1120S vs Schedule C for low income TPs

BTW, the lack of a B/S in Schedule C has occasionally been an important factor in my planning...

Another con to what OP proposes...not a lot of SS credits and not a lot of headroom for retirement account contributions if the LLC/S Corp is the only source of income. That's a little shortsighted. Hopefully the client would be okay when/if he ever retires or becomes disabled.

It's not always about driving tax as low as possible, although that's a large part of it. A lot of us have learned that to be the best possible external partner and advisor for our clients, we have to examine the holistic picture. Tax is just one facet of the diamond.

Totally agree, which is why none of my older S Corp clients takes a federally minimum wage ... And they all fund their retirement plans to the max. Soc sec tax is not the "bad" tax. You get something back for it: peace of mind when you retire because you have $2,500/month soc sec coming in (and not $500 for the rest of your years on this planet). And soc sec is only taxable at 85% max ...

And if you live in CA, soc sec income is not taxable:
Enter the amount of social security income included in your federal adjusted gross income as a subtraction on California Adjustments – Residents (Schedule CA 540).

A holistic and long-term vision is always better for the client over short-term savings.

I am not a social security expert but it does help you visualize how the mechanics of it work if you spend some time going through the calculations. Most are aware you need $8k-$10k to earn your 4 quarters for the year and then you need at least 40 quarters to qualify.

But when you see the calculations ie 90% on the first $30k, 45% on the next…. And then 20 something

I do not know those numbers as well as I should but the OP idea about cutting wages from $30k to $10k would have a major impact on Social Security benefits if you did that 10 or 20 years

But do not underestimate the Medicare savings to be had. I think actors and pro athletes use S corps a lot although I do not have any expierence with those types

While I agree with the majority here i wonder whether opinion would change if S Corp was no cost. I rather liked mine over the years...♫

While I agree with the majority here i wonder whether opinion would change if S Corp was no cost.

Of course it would, as when we examine Sch C vs 1120-S we do a cost-benefit analysis. The reality of the situation is that it's not no cost. It's relatively high cost compared to a Sch C, and I don't see that changing any time soon.

And I've seen analysis that there's a 6-8x dilution if you 'invest' in SS vs. investing your own. So I get my folks reasonable salary and tell them to invest the difference. They likely don't....

They likely don't....

More often than not they don't. Which is why I say pay out reasonable most of the time, but if you have a situation where the client is pulling in $500k+ net every year, and reasonable comp is less than the SS cap, I just advise paying the SS cap as comp each year. There's not really that much difference for a client like that, and it's getting him/her the max SS credit every year. That's crossing over from tax to retirement planning.

Again, a holistic view.

I've been told by a number of folks who work in this area that income of about half the FICA limit will will get you a benefit about 70% what income at the full limit would provide. I've not done the calculation myself, but we'd usually try to get folks to at least 70% of FICA limit to maximize one's "bang for the buck" if other factors weren't determinative.

I am going to side with ManVTax and say that I wonder if we are really doing a disservice to focus on the payroll taxes. A low income person may really need the SS in retirement.

I am not a social security expert but it does help you visualize how the mechanics of it work if you spend some time going through the calculations. Most are aware you need $8k-$10k to earn your 4 quarters for the year and then you need at least 40 quarters to qualify.

But when you see the calculations ie 90% on the first $30k, 45% on the next…. And then 20 something

I do not know those numbers as well as I should but the OP idea about cutting wages from $30k to $10k would have a major impact on Social Security benefits if you did that 10 or 20 years

But do not underestimate the Medicare savings to be had. I think actors and pro athletes use S corps a lot although I do not have any experience with those types

This is a very good point, the credits that you earn for SS are in brackets 90% / 32% / 15%. Filling the 90% bracket is a no brainer, and filing the 32% bracket provides double the benefit of the amount over. The brackets change every year, but are around $11k and $65k.

Remember SS is not just retirement money, its also disability insurance not something to be taken lightly

Late to this party but just a couple real life examples to think about.
Years ago I had a client, both she and her husband had separate businesses separate sch C filed. The spouse showed losses just about every year. He died suddenly at 35. The other spouse received $0, if you don’t pay in you don’t get anything back and your family could be at risk.
Client about 5 years from retirement, has had or worked in a family-owned S for most of his working life. They have a pretty good 401(k) plan that has been in place since before I began working with them over 10 years ago. He said he and his wife don’t care about social security. I told him to order their statements and take a look at where they fall in terms of eligibility. He did and proceeded to tell me he saw no reason not to begin drawing as soon as possible. I looked at the statement and told him the monthly benefit difference between drawing at 62 vs 67 was ~$700/month. He told me he has decided not to draw at 62.
Schedule C versus S corp. I totally agree any business with income averaging less than $35k NI is better off with a schedule C. The draw back is they tend to intentionally deflate the net income so little if any goes into SS. When they go to get a mortage or refi, no W2 just a schedule C with little if any income. So then you have the S which if properly supervised can instill some discipline, setting up payroll, paying UI, etc. Like putting on big people pants. If more of a hobby then no not worth it. But like one poster stated, if sales and income are so low the client has bigger problems than Sch C vs. S corp issue and focus should be on growing the business or working for someone else.

Mine is not a position worthy of ridicule.

Well, in a way it is. (Although I might use the word “pushback” as opposed to “ridicule”). You see, you made no mention of SS benefits in Post #1.

And, how much one’s SS benefits will be is just part of the “SS benefits” aspect. The other part is what the client might do with all those payroll tax savings…and that depends on whether or not those savings, plus the growth on those savings, is intended to replace the SS benefits he would have otherwise received. And that opens the door to a host of other questions, regardless of his yes or no answer to the preceding question. If he says he won’t need to save those savings because he will have plenty of other means to live on in retirement, is he being honest with himself? And if he says he will need those savings, then he better save them. At which point, the idea of saving the savings is no longer theoretical. He needs to be disciplined and he needs to do it. That begs the question: Will he actually do it?

I don't decide what's good for them

That’s where you and I might differ. If I’m dealing with a spendthrift client, what’s probably best for that person is to pay the (higher) payroll taxes. I will outright tell him: “You are a spendthrift. And I don’t believe you. I don’t believe you will be disciplined enough to save the payroll tax savings, nonetheless prudently invest them. I do not believe a pile of cash will be awaiting you at your retirement. Pay the payroll taxes.”

I know, I know. It’s excellent advice. The truth sometimes hurts.

I already said I give the dog-food-in-retirement concern. After that, it's their decision.

It sounds like we all understand the ramifications. I suppose the difference is merely how hard to push...

You can certainly connect them with your fave financial advisor and set up monthly investment plan....