To S-Corp or not to S-Corp?

[LightStache]

I'm starting a new LLC in California for a ten year contract 2020 - 2030. It will be just me at first, pulling in $200K-$300K per year in revenue and $10K - $30K per year in expenses. I anticipate adding a few partners and employees, but growth is not the focus. I'm looking to max out 401k and potentially set up a DB plan, although at 35 y/o I'm not sure it's worth it.

If I elect S-corp taxation, I'll pay myself around $100-$110K, which isn't too far away from the SS wage base of $133K. Since company 401k contributions are capped at 25% of W2 income that would only be $28K and then I could put in $19K, which would be subject to payroll tax.

OTOH if I don't elect S-corp, the company can contribute $56K to my 401K, not subject to payroll tax. Then I'd have $132K subject to full payroll tax, and the remainder just Medicare.

I'm pretty sure this engineering business will not be an SSTB, but it does kind of look like consulting so I'd like to stay under the $157K single limit if possible so that I don't have to worry about the determination.

So smart mustachians, should I S-Corp or just straight LLC passthrough?

[Much Fishing to Do]

Can be a very complicated analysis, so I'm not gonna try to give an answer but give some examples of how complicated with other types of things to consider (though I admit I very well may be remembering some of this incorrectly):

1) before I electred S COrp I'm pretty sure the SE tax applied to everything, so the medicare tax of 2.9% applied to all income from the business with no cap.  After S corp election this was not the case, so I effectively saved the 2.9% above my salary.  THis turned out to actually be my big SS savings on the election as my salary was properly above the cap anyway (which did allow me to make full solo 401k contributions). 

2) I lived in a place with a local income tax on earned income.  Just like the above, it was applied to all income with no cap before I elected as S corp but after only to salary.

These are two factors I had not even considered when I first elected S corp, but for the final year of my business when I profited $1M over my salary these two factors alone saved me over $60k in taxes for that single year.

[LightStache]

I'm starting a new LLC in California for a ten year contract 2020 - 2030. It will be just me at first, pulling in $200K-$300K per year in revenue and $10K - $30K per year in expenses. I anticipate adding a few partners and employees, but growth is not the focus. I'm looking to max out 401k and potentially set up a DB plan, although at 35 y/o I'm not sure it's worth it.

If I elect S-corp taxation, I'll pay myself around $100-$110K, which isn't too far away from the SS wage base of $133K. Since company 401k contributions are capped at 25% of W2 income that would only be $28K and then I could put in $19K, which would be subject to payroll tax.

OTOH if I don't elect S-corp, the company can contribute $56K to my 401K, not subject to payroll tax. Then I'd have $132K subject to full payroll tax, and the remainder just Medicare.

I'm pretty sure this engineering business will not be an SSTB, but it does kind of look like consulting so I'd like to stay under the $157K single limit if possible so that I don't have to worry about the determination.

So smart mustachians, should I S-Corp or just straight LLC passthrough?

Thanks for the reply @Much Fishing to Do. I'll have California state income tax on all passthrough earnings, regardless of whether its S-Corp or not. I'm on the fence because my income is low enough to where it might not matter, especially if I have a defined benefit plan. But your lesson is a good one -- if I'm more successful than I planned and end up with $1M profit, then S-Corp would make a material difference.

[SubL stache]

You can't stay under 157 based on W2 alone, your profits will also flow-through.  Engineering had great lobbyist so you would be non-SSTB.  Why not increase the W2 at the S corp to the amount you want in the 401k and still get the benefit of less FICA?  Idk just spit-balling but that's probably what I would do.

[LightStache]

You can't stay under 157 based on W2 alone, your profits will also flow-through.  Engineering had great lobbyist so you would be non-SSTB.  Why not increase the W2 at the S corp to the amount you want in the 401k and still get the benefit of less FICA?  Idk just spit-balling but that's probably what I would do.

I was thinking that if I just do a regular passthrough and bring in 225K after expenses, 56K goes to 401K, ~50K goes to cash balance plan, then I'd be at 119K of passthrough income right? Both the company 401K contribution and cash balance contributions aren't subject to payroll tax, so I'd have payroll on the $119K.

Whereas if I did the exact same as S-Corp and took $119K in W2, then my company-side 401K contributions would be limited to 30K. After the 20% QBI deduction and standard deduction, that would put me below the 32% federal bracket, so I probably wouldn't bother with employee-side 401K or cash balance plan.

Thanks for the feedback @SubL stache and @Much Fishing to Do. I think since it's better to have the earnings sitting in a corporation than a retirement account, I'll go for S-corp election.

Anyone see a compelling reason to not do S-corp?

[SeattleCPA]

Both the company 401K contribution and cash balance contributions aren't subject to payroll tax, so I'd have payroll on the $119K.

This isn't quite right. Those amounts will be subject SE taxes.

Tip: One of the oft-missed benefits of an S corp is that some deductions move to 1120S return and "automatically" save you not just income taxes but also payroll taxes.

[LightStache]

Both the company 401K contribution and cash balance contributions aren't subject to payroll tax, so I'd have payroll on the $119K.

This isn't quite right. Those amounts will be subject SE taxes.

Tip: One of the oft-missed benefits of an S corp is that some deductions move to 1120S return and "automatically" save you not just income taxes but also payroll taxes.

@SeattleCPA I really appreciate the correction because that makes a difference in my thinking. I guess what I'll do then is elect S-Corp and decide at the end of each year how much I need to contribute to 401K to stay under the 32% bracket.