New Mustache + S-Corp w/ Tax Questions

[haironfire!]

Hi All,

New NYC Mustachian and have been running a single employee s-corp as a consultant since 2010. My CPA always cautions investing too much in my SEP since I can't access it (he is not cut from the mustache cloth, he's the rainy day type) so I come to you all for help-- here's my current stats:

- 34k YR Salary
- Up to 73K capital/dividend draw
- SEP IRA (have contributed at random in past, mainly EOY).

In the past I kept my salary low because my work was inconsistent so I'd leave a surplus for quarterly taxes and to make sure the ACH was always funded. Now I have a two year contract for 156k and I'm wondering what's the best way to maximize my tax savings and contribute the most to my SEP pre-tax?

Should I start paying myself a higher salary? Is the SEP calculation based on the 34K or the 34K + 73K?

Thanks!

P.S. My immediate goal is to use the first 73k draw to pay off all my wife's student loans (between 3-7%) which should be done come February if we keep up the good work.

P.P.S. If anyone can recco an NYC accountant that's mustache minded, I'm all ears!

[protostache]

The SEP calculation is 25% of your W2 income, which would put it at $8,500 at your current salary. Raising your salary means paying more SE taxes to defer income taxes. You'll have to do the calculation yourself to figure out if it's worth it.

Remember that any amount your business pays for health insurance counts as salary for single-employee S-corps, since it goes into box 1 on your W2 and then you deduct it on page 1 of form 1040. So for example, if your business pays $10k in health insurance premiums for you for the year, your salary is actually $44k and your max SEP contribution is $11k.

Everyone's business is different, so you'll have to figure out what level of working capital works for you. Personally I'm backing off from retirement contributions for the year because I only have two months of buffer in the business and I want to extend it to six, but I don't have a two year contract to depend on.

Also don't forget that the money you put into an SEP isn't gone for decades. If you absolutely need the cash you can pull it back out, but you'll pay your marginal income tax rate plus the 10% penalty.

edit to add: The IRS wants to see you pay yourself a "reasonable" salary. You didn't say what your line of work is, but would someone also in that line of work consider $34k a reasonable salary for your level of experience? It's 43% of your annualized contract which may put it on the low side. Of course right now the likelihood of an audit is super low with your configuration since the IRS is focused mostly on S-corps that pay no salary and/or take losses, but make sure you're at least taking a defensible position. In my business I pay myself roughly the same percentage as salary, but I defend it by saying it's the same amount (to the penny) that my previous full time W2 job was paying.

[haironfire!]

The SEP calculation is 25% of your W2 income, which would put it at $8,500 at your current salary. Raising your salary means paying more SE taxes to defer income taxes. You'll have to do the calculation yourself to figure out if it's worth it.

Remember that any amount your business pays for health insurance counts as salary for single-employee S-corps, since it goes into box 1 on your W2 and then you deduct it on page 1 of form 1040. So for example, if your business pays $10k in health insurance premiums for you for the year, your salary is actually $44k and your max SEP contribution is $11k.

Everyone's business is different, so you'll have to figure out what level of working capital works for you. Personally I'm backing off from retirement contributions for the year because I only have two months of buffer in the business and I want to extend it to six, but I don't have a two year contract to depend on.

Also don't forget that the money you put into an SEP isn't gone for decades. If you absolutely need the cash you can pull it back out, but you'll pay your marginal income tax rate plus the 10% penalty.

edit to add: The IRS wants to see you pay yourself a "reasonable" salary. You didn't say what your line of work is, but would someone also in that line of work consider $34k a reasonable salary for your level of experience? It's 43% of your annualized contract which may put it on the low side. Of course right now the likelihood of an audit is super low with your configuration since the IRS is focused mostly on S-corps that pay no salary and/or take losses, but make sure you're at least taking a defensible position. In my business I pay myself roughly the same percentage as salary, but I defend it by saying it's the same amount (to the penny) that my previous full time W2 job was paying.

Super helpful. I'm in the film/tv/commercial world-- few of us have a consistent salaries from year to year. I can work 6 months straight and have two months off or only work two weeks out of the month for the whole year. My salary has been sporadic for the last 5 years so it would be hard to pinpoint a solid metric for how much I should get paid (esp. when the sony/paramount/universals skew the avg very high).

Healthcare and benefits are all through my wife's job so luckily that's not a factor. 

That said, sound like I should drop the 8k into the SEP and then I'll give it a bump next year once I've got a handle on the taxes and everything.

Thanks!