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How a couple saved $126,000 in tax for retirement, and found peace of mind during a big business change

Jeff and Trisha are a couple with two kids living in California. When they came to Cerebral for advice, Jeff had recently changed from doing W-2 work to running his healthcare business as a full 1099 independent contractor.

Jeff already had a strong feeling he was paying too much tax. He had all kinds of questions about what entity he should be, how to maximize his retirement contributions and what to do about health insurance.

It was becoming too much for Jeff to manage the taxes himself

Up until this point, Jeff had been preparing the taxes himself - and it had been easy enough to navigate so far. He only had a W-2 to deal with, Jeff and Trisha owned their own home - meaning only a small amount of work to prepare and few deductions.

But Jeff’s situation had changed. This change from W-2 to 1099 meant a change in strategy was needed, and he didn’t feel confident he could continue to self-prepare. 

Like most new clients, Jeff and Trisha realized this step up wasn’t something they wanted to grapple with alone. They recognized they needed expert help to make tax savings the right way (and the most efficient way) so they wouldn’t lose any more of their income.

We led Jeff through the process of how to incorporate and choose the right retirement plan

We were able to implement a plan that saved Jeff and Trisha over $126,000. You can see him talk about this savings in his video on our client testimonials page.

Though he quotes it as $118,00, it ended up as a total of $126,826. This means Jeff and Trisha saw a 604.95% return on the investment they made in getting support from us. You can read more about the ROI our clients usually see on our dedicated page here

We helped Jeff and Trisha save this considerable amount on their taxes using strategies based on the entity selection for Jeff’s business and the choice of retirement plan.

How exactly?

We recommended that he create a Professional Corporation (PC)

He would file an election to be taxed as an S-corporation. That way, Jeff would be able to split his earnings between a reasonable compensation of an estimated $250,000 and distributions.

While Jeff would still pay employment taxes (Social Security and Medicare) on his salary, the distributions would be exempt from self-employment taxes, which creates substantial savings as his earnings increase over time.

Also, importantly as a locum tenen physician working in multiple states, we created Jeff’s professional corporation in California, his home state, even though he was working in Iowa. Since he is a resident of California, he would still owe tax on the income earned in Iowa to California. As a California corporation, his PC would have to be “foreign qualified” (aka registered) in Iowa and any state he worked in. He would receive a credit on his California tax return for taxes paid to Iowa.

In order to come up with an appropriate salary for Jeff, he completed a Reasonable Compensation Analysis

This would be on file for future reference and would substantiate his salary in front of the IRS. We also coordinated Jeff’s salary with the Third Party Administration (TPA) in charge of calculating his retirement contributions to help set his salary at an amount that could maximize his retirement contributions while minimizing his social security and medicare tax paid and keeping the IRS happy.

We recommended he open a defined benefit plan

Regarding Jeff’s retirement plan, we recommended that he open a defined benefit plan that consisted of a Cash Balance Plan and a 401(k) profit-sharing plan so he could contribute more than he would be allowed to do with any other retirement plan option. (In 2019, this amount was about $198,000 for both Jeff and Trisha).

It was also recommended that Jeff hire his spouse, Trisha, as an employee of his business.

In this case, Trisha would need to be provided with a position that was based on her skills as an administrative assistant and bookkeeper with a suggested salary of $50,000. This, in turn, allowed her to contribute $46,000 to a retirement plan.

(Note that if Trisha was not able to work enough hours to substantiate a $50,000 salary, we recommended that Jeff cut her salary down to $25,000, which would still allow her to contribute up to $33,000 to the retirement plan).

We used the Backdoor Roth conversion strategy to maximize retirement contributions

Further, even though the contribution to a Roth IRA would not be deductible, having this type of account was in line with the couple’s goal of maximizing retirement contributions. Because Jeff and Trisha’s income put them over the limit for contributing to a Roth, we used the “backdoor Roth” conversion strategy that allowed the couple to make a non-deductible IRA contribution, and then immediately convert to a Roth IRA account. This also allowed Jeff and Trisha to rollover funds that they may already have in a traditional IRA, SIMPLE IRA, and/or SEP IRA account.

We identified expenses that could be reimbursed

In the area of business tax deductions, there were some expenses that we identified, such as travel and meal per diem that could be used through an Accountable Plan to be reimbursed.

“I would honestly tell you the biggest thing Alexis has given me is peace of mind”

Jeff and Trisha are now saving five times more money for their retirement. But beyond this achievement, Jeff says his trust in our process gave him the peace of mind that he was doing the right thing. There were a couple of hiccups along the way with his 1099 - and he was able to rely on our help to solve them.

Tax strategy and business strategy are intertwined here - and we’re so pleased that we could lead Jeff and Trisha through a complicated process and help them understand their position better. Not to mention the result!

“Alexis has been the best financial deal of my entire life. Of course with the exception of what I paid for my wife's engagement and wedding ring! If you’re a physician that is an independent contractor, is in private practice or maybe part of a smaller group, she’s going to be the right fit for an awful lot of Docs”

We couldn’t have put it better ourselves! We loved working with Jeff and Trisha, and we’d love to help you if you’re in the same position. If you’re a Physician paying too much in tax, and wanting to know how to save more for your future - start your own transformation today.