S Corp Limitations?

[Ben C.]

The main benefit everyone's raves about, in regards to using an S Corp to flip properties, is being able to funnel some of the profits as "distributions" and limit self employment taxes. However, in my situation my wife and I both have Regular w-2 jobs and file jointly. My question is, hopefully some accountants can chime in here, what are the income limitations on the FICA? I think I've heard around $118,000? To cut to the chase I am wondering if I should simply stick with an LLC (due to the possibility that the dividends wouldn't even save me money if I'm hitting my contribution limits via my regular W-2 income?) Thank you so much!

[Brandon Hall]

@Ben C. here's how it works.

FICA taxes are made up of Social Security (SS) and Medicare taxes. These amount to a total of 15.3% on each dollar of salary (or earnings in the case of a non-S-corp.

The SS tax = 12.4% while Medicare = 2.9%.

When you are an employee, your employer will pay half, and you will pay half. When you are a business owner, you will pay the entire 15.3%.

If your W2 earnings phase you out of the SS tax, meaning that your earnings are above the $127.2k threshold referenced above, then your self-employment earnings will only be subject to the Medicare tax. For people who flip properties, this can be an advantageous position because you have the ability to earn capital quickly and in large chunks without paying the standard 15.3% rate.

If you have an S-Corp and you are the sole owner, that SS threshold is $127.2k. If your spouse is also an owner, that threshold will double if she materially participates and is paid a salary. The key with S-Corps is: who gets a salary? Whomever is paid a salary is subject to FICA. So we wouldn't want to pay the spouse if her W2 earnings are below the $127.2k. It's a per-person basis, not aggregate, so your W2 earnings cannot be "applied" to her if that makes sense.

If I were you, I'd keep it simple and not go the S-Corp route. There are plenty of strategic tax options available without complicating things and utilizing an S-Corp too soon. The fees you pay to your accountant, annual filings, and payroll provider will pretty much nix your savings from the S-Corp unless you are earning $200k per year from the flipping biz.

Solution: definitely get an LLC up and running asap. Make sure all flips are owned by that LLC and all profits pass through that LLC (pending legal advice of course). Then do as others suggested and speak with a CPA asap. The cool thing about an LLC is that we can retroactively elect the S status if we deem it necessary and we can retroactively reclassify distributions as salary. But we have to have an LLC in place in order to do so.

I advise almost all of my clients to set up an LLC and route everything through that as it provides us with maximum flexibility in how we treat it going forward.

Is the S-Corp right for you? No idea, but put yourself in a flexible position now so that a pro can help you later.