What about the downsides? First, if you employ your children to do anything (which, while it sounds a bit sketchy, my accountant swears is legal), the tax burden goes up a bit. If you were in a partnership, no payroll tax is due and if you keep the total amount low, there is no federal or state income tax either. Further, since it is earned income, not only is no kid tax due but you could also put it in a Roth IRA and let it grow tax-free for years.
The only thing that changes as an S corp is that you do have to pay payroll tax (about 15.1%, including Social Security), but that is much lower than my marginal tax bracket of 45% (remember, distributions are still taxed as income). On the other hand, it only takes $1,300 a quarter to earn a quarter credit with Social Security and you need 40 quarter credits to earn Social Security, so this may be a way to help someone earn Social Security who may otherwise not. (I have four daughters and one of them may become a stay-at-home mom and never contribute to Social Security.)
The other downside is the temptation to not fully fund a 401k, profit-sharing plan, or Social Security contribution so that you can lower your salary and take more out as distributions. Think of an actual plumber who makes $100K a year. He could argue that the average plumber only makes $25K, but as an S corp, he saves 15.3% on the $75K in distributions (plumbers’ math is a bit different given that their salary assumes savings for Social Security at 12.4% and Medicare at 2.9%, but they do not have the 0.9% Obamacare tax on high income earners). The problem with this strategy is that by not fully funding retirement, you are giving up significant future earnings. This is less of a problem for us, given the average salary of a urologist, but it should be something to think about for a urologist working part time.
Overall, for us small-town urologists, electing to incorporate as an S corp can limit exposure to some risks while providing a small tax benefit with minimal hassle. No one is going to retire on this maneuver but given the average urologist’s salary, it shouldn’t cost you money either.
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