Maintain an S-Corporation – Should you be one?
The other day I attended a new Elko New Market BNI group which was quite a bit of fun. I met quite a few new people and then I bumped into the Real Estate agent within the group. “Nice to meet you” I said, He replied the same. I asked the realtor how long He’s been in the business, to which He replied “it’s been about 8 years.” When I asked Him what He does for tax planning, He told Me that He’s been going to the same tax person for a number of years. I’ve learned to follow up when I hear that so I asked “So, I’m assuming you’ve become and S-Corp then?” and He drew a blank stare. I gave a quick explanation as to the differences in the taxation of S-Corps and LLC’s, to which He said “well I wonder why my tax person has never done that for me?”
My new realtor friend might be able to implement strategies that could save Him thousands a year, depending on His situation.
We run into that all the time, where people have been with a “tax person” or a “bookkeeper” for a number of years, but they’ve never sat down with a pro-active planner to help them discover how to make sure they pay their fair share, and not a penny more. We’re a Lakeville tax and accounting firm that’s dedicated to helping people maximize their efforts and focus on their business. The way we do that is by handling their annoying bookkeeping, tax filing, tax planning, payroll, and accounting functions and then make sure they pay ONLY your fair share in taxes.
One of the most basic things we do for each business owner is to examine whether or not they should use an LLC or an S-Corp strategy.
Here’s a quick summary of the differences between an “LLC” and an “S-Corp”:
A – You can become either an “LLC taxed as a sole proprietor” or an “LLC taxed as an S-Corp”. For purposes of clarity, I’ll be referring to them as “S-Corps” or “LLC’s” although technically they are both LLC’s.
B – In an LLC, 100% of your net profits are subject to social security and medicare taxes which we call “self-employment taxes”. The Social Security portion is due on all net profits up to the social security limit of about $118,000 and medicare is due above and beyond that limit. After you pay the self-employment taxes, you then pay state and federal income taxes. If you have never set yourself up as a company, you are taxed as a sole proprietor as a default.
C – While 100% of the net profits in an LLC are subject to self employment taxes, an S-Corp is different. When you form an S-Corp, you will take a “reasonable salary” and a “distribution” or dividend. These two types of income are taxed differently, the salary is subject to the self employment tax while the distribution is not. The salary has to be reasonable according to your occupation, experience, industry standards, and a number of other conditions that a tax professional can help you navigate. The distribution is not subject to self employment tax, and is a passive income stream much like income from a rental property. The S-Corp strategy is a very helpful and appropriate strategy to explore, which is why we often lead with it. This is a summary, talk to us or see IRS for specifics
Are you an S-Corp yet? Do you know why? Have you been shown the different scenarios?
A good tax planner will take into account your personal goals, balance sheet, spouse’s income, industry norms, and much more to determine a short term and long term tax plan. The goal is usually to pay only your fair share to uncle sam, unless you love government to the extent that you donate to them more than they require of you…..
Because our client’s are often in a position to benefit greatly from becoming an S-Corporation, we wanted to share this video that helps teach the bureaucracy involved in it’s maintenance. it’s important to understand the requirements that become relevant to take advantage of this highly useful strategy. Mark J. Kohler is a CPA, and entrepreneur, that helps people understand the opportunities and nuances associated with tax-planning. In this short video He shares…
4 Ways to Maintain an S-Corporation:
1 – File your Quarterly Payroll Reports
Even if you didn’t make anything, you’ll want to make sure you file a zero report. Mark says that the IRS is like a suspicious boyfriend or girlfriend, because if you don’t call them they will always assume the worst. This means that it’s not alright for small business owners to blissfully wait till the end of the year to sit down and finally do their tax filing. While the S-Corporation is extremely helpful for tax reduction, there are some pieces of bureaucracy that you’ll have to jump through – which is what we specialize in taking care of all this with a complete, all-inclusive service for small businesses.
2 – Do your Annual Reports like a company
There are some other bureaucratic things you’ll want to make sure you do as a company, particularly so you keep it bona-fide. Annual meetings, shareholder meetings, company books, by-laws, minutes, and stock certificates are all part of what He calls “company maintenance”. This is important so that you will be a separate company and create a bona-fide “corporate veil”.
3 – Pay your Annual Registration Fee to the state
Again, this is about making sure you pay your fees and file anything required to keep you in good-standing. The state can involuntary dissolve your corporation and you will no longer have one.
4 – Fail a Corporate Tax Return
You will now have a corporate tax return due, which is often more expensive to have prepared and is due on March 15th rather than April 15th. It’s easy to file an extension, but if you’ve become and S-Corp, it is critically important that you put together and file a good tax return for your corporation. It’s also important that you don’t assume your bookkeeper or tax person is on top of things, We meet people every week that haven’t been given the right advice and have failed to file the appropriate returns.
To conclude, We want you to know that an S-Corporation is a very helpful and powerful tool to implement and possibly mitigate your taxes. Self-employment taxes are 15.3%, which is hefty enough where mitigation can create tremendous savings. Think of it this way, for every $10,000 in profit which is not subject to the 15.3%, you save $1,530. If you had $100,000 subject to self employment taxes, and then maneuvered to legitimately have only $30,000 subject, you would save about $10,710 in self employment taxes. These results aren’t guaranteed, and each situation needs planning. This is why we provide our service that includes almost everything needed to take advantage of the tax benefits of the S-Corporation.
While our pricing scales upwards for more complex accounting, payroll, planning and filing, this is our typical setup:
Nuance Financial Tax & Accounting Small Business Package:
1 – S-Corporation Corporate Tax Return
2 – You and your Spouses Personal Tax Return
3 – Tax Planning – Pro-active, and ongoing tax planning to manage the tensions of Salary, Payroll, Deductions, and Retirement plans so you pay your fair share and not a penny more.
4 – Filing your Quarterly taxes and Sales Taxes (scope varies greatly on this)
5 – Provide a payroll service. We generally utilize either intuit payroll, ADP, or Paychex who provide us with wholesale pricing
6 – We RUN the payroll service and take care of it’s processing
7 – We provide QuickBooks online
8 – We provide a bookkeeping service that ensures your books are setup to the highest standards and up-to-date constantly
9 – Financial consulting, advice, and oversight for your business and it’s operations.
We always connect in person, do a free analysis to see if we would even be valuable, and then present a precise quote. Email please contact us and we’ll connect over a cup of coffee or at our office!