As a freelancer, you’re both a CRNA and a business owner, which means you have a lot more responsibilities. A few wrong mistakes could mean losing money or facing tax penalties. You don’t want to wind up paying more than you ‘should’ in federal income taxes, nor do you want to be hit with an unpleasant surprise when it comes time to file your taxes.
When tax season comes around, some CRNA business owners and self-employed professionals are shocked to see their tax bill. While there’s no avoiding taxes, there are legal ways to structure your business and your salary to reduce taxes.
One such opportunity is reducing FICA self-employment taxes for S corporations.
The Advantages of an S Corp
We’ve previously discussed the importance of considering how to structure your CRNA business, whether that’s a sole proprietorship, limited liability corporation, or S corporation. There are different advantages and disadvantages to each, depending on whether you intend to have employees or work independently, how you want to file taxes, and more.
Unlike a corporation that pays income tax separately, a S corporation pays income tax through its owners’ tax returns based on their percentage share of ownership. As a CRNA, you may structure your company as a S corporation and serve as the sole owner. The benefits of a S corporation is that it’s a pass-through entity for federal income taxes and most state income taxes. This means your business income, tax deductions, credits, and losses pass through to the owner, instead of being taxed at the corporate level.
Structuring your business as a S corporation may also help you avoid the higher taxes self-employed professionals have to pay for Social Security and Medicare.
A Strategy for Reducing Your FICA Taxes
As a self-employed CRNA, you’re likely all too familiar with the self-employment tax rate. When you’re an employee of a hospital or another group, you only have to pay part of the Social Security and Medicare taxes—around 7.5%—whereas self-employed CRNAs must pay both portions. This rate fluctuates, but is generally around 15%. For a CRNA earning $200,000 per year, working for yourself can cost you an additional $15,000 in taxes.
By organizing your business as an S corporation, you have a little wiggle room. While, as an employee, your salary is subject to FICA taxes, your company’s net profit isn’t. One strategy for reducing taxes is to reduce your salary to pay a lower FICA tax amount and take your S corporation’s net profit out of the business as a distribution.
The Caveats to This Strategy
There are a couple of essentials to keep in mind if you are using this strategy. First, you can’t lower your salary to $0 to avoid FICA taxes altogether. The IRS requires S corporation owners to receive “reasonable compensation.” This means they must be paid a reasonable salary based on the services rendered to the business. Speaking with a CPA or business lawyer can help you understand what a reasonable compensation may be for a CRNA.
Second, the net profit of your business is still subject to federal income tax, whether you distribute it to yourself or leave it within your business.
Does This Strategy Make Sense For You?
As a self-employed CRNA, tax planning can help you potentially save thousands of dollars in taxes paid. Because tax planning can be so beneficial, it’s recommended you don’t go it alone. The IRS tax code is 72,536 pages long and filled with various opportunities and strategies for optimal tax efficiency. The key is understanding how each possible opportunity works, and how it fits into your structure and long term goals. These strategies must be implemented by professionals in accordance with the law and on a foundation of honesty.
Consider working with a professional who understands the unique elements of CRNA businesses. Furthermore, to keep your business and personal finances organized and streamlined, it can be beneficial to integrate your tax planning with your financial planning.
With years of experience working exclusively with CRNAs, we have the knowledge to help you determine appropriate tax minimization strategies to help you save more of your hard earned money. If you encounter questions as you investigate some of these tax strategies, don’t hesitate to reach out to us. We’d be happy to help you review your options or offer guidance. You can call our office at 855.304.3748 or email [email protected].
About Jeremy Stanley
Jeremy Stanley is the founder of CRNA Financial Planning® as well as CRNA Tax Associates®. He has been providing advice and guidance for Certified Registered Nurse Anesthetists (CRNA) for over two decades. As a CERTIFIED FINANCIAL PLANNER™, Jeremy has met rigorous certification and professional standards set by the CFP® Board. He is committed to adhering to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients.
Jeremy is also the author of The Wealthy CRNA and A CRNA’s Life After Anesthesia. The Wealthy CRNA features insights into becoming a financially successful CRNA and how to start planning for your financial future, and has been prior approved for up to 4 Class A CE credits by the AANA. A CRNA’s Life After Anesthesia serves as your financial roadmap for a smooth emergence into retirement. It reviews recent changes in the CRNA industry along with the new rules of retirement and the final steps of legacy planning. This book has been prior approved by the AANA for up to 2 Class A CE credits.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.