Make the Switch?

December 21, 2010 | Subscribe to our RSS Feed

I wrote, earlier this year, about pending legislation that would have taxed the net income of dental practices, set up as S Corporation’s, as self employment income.  If passed the new law would have added self employment tax to that income as well as regular income tax.   With the Republicans gaining control of the House after the recent mid-term elections it looks like all you S Corporation dental practices should be safe for awhile.  This is certainly good news heading into 2011 and the future.

What this lack of change also means is that it is a good time to revisit having sole proprietorships or single member LLCs taxed as S Corporations.  For those entities the tax savings from such a switch can be considerable and who wouldn’t like to put a few thousand dollars in their pocket instead of Uncle Sam’s.

Just be advised that you will now have to take a “reasonable” salary as an S Corporation shareholder, which will include some Social Security and Medicare tax that is analogous to the SE tax.  Your accountant can help you set your salary at the proper level.  Keep in mind you have to take a salary as the IRS is well aware of the tactic of S Corporation shareholders taking all compensation as distributions.    Remember “Pigs get fat, hogs get slaughtered”.

Possible downsides to making this change would be

• Reduced capacity to make deductible contributions to retirement accounts
• Needing to prepare separate tax returns for the S Corporation

The switch to be taxed as an S Corporation can easily be made by your accountant.  This is a great opportunity for all you sole proprietor and single member LLC dentists to put some extra money in your pockets in coming years.  Talk to your accountant to see if this switch is right for you.

Questions for Larry the Accountodontist?

larry.goldberg@glassjacobson.com