask questions about 3-4-5 but the help was very superficial not as deep as I wanted. Basically they have no tax experts.

Any thoughts?
Modify message

dandarc

  • Magnum Stache
  • ******
  • Posts: 3469
  • Age: 36
Re: Can brokerages help me with small business tax and retirement?
« Reply #1 on: September 11, 2015, 08:36:23 AM »
If you are happy with your 401K at your day job, you could max the deferral there (18K or 24K if over 50).  If you do that, then go with a SEP-IRA for your side-business.  It is simpler than a SoloK, and if you don't need the employee-deferral contributions, the SoloK has no advantage.

Do you have employees in your side business?  Doesn't read like you do, but if you do, take that into account - your business retirement plan covers all employees, so you'd want to be careful there.

And the one shop that will do the best job for all of this is called "misterno".  None of the stuff on your list is very complicated.  Learn, then execute the plan.  Any one-stop solution will cost you money.

Finally, I'm curious why you want to be an S-Corp in your side business?  Usually it is to save on self-employment taxes, but in your case, I'm not sure there is all that much tax you could save.

misterno

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Can brokerages help me with small business tax and retirement?
« Reply #2 on: September 11, 2015, 09:40:17 AM »
If you are happy with your 401K at your day job, you could max the deferral there (18K or 24K if over 50).  If you do that, then go with a SEP-IRA for your side-business.  It is simpler than a SoloK, and if you don't need the employee-deferral contributions, the SoloK has no advantage.

Do you have employees in your side business?  Doesn't read like you do, but if you do, take that into account - your business retirement plan covers all employees, so you'd want to be careful there.

And the one shop that will do the best job for all of this is called "misterno".  None of the stuff on your list is very complicated.  Learn, then execute the plan.  Any one-stop solution will cost you money.

Finally, I'm curious why you want to be an S-Corp in your side business?  Usually it is to save on self-employment taxes, but in your case, I'm not sure there is all that much tax you could save.

I maximized my IRA and 401k in my day job already

The reason I want to switch to S corp because the salary is taxed but the distribution is not. Essentialy this means I don't have to pay taxes on almost 50% of my profit. So why are you saying there is no advantage in converting to S Corp? Can you be more specific?

Also, I have no employees.

The reason I am willing to do solo 401k instead of SEP IRA is because SEP IRA is limited to 5,500 whereas solo 401k has a cap of $53,500 or (25% of my income - 18,500) whichever is lower. So any thoughts on that?
« Last Edit: September 11, 2015, 09:42:45 AM by misterno »

dandarc

  • Magnum Stache
  • ******
  • Posts: 3469
  • Age: 36
Re: Can brokerages help me with small business tax and retirement?
« Reply #3 on: September 11, 2015, 11:58:26 AM »
If you are happy with your 401K at your day job, you could max the deferral there (18K or 24K if over 50).  If you do that, then go with a SEP-IRA for your side-business.  It is simpler than a SoloK, and if you don't need the employee-deferral contributions, the SoloK has no advantage.

Do you have employees in your side business?  Doesn't read like you do, but if you do, take that into account - your business retirement plan covers all employees, so you'd want to be careful there.

And the one shop that will do the best job for all of this is called "misterno".  None of the stuff on your list is very complicated.  Learn, then execute the plan.  Any one-stop solution will cost you money.

Finally, I'm curious why you want to be an S-Corp in your side business?  Usually it is to save on self-employment taxes, but in your case, I'm not sure there is all that much tax you could save.

I maximized my IRA and 401k in my day job already

The reason I want to switch to S corp because the salary is taxed but the distribution is not. Essentialy this means I don't have to pay taxes on almost 50% of my profit. So why are you saying there is no advantage in converting to S Corp? Can you be more specific?

Also, I have no employees.

The reason I am willing to do solo 401k instead of SEP IRA is because SEP IRA is limited to 5,500 whereas solo 401k has a cap of $53,500 or (25% of my income - 18,500) whichever is lower. So any thoughts on that?
The total limits on SEP IRA and the SoloK are the same - $53K.  SEP IRA is not at all the same thing as a traditional or Roth IRA.  With only 35K in self employment income, you'll not come close to that number either way.  You've already maxed your 18K 401K employee limit, so you could only make an employer contribution to the 401K.  As a sole-proprieter, that means you can do 20% of your business income less 1/2 self-employment tax.  The formula is exactly the same for a SEP-IRA.

As an S-Corp, all of your income is still subject to income tax, but the "profit" distribution is not subject to self-employment tax, while your salary is.  The reason in your case that an S-Corp may not be all that valuable is that your day-job wages put you near the social-security income limit already.  Using the calculator here: http://www.bankrate.com/calculators/tax-planning/self-employed-business-tax-calculator.aspx

If you have 35K of self-employment income with 110K of regular wages, your self-employment tax is $1,805.  If you have $18,500 of SE-income instead, your self-employment tax is $1,363.  So you 'saved' $442 by moving that $16,500 to a distribution.  A little under 3%.

You might say, "well every little bit counts".  But you forwent being able to shelter 18% (estimate to get to the point quicker) of that $16,500 in a SEP-IRA - You could have deducted at least $2,970.  If your income tax rate is 25%, that works out to $742 less tax paid - about 4.5%.  So you could have saved more in taxes by being taxed as a sole-proprieter and taking full advantage of a SEP-IRA, compared to being an S-Corp.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3469
  • Age: 36
Re: Can brokerages help me with small business tax and retirement?
« Reply #4 on: September 11, 2015, 12:15:19 PM »
Just as I hit post, it occurred to me that as an S-Corp you can do 25% of your salary vs. the ~18% you could do on the whole amount as a sole-proprieter.

So to make the point, lets do the calculation exactly as stated by the IRS.

35K sole-proprietor income:
Self-Employment income: $35,000
less self-employment tax deduction: $902.50
Basis for calculation: $34097.50

Percentage: 20%

Maximum Deduction = $6,819.50

Taxes saved with SEP-IRA as sole-proprietor if in 25% bracket: $1704.88.


S-Corp with 18,500 salary:
Maximum deduction = .25 * $18,500 = $4625

Taxes saved with SEP-IRA as S-Corp in 25% bracket: $1,156.25


So the SEP-IRA will save you $548.63 more if you are a sole-proprietor vs. the S-Corp.  Vs. $442 saved on the self-employment taxes as an S-Corp.  Not quite as big, but still you'll save by being taxed as a sole-proprietor.  (And maxing a SEP-IRA)
« Last Edit: September 11, 2015, 12:18:32 PM by dandarc »