Retirement plan puzzle for new Subchapter S

[Guest GregT]

Google led me here, where folks seem to be knowledgeable, so let me throw this out:

I write for TV and have just become a Subchapter S Corp. One of the major reasons for this is so I can put some tax-deferred retirement income aside. Now I need to decide between a SEP-IRA and a 401k. Now, I know the limit is $42,000, whichever way I go, but I'm confused over which way may might be most advantageous.

The SEP-IRA path is 25% of my salary, right? So I would need to pay myself $168,000. The 401k way is 25%of salary plus $14,000 of pass-through income. I will make enough to do it either way, I just don't know if there are tax savings from doing it one way or another.

A related question, I guess, is what is the optimal salary to draw? or what is the best balance between salary and pass-through income? I will gross about $425,000 with expenses (primarily agent commission and legal) about $70,000. I live in California, which I think imposes a 1.5% tax on S corp net income.

Grateful fo any advice, or to be directed to a clear discussion of above issues!

Greg

[FAPInJax]

One question is your age?? There may be other types of plans to consider.

[Guest GregT]

I am 44.

--Greg

[SoCalActuary]

You should work with a competent local accountant or pension consultant to sort this out.

Among the items to address: What is the proper salary to take in the S Corp?

What type of union or guild are you in?

Do you have a spouse who can also be an employee of your S Corp?

From your age, it looks like a defined benefit plan would give you a contribution in excess of $60,000 per year. A spouse could have a similar benefit if paid enough.

[Guest GregT]

>>You should work with a competent local accountant or pension consultant to sort this out.<<

No doubt, but I'm first trying to understand the issues myself.

>>What type of union or guild are you in?<<

The Writers Guild, which has its own pension plan.

>>From your age, it looks like a defined benefit plan would give you a contribution in excess of $60,000 per year. A spouse could have a similar benefit if paid enough.<<

How does one get above the $42K limit? I do have a spouse. I'm not sure I want to stick more than the $42K in retirement, anyway. Obviously adding my wife to the payroll means extra FICA.

--Greg

[SoCalActuary]

Your guild plan gives you a pension benefit at retirement, and may give you an option for a supplemental plan. The payments to that plan are paid out of your receipts for your work, and may be made by the production company directly, by the studio, or by your own company.

The payments by other parties are not business expenses of your company, just reductions in your revenue. The payments from your company, if any, are your pension deduction.

I will now describe the most favorable scenario to you getting a pension plan for yourself.

If you have a defined benefit pension plan sponsored by your company, it can provide a supplemental pension to your guild plan, with a company contribution that could potentially exceed the $42,000 available in a SEP or a 401(k)/profit sharing plan. With this plan, you would be accumulating additional benefits to those in the Guild plan.

For example, you could aim for a pension payable at age 62 of $170,000 annually for your and your spouse's lifetime, worth about $2 million at that time.

However, your Guild plan and a private plan for your company may have to be coordinated if both come from the same source, that is your company contributions.

To coordinate the two, you must have an actuary review your Guild benefits and your company plan. In addition, you should have a clear guide to the rules on when the two plans must be coordinated. For this, you need a good entertainment attorney or tax consultant.

[Guest GregT]

Do you have specific knowledge of the Writers Guild pension plan?

Coordinating the two plans seems needlessly complex for me right now, though I will file your post away for later consideration. Mostly I am curious if there is a "sweet-spot" in the tradeoff between salary and pass-through profit.

--Greg

[GBurns]

Coordinating the 2 plans might seem needlessly complex, but, What would you do if after a few years you find out that the rules that SoCalActuary refers to state that you either cannot have 2 plans or that they must be coordinated ? Filing it away is not a very good idea, you could end up with penalties and loss of benefits instead.

The "sweet spot" of trade off between salary and dividends etc is a facts and circumstances decision, and requires a look at your company financials etc. That is the reason why a competent accountant, tax practitioner or pension consultant was suggested. There is no national or regional industry average.

[mbozek]

Why do you think there is an advantage to being an S corp in establishing retirement plans. It seems that you are just paying an additional 1.5% in state tax since the max contribution to a DC retirement plan of an incorporated or unincorparted business is 42k. S Corp are used to protect the owners assets from law suits, not establish retirement plans. The 401k has advangages over a SEP in that loans of up to 50k are available and certain investments such as LI are available. However there is greater admin and paperwork requirements with a 401k plan, e.g. annual reports, IRS approval, etc. Also there may be different treatment of assets held by a 401k plan from IRAs in terms of creditors's claims under state law. You need to consult with a tax advisor on which plan is better for you.

[Guest GregT]

Coordinating the 2 plans might seem needlessly complex, but, What would you do if after a few years you find out that the rules that SoCalActuary refers to state that you either cannot have 2 plans or that they must be coordinated ? Filing it away is not a very good idea, you could end up with penalties and loss of benefits instead.

The "sweet spot" of trade off between salary and dividends etc is a facts and circumstances decision, and requires a look at your company financials etc. That is the reason why a competent accountant, tax practitioner or pension consultant was suggested. There is no national or regional industry average.

>>Coordinating the 2 plans might seem needlessly complex, but, What would you do if after a few years you find out that the rules that SoCalActuary refers to state that you either cannot have 2 plans or that they must be coordinated ? <<

I am 100% sure that there are no rules that *require* me to coordinate or merge my retirement account with my union's pension plan. A bigger question is whether such coordination is even allowed, or what the benefit is. Certainly I want the 401k or SEP-IRA money under my control, the Guild's pension trustees'.

--Greg

[Guest GregT]

Why do you think there is an advantage to being an S corp in establishing retirement plans. It seems that you are just paying an additional 1.5% in state tax since the max contribution to a DC retirement plan of an incorporated or unincorparted business is 42k. S Corp are used to protect the owners assets from law suits, not establish retirement plans. The 401k has advangages over a SEP in that loans of up to 50k are available and certain investments such as LI are available. However there is greater admin and paperwork requirements with a 401k plan, e.g. annual reports, IRS approval, etc. Also there may be different treatment of assets held by a 401k plan from IRAs in terms of creditors's claims under state law. You need to consult with a tax advisor on which plan is better for you.

>>Why do you think there is an advantage to being an S corp in establishing retirement plans. It seems that you are just paying an additional 1.5% in state tax since the max contribution to a DC retirement plan of an incorporated or unincorparted business is 42k.<<

If I am not an S corp (or an LLC), I become simply a studio employee, and I am not eligible for a Traditional IRA nor a Roth IRA because I have a union pension plan and my income is too high. In other words, I can't shelter any money at all.

>>S Corp are used to protect the owners assets from law suits, not establish retirement plans.<<

Well, for people in my situation, they are useful for pensions. Most film and TV writers with income above a certain level are incorporated. The other important benefit is that agent's commission, which is usually 10% of gross income, can be deducted -- along with other significant professional expenses, like lawyer fees. A non-incorporated high-income writer runs into the problem of deductions capping out.

>>The 401k has advangages over a SEP in that loans of up to 50k are available and certain investments such as LI are available. However there is greater admin and paperwork requirements with a 401k plan, e.g. annual reports, IRS approval, etc. Also there may be different treatment of assets held by a 401k plan from IRAs in terms of creditors's claims under state law. You need to consult with a tax advisor on which plan is better for you.<<

This is helpful. Thank you.

--Greg

[mbozek]

NJ imposes a 2% tax on S corp income. Maybe its different on the West Coast but commissions, fees, legal and professional fees and other business expenses for a self employed person who is not incorporated are deductible from gross compensation on the Schedule C (lines 10 and 17) to determine the net earnings from SE. In an S corp excessive deductions can be recharacterized as dividends by the IRS.

[Guest GregT]

>>Maybe its different on the West Coast but commissions, fees, legal and professional fees and other business expenses for a self employed person who is not incorporated are deductible from gross compensation on the Schedule C (lines 10 and 17) to determine the net earnings from SE.<<

I think my life would be a lot simpler if I could use a Schedule C. The tricky thing seems to be that I must choose between being a salaried employee of a studio or being incorporated. That middle ground, being simply self-employed doesn't seem to be an option, but now that you mention it, I wonder why not. I have never heard it suggested nor do I know anyone who does it that way. It may be because of union rules or studio policy.

>>In an S corp excessive deductions can be recharacterized as dividends by the IRS. <<

What do you mean "excessive deductions?" Surely legitimate business expenses are OK.

Greg

[GBurns]

>>"I am 100% sure that there are no rules that *require* me to coordinate or merge my retirement account with my union's pension plan."<<

>>"It may be because of union rules or studio policy"<<

Have you looked at the rules of the Guild plan etc ?

>>"I think my life would be a lot simpler if I could use a Schedule C."<<

>>"I wonder why not".<<

>>"What do you mean "excessive deductions?"<<

These responses plus some others, suggest that you do not understand the differences and uses of the various entity structures and their tax implications etc.

IMHO, you should seek advice and clarification of these issues before trying to make decisons as to what might be best for you.

[Guest GregT]

>>Have you looked at the rules of the Guild plan etc ?<<

Yes.

>>These responses plus some others, suggest that you do not understand the differences and uses of the various entity structures and their tax implications etc.<<

I'm always ready to be enlightened. If you have any specific answers to my queries, other than a general suggestion to ask somebody else, I'd love to hear it. I don't think I am egregiously ill-informed for a non-professional, as you seem to suggest, and this website is not the only resource I'm consulting, if that's your concern.

Greg

[mbozek]

For professionals an S Corp does not provide an advantage over self employment since there is no protection from malpractice judgments and states impose additional taxes. Self employed professionals establish retirement plans to lower income tax and AMT and protect assets from creditors. It may be different in the entertainment industry where the line between self employment and common law employee is not clearly defined which necessitates the creation of corporate entities which can provide liability protection.