As a healthcare professional you have gone through extensive education and specialized training to learn how to take care of your patients and their conditions. The last thing you want to do is spend extra time researching the ever-changing and confusing tax laws or preparing financial statements. At T&V we understand your industry and can provide you with the information you need to make decisions and get back to your practice and patients.
Before you start a practice, there are a number of preliminary decisions to be made. One of the first choices you will face is the legal form in which you will operate the business. Should it be an unincorporated sole proprietorship, a partnership, a limited liability company, a regular corporation, or an S corporation? Each of these forms has both tax and non-tax advantages and disadvantages that must be weighed in conjunction with your own plans and personal situation.
Sole proprietorships, for example, are the easiest and cheapest business form to set up, and they can be operated with few formalities. However, they offer no personal liability protection and don't allow you to get many of the tax benefits that are available to corporate employees.
Partnerships offer many of the same advantages and disadvantages as the sole proprietorship, but they allow the business to be owned and run by more than one person. Also, the liability problem can be overcome to a certain extent by forming a limited partnership. Under traditional tax rules, partners whose liability is limited cannot be involved in actively managing the business; however, the IRS is reconsidering these rules. Losses from these partnerships may be restricted by the so-called passive activity rules.
Another form of entity, known as the limited liability company, is approved for use in almost every state and offers what many see as the best alternative for the typical small business. These entities can be set up to be taxed as partnerships, avoiding the corporate income tax, while the managing members' personal assets remain fully protected from business creditors. Furthermore, in some states, like California, the Medical and Dental boards forbid practice under an LLC.
S corporations also offer liability protection, without a separate corporate tax. Like partners and sole proprietors, however, more than 2 percent S corporation shareholders are ineligible for tax-favored fringe benefits. Another potential drawback of S corporations results from limitations on the number and kind of permissible shareholders. These restrictions can limit an S corporation's growth potential and access to capital in some businesses. In others, however, an S corporation can be a key ingredient toward success.
What about regular corporations, known as C corporations? They do not have the shareholder restrictions that apply to S corporations, but they are subject to a double system of taxation. That is, their profits are subject to income tax at the corporate level and are also taxed to the shareholders if distributed as dividends. But if profits are to be plowed back into the business to foster the company's growth, the tax price is usually lower than with an S corporation. And there are many situations in which the double tax can be substantially minimized. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life. Another drawback is that Professional C Corporations pay a flat 21-percent (35-percentage for years prior to 2018) tax at the entity level.
Besides the question of choosing a form of entity for your new business, there are many other tax decisions to be made, and much planning to ensure that you meet your income and payroll tax reporting and compliance chores properly. How will you handle your start-up costs? Will your workers be employees or independent contractors? Can you qualify for a home office deduction? Should you set up a qualified retirement plan, and, if so, what kind?
Please do not hesitate to call to set up an appointment to explore these important matters further. With our experience, we can help you come to the right decisions and implement them quickly so that you can concentrate on the success of your new practice.
COMPENSATION AND RETIREMENT PLANNING
S corporations are one of the most popular choices of business entity. As a shareholder-employee of an S corporation, I am writing to remind you of some important rules governing compensation, health and accident insurance, and Schedule K-1 issues. The IRS recently highlighted these key issues on its web site.
When S corporation shareholders perform more than minor services for the corporation, and receive or are entitled to receive compensation in exchange, they are employees for federal employment tax purposes. Their compensation must be reported as wages for those purposes. Additionally, compensation to a shareholder-employee must be reasonable.
The IRS looks at the following factors when determining "reasonable" compensation:
Training and experience;
Duties and responsibilities;
Time and effort devoted to the business;
Payments to non-shareholder employees;
Timing and manner of paying bonuses to key people; and
What comparable businesses pay for similar services.
If your S corporation also pays health and accident insurance premiums on behalf of greater-than-two percent shareholder-employees, the S corporation may deduct the cost of health and accident insurance premiums paid on their behalf. A "greater-than-two-percent" shareholder employee for this purpose is a person who owns, or is considered as owning under constructive ownership rules, more than two-percent of the outstanding stock of the S corporation or stock possessing more than two percent of the total combined voting power of all the corporation's stock. The S corporation reports the premium amounts as wages for income tax withholding purposes on the shareholder-employee's Form W-2. However, these amounts are not subject to Social Security, Medicare or FUTA.
Finally, the IRS reminds S corporation shareholder-employees that the Schedule K-1 issued by the S corporation does not state the taxable amount of their distribution. The Schedule K-1 reflects the S corporation's income, loss and deductions, which are allocated to the shareholder for the year.
If you have questions about the tax obligations of being an S corporation shareholder-employee, or any -- and other -- issues discussed in this letter, please contact our office.
HOW TO CLASSIFY WORKERS
One of the steps we recommend to clients that use independent contractors and therefore face a heightened risk of a costly IRS payroll tax or benefits audit is a quick review of some of the key things the IRS tells its agents to look at in determining whether a worker is an independent contractor or an employee.
The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.
Workers are more likely to be classified as independent contractors if they:
Make a significant investment in business property, such as tools;
Pay their own business expenses;
Receive a flat fee that is not based on an hourly or similar rate;
Are not prohibited from doing work for other companies;
Can pay subcontractors to get the job done;
Are not performing services as an integral part of your regular business;
Have a contract with an enforceable liquidated damages provision;
Can make a profit;
Can suffer a loss.
Are licensed and have a substantial amount of flexibility, as in the case of associates.
Workers are more likely to be classified as employees if they:
Are given specific instructions and ongoing training in how to get the work done;
Cannot work for others;
Have expenses paid by your company;
Are paid a salary or hourly wage;
Do not have a significant investment in their trade or business;
Are an integral part of your regular business;
Receive direct reimbursement for all, or almost all, expenses;
Other factors are:
Whether or not the work is performed on the business's premises;
Whether the worker has flexibility in setting hours;
Whether the relationship is temporary or short-term;
Whether the work is full- or part-time;
Whether the worker performs services for one or more businesses.