Help! I have read so much on this subject and I'm still not sure what to do. I'm beginning to think that sole proprietorship is the way to go with LLC the next best choice.

Here's my situation.

I am changing my working situation to the following:
I am a doctor employed half time by an HMO with full benfits and will make more than $100, 000/year in this position.
I am starting a "business = medical practice" with no employees or partners and will definitely make more than $200, 000 but maybe up to $300, 000 or so. For the business, my expenses will include medical malpractice insurance, office rental, biller, slip and fall insurance for the office I'm renting and "supplies-paper, bandages, etc."

I'm thinking that sole proprietorship is the way to go because:
1. I'll max out my social security tax as an employee and won't have to pay the employer contibution 15.3% on the self employed income anyway and won't have to pay unemployment tax.
2. I have no employees/liability from which to protect myself.

Is my logic sound or should I consider LLC or Scorp?

Is it true that I wouldn't pay SS tax on the self employed income if I'm over $97,500 in 2007 as an employee?

Also, am I eligible to open a SEP, Simple or SOLO 401K for the self employed portion of my salary? I have a 401K with as an employee and max out on the contributions.

Thanks a million for any advice! Jane

Zip Code: 96768

Here are the issues as I see it.

You're correct that the social security max will be $97,500 in 2007. If you earn at least that amount as an employee at the hospital, what's happens to your profits from your practice?

If you set up an S-Corp, you're required to pay yourself a reasonable salary. On that salary, you'll need to withhold social security taxes on the first $97,500 that you pay yourself, even if you hit the social security max from another employer. Plus, the corporation will need to match any social security taxes withheld.

So yes, any social security taxes withheld from your pay from your corporation will be reclassified by you as federal taxes withheld, but you won't be able to get the company match back. At a rate of 6.2%, that could end up costing you $6,000 in extra taxes!!!

If you go with a single member LLC, you'd be taxed as a sole proprietor most likely. When you're a sole proprietor, you first look at all of your social security wages from your other employers before determining whether to pay additional social security taxes on your private practice income. So you'll probably avoid being stuck paying extra social security taxes with the LLC.

As your income increases, however, S-Corps become more attractive than sole proprietors. That's because with an S-Corp, once you pay yourself a reasonable salary, you can begin pay yourself with S-Corp Dividends, which are not subject to social security or Medicare taxes. With a sole proprietor, all of your income is subject to these taxes. Assuming you're over the social security max, this will save you taxes at a rate of 2.9%.

As you can see, there are a lot of variables to factor in. I recommend that you contact a CPA to help you with this decision. While you're at it, you should probably talk with a lawyer as well to make sure you're protecting yourself from possible risks that will arise in connection with your private practice.

With respect to your retirement plan, if you already are maxing out your 401k plan through another employer, you probably want to go with the SEP. A SEP allows you to contribute as much as 25% of your W-2 wages, up to $45k in 2007. When you meet with the lawyer, you might also ask whether you'll better protect your retirement savings by going with a more sophisticated retirement plan for your business, however.

Good luck with your new business.

Zip Code: 01801

Hi,

I wrote an article about this topic during July, 2005 that was geared toward whether people who moonlight should incorporate. But since you will continue working half time at the hospital, I think it is relevant.

The link to the article is:

http://www.mdtaxes.com/news0705.html

Zip Code: 01801