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8221 Brecksville Rd, STE 205 Brecksville, OH 44141 (440) 340-1030 Avoid Falling Between Two Stools Page 1 Borbala’s Schedule Page 2
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Puzzling Questions
A mericans love puzzles, games, and brain teasers. Newspapers publish crossword puzzles, word search puzzles, and word jumbles. Bookstores sell jigsaw puzzles. Airport gift shops stock sudoku puzzles to pass the hours in the sky. We love puzzles so much that someone found their way to a basement office in Washington where the Department of Bogus Holidays litters our calendars with junk celebrations like National Talk Like Yoda Day (May 21) and National Eat Your Beans Day (July 3) and made it official. And so Tuesday, Jan. 29 was National Puzzle Day. Most people think of puzzles as trivial diversions. But planning to avoid taxes is a puzzle, too. And, as the English economist John Maynard Keynes once said, “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” Consider the basic challenge of choosing how to organize your business. If you operate as a sole proprietor (or an LLC taxed as a sole prop) and earn $200,000, you’ll pay self-employment tax on every dime of it. On the bright side, that’s $21,836 that gets credited to your Social Security account. Of course, that won’t mean much if you don’t believe Social Security will still be there for you when you retire. (Rule of thumb: if you’re young enough to have tattoos, don’t count on it.) Now, if you elect to be taxed as an S corporation and the reasonable compensation for the work you do is $100,000, you could save yourself a sweet $6,535 in tax. It’s even sweeter than contributing to a retirement plan or buying new equipment for your business, because you aren’t spending anything to get a deduction. You’re just paying employment tax on less income. That doesn’t sound like much of a puzzle, right? But consider this ... if you want to hire your minor kids to shift income to their lower bracket, now they’ll owe FICA they wouldn’t if you were still a sole proprietor. Oh, and now you can’t use that corporation to cover yourself under a medical expense reimbursement plan. But wait, there’s a workaround to that problem. You can just buy a high- deductible health plan and establish a health savings account. Or maybe you could establish another proprietorship, or C corporation, and pay MERP benefits from that business. So, while tax planning may not be as fun as finishing a crossword puzzle (in ink), we think you’ll agree it’s far more rewarding.
Having fun yet? Of course, now your“covered comp”for determining retirement plan contributions will be based on the salary only, not your whole income. If you’re used to maximizing an SEP contribution , you’ll find yourself saving a whole lot less with the S corp. Aren’t puzzles great? Now, at that point, you could switch from the SEP to a solo or safe harbor 401(k), perhaps with a cross-tested profit-sharing contribution. You could even look at a defined benefit pension plan . (Yes, it’s the Studebaker of retirement plans, but sometimes it’s the right answer.). But that raises the question of whether you belong in a traditional qualified plan at all —or whether you’re better off with a Roth or insurance-based plan . All of a sudden, the National Puzzle Day that sounded like so much fun about eight paragraphs ago is starting to look about as fun as that new“Escape Room”movie, right?
Don’t worry ... when it comes to organizing your business, or any other tax challenge, we’re here to find the best solution.
We really like these puzzles, and nobody does it better!
–Liao Xiong Staff Accountant, Concierge CPAs, Inc
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