I need your opinions here. My brother is a dentist here in Philly. His practice grosses about $1M per year (he has multiple dentists working for him) and nets about $400,000. An aggressive accountant has suggested that he incorporate and pay himself about a $100,000 wage, taking the other $300,000 as pass thru profit that is not subject to earned income or Social Security taxes.
Is this kosher?
The 100,000 salary may considered be too low. In any event the small savings in medicare tax may not justify the additional accounting fees to file corporate federal and state income tax returns. There may also be state corporate income taxes that exceed any medicare tax savings.
Is it kosher, yes it is, and great for the accountant. It should however not be the reason your brother incorporates.
Only the first 102k of salary is subject to SS, so you wouldn't be saving much in SS taxes by doing the 100/300 split. Be aware that some politicians want to remove the income cap (so your entire salary would be subject to SS taxes, but theoretically the rate would be lower). However, he would save medicare taxes of 2.9%.
Just be sure that 100k is a fair market salary. Some states also levy a tax on income that is passed to to shareholders.
Your brother may be able to put around 45k a year into a SEP IRA. 25% of salary, up to a maximum of 45k, can be saved this way. But he may have to offer the same benefit to all his employees, otherwise his plan would be discriminatory -- just check the rules.
And at present, is he operating as a sole proprietor? That seems kind of risky to me with a medical business.
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