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Multiple 401K questions? 1099 vs W2? LLC vs S corp? I'm confused!

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  • Multiple 401K questions? 1099 vs W2? LLC vs S corp? I'm confused!

    Hi guys, long time lurker, first time poster.

    I'm about 6 years out of Ortho fellowship. I went to work for a Hospital in the Midwest right after fellowship and was a W2 employee. Didn't have much options and was not allowed to moonlight or do any independent contractor work. So basically just put the standard 18K into the company 401k and the rest into real estate and taxable accounts. (I didn't realize they were a non profit and I could have done some loan forgiveness but unfortunately that boat has since sailed)

    Now I moved into a multi specialty group but am still an employee. Same plain Jane W2 with only 18K 401k option (small company so they have no match), however, I specifically negotiated with my new job that they will allow me to do locums work as long as I use my vacation time. I probably will only end up making about 10-15K per year this way (I want to have at least some vacation time for vacation!)

    So now, do I form a LLC, get EIN and have the locums company pay my entity via 1099? My CPA was thinking instead to form a S corp, but after some reading on this site it doesn't seem to make sense with all the accounting and record keeping hassle.

    Do I even need a LLC at all, or can I just do sole proprietor? What are the advantages, disadvantages of this?

    After I decide which entity to form, how do I maximize my tax sheltering? I really don't need the extra income and paying 39.6% + state tax on it wouldn't really make the extra work and time away from family worth it.

    I am under the impression that my new LLC I use for locums can open up its own 401k? Is this correct? Is this even worth it if I'm only projecting to make 10-15k at the most. One benefit of getting paid via 1099 to this new entity is I can now deduct all my CME, travel, phone, internet, license and professional membership fees "above the line" and I won't be subject to the 2% floor if it was W2 income? Is this the best reason to get paid via 1099? These expenses may even completely negate any income.

    To make matters even more complicated my old employer wants me to come there a few days every other month and do some trauma call but they said they can only pay me W2 income. That would basically be taxed at 39.6% + state tax. Hardly worth the extra travel and trouble. Is there any way I can just put that entire earnings into another retirement account since it is considered a "unrelated employer" to the others?

    I'm sorry for the long winded questions. I would appreciate any help!

  • #2
    I have been looking at a very similar situation being a military employee and starting some side work. I did make an LLC but you do not need one to set up a solo 401K. My understanding is that you can set up a solo 401K and make employer contributions up to 20% of your net pay for the year - up to a total of employer and employee contributions of $54K for 2017. SEP IRA is usually simpler to execute and less fees involved and might be best if you already contribute $18k into another plan. A good link to a comparison is here:


    • #3
      I just did a series on this topic. Read these 2 posts:

      Unless you are located in CA and don't want to set up as a sole proprietor, you do not need an s-corporation for that amount of income. Ask your CPA to make his/her case - s/he is the expert, after all.


      • #4
        Thanks Johanna!

        I think I'm leaning towards just being a sole proprietor and using the income for CME and other expenses and if I do have any leftover at least I can put 20% of it into a Solo 401k. I do have to eventually move my old jobs 401k into something and since I do a back door roth it would be nice to have a solo 401k.

        S corp is out of the question, and I worry about LLC since I would have to register as a foreign entity in every state I do locums in, correct? Even though I am using a locums company and will only be paid by them, not the hospital? Will my audit risk go up with sole proprietor since I will be lumping my business expenses / write offs with my personal stuff? Should I get a sole proprietor EIN (is there even such a thing?)

        The only problem with the leftover 1099 income vs W2 is that I will actually end up paying MORE tax on it since I have to pay additional self employment taxes on top of federal and state.

        Sorry for the newbie questions.

        BTW, I signed up for a meeting with you, hopefully we can go over the specifics of my situation. I think the first opening you had was 2 weeks from now. Talk to you soon!



        • #5
          You don't need LLC for solo 410(k). It's more a legal entity than a financial one. It can still be a good idea; it just doesn't really apply to this concept.

          S-corp is almost always not worth it when its income comes from your actual work (as opposed to sales or from employees' work) and when it's only in the tens of thousands. The fees and corporate filing charges are cost-prohibitive.

          Anyone with self-employment income (p much any time you're paid without it being taxed up-front) can contribute to a solo 401(k). A SEP-IRA can be used and can be very similar, both pretax, same contribution limit (25% of income = 20% of net profit, just different ways of expressing it, e.g. 1/4 or 1:4). However, if you do anything in which pretax IRA balances can count against you (like backdoor Roth IRA), then it's preferable not to have a SEP.

          You should be able to find solo, individual, or one-participant (different labels for the same thing) 401(k) plans at major brokerages - Fidelity, Schwab, TD-Ameritrade, etc. You may not want to use Vanguard since they don't accept incoming rollovers.


          • #6
            Yes, you still owe the employer portion of SS/MCR as self-employment tax.

            What work-related expenses you can write off on your schedule C for self-employment income seems to vary from person to person. Some seem to say that you would need to prorate write-offs used for both, like home-state medical license, exams, equipment, etc between your employed and self-employed practices, unless it applied specifically to your self-employed job, e.g. an out-of-state license, un-reimbursed travel, etc. Others don't see a problem putting all your work-related expenses on your schedule C. Others will put new computers, phones, data plans, subscriptions, professional society dues (minus advocacy portion since that's not deductible), custom-tailored and logo-embroidered white coats and scrubs (cropped sleeves a must for ortho), and such onto schedule C, since they might occasionally look at UpToDate on it or optionally do charts from home.

            I'm not a tax professional or CPA, but I've been rather conservative with mine in the past, only putting write-offs on the schedule C which were fully necessary to perform that job, though some also indirectly applied to my W-2 job.