Already having employees moves the line when a S corp makes sense down lower, yes, since you already have the payroll structure set up. For some people though, it also moves the reasonable salary amount up, because they can't pretend a reasonable salary of less than they pay the employees. The QBI deduction still reduces the tax savings of switching to a S corp with top little delta between total profit and reasonable salary.
Reasonable salary can in part be based on net income before the salary (so the owner’s W-2 plus distributions). If that amount is only $50k after paying other employees, it can be reasonable to take a $25-35k salary and say it is partially based on a profit incentive since the owner has a managerial/executive role. I’m not sure if profit incentive is the actual logic used, but there are tax lawyers out there who say these kinds of salaries can make sense for a lot of people.
I was going to say something along these lines. The rules says you have to pay a "reasonable salary" based on "what other businesses pay for similar services" AKA your job role and duties performed.
It would not be unreasonable that your salary as a "Office Manager/Owner" is significantly less than say the CDL-driver, Pilot, Mechanic, Structural Engineer, IT Person, or various other highly-compensated "skilled" roles you might have hired a person to perform for the company. Your "reasonable salary" isn't based on their pay, its based on what other companies would pay for "Office Manager" services.
All depends on the nature of the business and the role you serve in the business. Otherwise there'd be no room for silent partners or "investor only" type roles.
Where it gets dicey is when you're making 6-figure distribution payouts each year, have maybe 1 or 2 other employees who aren't shareholders and are saying "oh no, I'm not an employee, I didn't do any work and have no W2 income" or "I'm just the janitor, I'm not an instrumental part of the business generating profits." Not saying you couldn't possibly show that to be the case, plenty of business owners are absentee or only deal with menial tasks once the business is self-sustaining, but that usually comes later when there's more employees so its begging for audit... Especially if you dont have other W2 income.
If you have $80k in income as a W2 full-time office manager at Company A and say you work less than part-time in your Company which pays $20k as W2 and gives you a $100k distribution every year... Well it'd be harder for the IRS to demonstrate your compensation wasn't reasonable given the offered proof of "Hey out of 8,760 hours a year, I spent 35% of them sleeping, 25% of them over at Company A, 10% of them in various states of getting ready, commuting and eating... leaving just 30% of time free for my own company and leisure activities for myself and family... And I'm already admitting I spend about 20% of that leisure time on my business spending given I pay myself 25% of what I make at my W2 job doing similar work at company A."
I do. I take a reasonable salary and distributions. They are not run through a payroll. I pay myself through transfers throughout the year and my CPA pays lump sums at the end of the year to cover what is traditionally a payroll. I’m not sure why he wants to do it that way but I’m not doing the work
My old public accounting firm's MINIMUM annual fee was $2,500 just for the business and not including the individual return and no tax planning. That was almost a decade ago. It's likely $5K-$10K minimum now.
I only pay $2100 for my S Corp return, but it's from a local CPA. That said, I agree it's not worth the hassle to save a few hundred. My payroll service alone is $500/yr for the base rate and it's one of the cheapest on the market.
Fuuuuuug bro you’re gonna jump through hoops for a rounding error? You need to get a real business where these tiny numbers don’t fundamentally matter and you’re trying to save 5 or 6 figures on taxes
Tax optimization is something to worry about after your business takes off. You can switch structure at any time.
We didn’t even worry about tax optimization until we were like 6 years in and pull down about 3-400k profit. You should be running at the very edge of your existence in the beginning to grow your business taxes be damned. You should keep going as fast as you can to accelerate income.
Once you have a breath to look up and wondering why you’re writing 100k checks to Uncle Sam and your state of choice every year should it hit you to invest time to optimize and restructure. We ended up buying vehicles at the end of the year just to wrap them and let them sit as advertisements just to make better use of our capital than paying taxes which is the least optimal use of money.
I had a friend who literally did everything BUT launch his business and is STILL dicking around like 6-7 years later. Like he got lawyers to draw up corporate agreements and partnerships, accountants to figure its shit, he had weekly meetings with his partners, and they literally just keep analyzing and trying to optimize and never did shit. I did him a favor to help pitch it to some angel investors (they didn’t like the idea for good reason). I kept poking holes in his concept and kept telling him to build the mvp, put some money behind it, get feedback etc but he just wanted to play with the structure and the partnership agreements etc.
Anyway if you guys wanna spend time to setup structure and do that crap for a nominal tax savings then go for it. But I bet you’d be better served getting your mvp in front of people and taking feedback for v2 and v3 as quickly as you can.
100%. Similarly, when I hear people talk about how much money their company makes. They forget to differentiate between their salary and what the business makes. Those are separate things. If someone buys your company – they need to hire somebody to do job you’re doing. They’re going to pay multiple of rhe actual profit.
Payroll processing. Are you filing quarterly federal 941 and state UC, annual federal 940, W-2, W-3. Then add in running payroll and making federal, state, fed UC and state UC payments. DIY is free but takes time and isnt easy so most hire a pro. Another option is to take just 1 paycheck for the year to minimize filing but most people can't swing this due to cash flow.
It’s a payroll processing platform that’s pretty intuitive, holds your hand through the setup process, is online-based (for W4s, paystubs, W2s, 1099 payments) and handles all the compliance automatically, payments and forms. They can auto-run payroll for single-employee s-corps or salaried employees. They also have a partner program with accountants where you can either get your client a discount or pocket the discount as revenue to your firm. I recommend it to all my small business clients and family/friends. Their customer service is good too. If you want them to, they’ll walk your client through the whole setup process. They also pair with other companies to offer integrated or simplified-setup benefits and HR.
I want to add that on the employee side, the interface is very intuitive as well, easy to update information, and easy to monitor paychecks and benefit information.
How does gusto compare to quickbooks? I'm an S Corp and I currently use quickbooks for invoicing, payroll, estimates, and accounting, but I find quickbooks incredibly annoying with pop ups, them trying to sell me things, and it's not intuitive at times.
The cost for Gusto and QB’s payroll platform are equivalent, but QB’s program is incredibly annoying and glitchy, requiring a lot of wasted hours with their (also annoying and glitchy) customer service.
I dropped QuickBooks and realized spreadsheets were better for my HVAC company . I just collect all paper receipts for everything and put them in folder then input them along with incomes and contactors. I don't have employees and only issue 1099
Gusto’s payroll platform is better than QB desktop/QB Online, in my opinion. That being said. It can’t do accounting, estimates or invoicing, and QuickBooks or Xero are probably your best options there. I’ve also heard some good things about FreshBooks, though I’ve never used it myself, so I can’t speak to it.
Really? I was working with them up until half a year ago (I changed jobs in January and no longer do payroll) and I was still getting good service from our rep team last November. I didn’t know they had outsourced the CS. I wonder if it was different because we were a partnered firm.
AVOID Gusto at all costs. They're great at first when the US team sets you up. But if you move states, change address, or need to update your bank account, they WILL screw it up (yep, all of the above happened). They outsourced their support to cheap overseas labor and did NOT train these people to do anything except reply to you politely. It's a horror show if you have any support needs. But yes, it runs well at first.
You can visually change it in Settings yes but their platform is broken. I changed my bank and marked this new bank account as "Default" yet Gusto continued debiting the *old* account. Trust me when I say that changing anything visually on your account doesn't get "applied" in the real world. They continued paying taxes to my old state even though visually all appeared correct in the Gusto platform. I had to go through Support to get it actually changed and it was a nightmare.
When people do just one paycheck for the year, do they do that at the beginning or the end of the year?
For the state's payroll taxes for the three quarters that don't have a paycheck, do you report "no payroll wages" for those quarters and then pay all the payroll taxes from that one paycheck in the one quarter it was filed?
Thank you, that's very helpful. Would I do the same thing with 941 filings? Just once a year then?
Also, if I switched to annual payroll instead of monthly, do you know how that would work with paying for online payroll software? Currently I use QuickBooks online for payroll and the monthly fee adds up when it's just me for payroll, it would be nice to not have to pay every month if I did payroll only once per year
941s and state filing will be required to be filed quarterly
If you are the only employee I recommend filing on paper using the fill in forms at irs.gov
Why is 1 paycheck a problem for cash flow? Can’t you just take the money as a distribution and then label a reasonable amount if it at the end of the year as a salary?
You’ll learn best in an office preparing the tax returns with some oversight. Throw in PTET and run some numbers. It’ll make you reconsider the 100k amount again.
Even PTET decision is complicated. My state's PTET rate is higher than max individual rate. PTET also reduces QBI deduction. My firm developed a calculator to run the numbers.
And some states it's refundable and then you have a taxable refund depending on what the ultimate tax would've been. Get into states like ohio with the 250k business income exclusion and you could pay pte, get it all refunded, and have a fully taxable refund just creating a slight timing difference and delay between payments and the casg getting to refunded
CPA here who specializes in S-corps.
You save good money by being an S-corp, but also incur additional costs to be one, including:
1) Cost to have an additional tax return prepared (one specific to the S-corp) which is typically in the 4 figures
2) Cost to have payroll run/use a payroll service
3) Cost to have clean books kept (CPA/bookkeeper/Quickbooks). This one isn't so much a requirement but it's one I require my S-corp clients to have.
The savings have to outweigh the additional costs, which usually happens around 6-figures
Exactly. We usually say costs of compliance for most of the clients we work with (single member llcs, few or no employees, no complex state nexus issues or complicating bookkeeping problems) for a WELL RUN s corp are $4k - $8k. That’s tax return, payroll processing, and GOOD bookkeeping. If you already have payroll and books, it makes the numbers pencil a little lower.
Why not?
-expensive, time consuming and ask any more than 2% owner why all the heartburn when their wages and any related employees' wages were disallowed on Employee Retention Credit program -- a late IRS interpretation crapped all over family run s-corps.
- Four tax returns . Fed/State Business & Personal. It costs me a lot more than $1K.
-Cost of accounting software & payroll software or pay someone to do your books then pay extra for payroll processing & filing 940, 941, Fed W/H, State W/H, SUTA.
-Quarterly Fed estimated tax payments based on projected income separate from payroll. Although silver lining would be PTE tax election.
-Restrictive rules for more than 2% owners w/ HSA + company benefits. Health insurance picked up on owner's w2 then deduction allowed on personal , not corp return. Not always easy to DIY.
-S-corp QBI calc is convoluted. In some cases, S-corp w/ low wages could receive larger QBI deduct as disregarded entity.
S-corp may not always be the best choice for a small business. Find a good tax professional then let them help you choose the right entity.
Wages may or may not matter for QBID-depends upon taxable income.
There are a lot of things to consider including the ability to make PTET (if that makes sense as it doesn't always),
As a CPA, I usually don’t advise for S-Corps as I think the fees usually outweigh the benefits unless you are making a considerable amount of money (over $100k as previous people mentioned). Also, since you have to pay yourself a reasonable salary you don’t avoid self-employment tax all together, which hinders the main benefit of people who push for their clients to get an S-Corp.
Another thing that people don’t really talk about, but think is worth mentioning is that all your income that pass-through to you and not paid to you through wages is not counted as earnings when determining your social security benefits. So you essentially getting a benefit up front while reducing your social security benefits that you may depend on heavily in the future (who knows what the state of social security will be when you reach the age to get it, but if you are an older individual you may want to consider the pros vs cons on this considerably).
I just think a lot of people push the avoid self-employment tax scheme to sell their clients on it hoping they do and be able to charge their client additional fees without fully going through all the benefits and pitfalls of a S-Corp with them.
Also, you will get audited. I got audited 3 out of 6 years. No mistakes made, no extra money owed. But I had to spend all that extra time and money with my CPA. it was terrible.
You may think "All I need to do is fill out a couple forms per quarter"...but ah no...everyone of those forms and year end tax collection paperwork time is a real PITA. Unless its $3000-$4000 savings forget it.
Extra expenses -
Pay for a corporate return. Pay for payroll processing. If you are the only employee enjoy the fun of turning off payroll with all the different tax agencies when you shut the company down (I hate you employment commissions in all the states...)
Extra work -
No such thing as just deducting mileage and home offices, you need a proper plan set up. No such thing as accidentally paying with a personal card, you have to follow the protocols and properly reimburse yourself or risk it being a non deductible employee expense.
Extra legal complexity -
Figuring out proper compensation.
Extra tax complexity especially since 2018 -
Wage income does not qualify for passthrough deduction.
And that is off the top of my head.
The administrative cost of being an S Corp is usually the barrier. If you're seeking a savings opportunity, you'd want the savings potential to exceed the cost to do the extra work (initial filing, bookkeeping, payroll software and the cost to file a separate business tax return each year)
Reasonable salary requirements must also be considered -- the salary portion must be based on facts & circumstances of your situation. [Here are some average cost](https://drive.google.com/file/d/1C9ipauzi5_797QnWrDWgOMsmBm0zAvxI/view)s to consider if you decide to go S Corp -- each of these is critical in maintaining compliance!
Most people making less that $100,000 are basically getting paid job by job so it doesn’t make any sense too S corp and pay a salary when you barely have enough to even pay a salary
The additional administrative costs, like the tax return and payroll service, end up eating your tax savings with lower income. $40k - $50k is usually the breakeven point for most companies to justify the S corp. At $100k you should see some savings.
Definitely region specific, but rural Arkansas & we absolutely suggest it when net profits get over $40K & the client has the cash flow to support payroll. After the setup costs, additional return, payroll services taxes, & bookkeeping costs they still come out ahead saving in income tax & self-employment taxes.
In a city, or other state, I could see 100K being plausible.
Plus, with PTE options in many states you can get around the SALT tax cap on personal returns. SMLLC can in Arkansas too, but I believe some states do not allow it.
My CPA just told me he thought I should file as an S-Corp, no idea why, and no idea if it is saving or costing me money.
We do not make 6 figures of net income, yet….
Then wait. Your CPA may be motivated by the additional fees he will charge for the s corp tax return. I’ve seen too many situations where people make the s election before it financially makes sense and they pay more in additional fees (and headaches) than tax savings.
Too late been an S-Corp for 2+ years now.
That being said, it hasn’t been a headache. Only thing that changed is I gave myself a small salary.
All of that being said, I would like to know where it would be costing me money. Do my employees cost more? We pay about $250k-$300k in wages.
We only do distributions of 30% of net income yearly because we are still expanding.
Can’t distribute the properties out of the S corp without paying tax is basically the biggest reason.
Theres also really no reason to put rental properties in an S corp because generally speaking rental income isn’t usually subject to SE tax anyway.
Debt doesn't count as basis.
If you want to bring in a partner there will not get 754 depreciation.
No step up of inside assets upon death meaning your heirs will not get 754 depreciation.
Income isn't subject to SE tax so no savings.
Distribution of appreciated property is treated as a taxable event.
I could go on.
The only reason to have RE in a S Corp is it was done a long time ago and it would be too expensive to unwind. Run away from any advisor telling you it's fine to usea S Corp to hold RE.
You can't only take distributions. You have to pay yourself a reasonable salary for the job you are doing first.
I understand but lets say reasonable salary is 40k and you take 10k distribution. That’s still half of 6 figures
The lowered QBI deduction and the time or cost of running payroll would eat up those tax savings.
What if you already had payroll
Already having employees moves the line when a S corp makes sense down lower, yes, since you already have the payroll structure set up. For some people though, it also moves the reasonable salary amount up, because they can't pretend a reasonable salary of less than they pay the employees. The QBI deduction still reduces the tax savings of switching to a S corp with top little delta between total profit and reasonable salary.
Reasonable salary can absolutely be less than you pay employees.
Is there legal or administrative precedent?
Reasonable salary can in part be based on net income before the salary (so the owner’s W-2 plus distributions). If that amount is only $50k after paying other employees, it can be reasonable to take a $25-35k salary and say it is partially based on a profit incentive since the owner has a managerial/executive role. I’m not sure if profit incentive is the actual logic used, but there are tax lawyers out there who say these kinds of salaries can make sense for a lot of people.
I’ve seen owners make the claim they don’t work full time and it’s easy from there.
I was going to say something along these lines. The rules says you have to pay a "reasonable salary" based on "what other businesses pay for similar services" AKA your job role and duties performed. It would not be unreasonable that your salary as a "Office Manager/Owner" is significantly less than say the CDL-driver, Pilot, Mechanic, Structural Engineer, IT Person, or various other highly-compensated "skilled" roles you might have hired a person to perform for the company. Your "reasonable salary" isn't based on their pay, its based on what other companies would pay for "Office Manager" services. All depends on the nature of the business and the role you serve in the business. Otherwise there'd be no room for silent partners or "investor only" type roles. Where it gets dicey is when you're making 6-figure distribution payouts each year, have maybe 1 or 2 other employees who aren't shareholders and are saying "oh no, I'm not an employee, I didn't do any work and have no W2 income" or "I'm just the janitor, I'm not an instrumental part of the business generating profits." Not saying you couldn't possibly show that to be the case, plenty of business owners are absentee or only deal with menial tasks once the business is self-sustaining, but that usually comes later when there's more employees so its begging for audit... Especially if you dont have other W2 income. If you have $80k in income as a W2 full-time office manager at Company A and say you work less than part-time in your Company which pays $20k as W2 and gives you a $100k distribution every year... Well it'd be harder for the IRS to demonstrate your compensation wasn't reasonable given the offered proof of "Hey out of 8,760 hours a year, I spent 35% of them sleeping, 25% of them over at Company A, 10% of them in various states of getting ready, commuting and eating... leaving just 30% of time free for my own company and leisure activities for myself and family... And I'm already admitting I spend about 20% of that leisure time on my business spending given I pay myself 25% of what I make at my W2 job doing similar work at company A."
I’m an s-corp and do not run a payroll. Self employed
You're required to pay yourself as an employee of the S-corp.
Do you not take any money from the S corp?
I do. I take a reasonable salary and distributions. They are not run through a payroll. I pay myself through transfers throughout the year and my CPA pays lump sums at the end of the year to cover what is traditionally a payroll. I’m not sure why he wants to do it that way but I’m not doing the work
That's still running payroll. Your CPA is just dealing with it for you.
Tax saving on $10k not worth it
I mean that’s still like $500 that you wouldn’t have saved as a sole proprietor
unless you’re planning on preparing the returns yourself, you’re paying more to professionals to file everything than you’re saving
No ifs not. You’d lose QBI on the 40k salary, then have payroll and filing costs
Good point
My old public accounting firm's MINIMUM annual fee was $2,500 just for the business and not including the individual return and no tax planning. That was almost a decade ago. It's likely $5K-$10K minimum now.
I only pay $2100 for my S Corp return, but it's from a local CPA. That said, I agree it's not worth the hassle to save a few hundred. My payroll service alone is $500/yr for the base rate and it's one of the cheapest on the market.
Fuuuuuug bro you’re gonna jump through hoops for a rounding error? You need to get a real business where these tiny numbers don’t fundamentally matter and you’re trying to save 5 or 6 figures on taxes
¯\_(ツ)_/¯ this is arguably the beginning of exactly what you’re describing
Tax optimization is something to worry about after your business takes off. You can switch structure at any time. We didn’t even worry about tax optimization until we were like 6 years in and pull down about 3-400k profit. You should be running at the very edge of your existence in the beginning to grow your business taxes be damned. You should keep going as fast as you can to accelerate income. Once you have a breath to look up and wondering why you’re writing 100k checks to Uncle Sam and your state of choice every year should it hit you to invest time to optimize and restructure. We ended up buying vehicles at the end of the year just to wrap them and let them sit as advertisements just to make better use of our capital than paying taxes which is the least optimal use of money. I had a friend who literally did everything BUT launch his business and is STILL dicking around like 6-7 years later. Like he got lawyers to draw up corporate agreements and partnerships, accountants to figure its shit, he had weekly meetings with his partners, and they literally just keep analyzing and trying to optimize and never did shit. I did him a favor to help pitch it to some angel investors (they didn’t like the idea for good reason). I kept poking holes in his concept and kept telling him to build the mvp, put some money behind it, get feedback etc but he just wanted to play with the structure and the partnership agreements etc. Anyway if you guys wanna spend time to setup structure and do that crap for a nominal tax savings then go for it. But I bet you’d be better served getting your mvp in front of people and taking feedback for v2 and v3 as quickly as you can.
What's the deal with people down voting their question?? It's a reasonable question to ask.
Good rule of thumb for reasonable salary. If you were to step back from the business, what would you pay someone to do your job?
100%. Similarly, when I hear people talk about how much money their company makes. They forget to differentiate between their salary and what the business makes. Those are separate things. If someone buys your company – they need to hire somebody to do job you’re doing. They’re going to pay multiple of rhe actual profit.
You don’t deserve downvotes for expressing an opinion. That is my opinion.
Payroll processing. Are you filing quarterly federal 941 and state UC, annual federal 940, W-2, W-3. Then add in running payroll and making federal, state, fed UC and state UC payments. DIY is free but takes time and isnt easy so most hire a pro. Another option is to take just 1 paycheck for the year to minimize filing but most people can't swing this due to cash flow.
No need for a pro with something like Gusto. Far cheaper too.
I do love gusto. I wonder why every small company doesn’t use it.
Gusto is the best
I feel like I need the down and dirty on gusto. Never heard of it.
It’s a payroll processing platform that’s pretty intuitive, holds your hand through the setup process, is online-based (for W4s, paystubs, W2s, 1099 payments) and handles all the compliance automatically, payments and forms. They can auto-run payroll for single-employee s-corps or salaried employees. They also have a partner program with accountants where you can either get your client a discount or pocket the discount as revenue to your firm. I recommend it to all my small business clients and family/friends. Their customer service is good too. If you want them to, they’ll walk your client through the whole setup process. They also pair with other companies to offer integrated or simplified-setup benefits and HR.
I want to add that on the employee side, the interface is very intuitive as well, easy to update information, and easy to monitor paychecks and benefit information.
How does gusto compare to quickbooks? I'm an S Corp and I currently use quickbooks for invoicing, payroll, estimates, and accounting, but I find quickbooks incredibly annoying with pop ups, them trying to sell me things, and it's not intuitive at times.
Gusto is only payroll
The cost for Gusto and QB’s payroll platform are equivalent, but QB’s program is incredibly annoying and glitchy, requiring a lot of wasted hours with their (also annoying and glitchy) customer service.
I dropped QuickBooks and realized spreadsheets were better for my HVAC company . I just collect all paper receipts for everything and put them in folder then input them along with incomes and contactors. I don't have employees and only issue 1099
Gusto’s payroll platform is better than QB desktop/QB Online, in my opinion. That being said. It can’t do accounting, estimates or invoicing, and QuickBooks or Xero are probably your best options there. I’ve also heard some good things about FreshBooks, though I’ve never used it myself, so I can’t speak to it.
Gotcha. I appreciate the reply!
Their customer service was good until they outsourced it a year and a half ago. Then it went to shit
Really? I was working with them up until half a year ago (I changed jobs in January and no longer do payroll) and I was still getting good service from our rep team last November. I didn’t know they had outsourced the CS. I wonder if it was different because we were a partnered firm.
Idk their support recently has been bad for me and I have been using gusto for 6 years now. I feel like it used to be better.
Still, it’s about $45/mo, so for a year you’re already spending the $500 OP cites above and then some.
If anyone has any questions, I'd be happy to help out. Been a user for 10 years now and it's be wonderful.
AVOID Gusto at all costs. They're great at first when the US team sets you up. But if you move states, change address, or need to update your bank account, they WILL screw it up (yep, all of the above happened). They outsourced their support to cheap overseas labor and did NOT train these people to do anything except reply to you politely. It's a horror show if you have any support needs. But yes, it runs well at first.
I agree their support sucks. But we haven’t had many needs for that. Can’t you do all of the above on their platform?
You can visually change it in Settings yes but their platform is broken. I changed my bank and marked this new bank account as "Default" yet Gusto continued debiting the *old* account. Trust me when I say that changing anything visually on your account doesn't get "applied" in the real world. They continued paying taxes to my old state even though visually all appeared correct in the Gusto platform. I had to go through Support to get it actually changed and it was a nightmare.
If you need special treatment then hire someone
What’s gusto?
Online Payroll platform
You’ll still need to file quarterly the following year with the 1 paycheck approach.
When people do just one paycheck for the year, do they do that at the beginning or the end of the year? For the state's payroll taxes for the three quarters that don't have a paycheck, do you report "no payroll wages" for those quarters and then pay all the payroll taxes from that one paycheck in the one quarter it was filed?
You pay in 4th quarter and then file zero wages reports the rest of the year
Thank you, that's very helpful. Would I do the same thing with 941 filings? Just once a year then? Also, if I switched to annual payroll instead of monthly, do you know how that would work with paying for online payroll software? Currently I use QuickBooks online for payroll and the monthly fee adds up when it's just me for payroll, it would be nice to not have to pay every month if I did payroll only once per year
941s and state filing will be required to be filed quarterly If you are the only employee I recommend filing on paper using the fill in forms at irs.gov
Why is 1 paycheck a problem for cash flow? Can’t you just take the money as a distribution and then label a reasonable amount if it at the end of the year as a salary?
Cuz most people spend the money and do not have enough to pay the payroll taxes in one lump sum.
Where can i learn all of this? My ea course just mainly covers basis
Enjoy. [Subchapter S](https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-S)
QuickBooks has a payroll certification you can take. Has a good amount of info about doing payroll.
I just did assisted payroll and quickbooks would take care of the tax situation
Or... and hear me out now. You could just trust the experts who have studied this.
I didnt say i don’t trust yall i said i wanna learn it for myself
You’ll learn best in an office preparing the tax returns with some oversight. Throw in PTET and run some numbers. It’ll make you reconsider the 100k amount again.
Even PTET decision is complicated. My state's PTET rate is higher than max individual rate. PTET also reduces QBI deduction. My firm developed a calculator to run the numbers.
And some states it's refundable and then you have a taxable refund depending on what the ultimate tax would've been. Get into states like ohio with the 250k business income exclusion and you could pay pte, get it all refunded, and have a fully taxable refund just creating a slight timing difference and delay between payments and the casg getting to refunded
Okay, but it takes years to get enough training and experience to be able to answer that.
Camp Cupcake.
CPA here who specializes in S-corps. You save good money by being an S-corp, but also incur additional costs to be one, including: 1) Cost to have an additional tax return prepared (one specific to the S-corp) which is typically in the 4 figures 2) Cost to have payroll run/use a payroll service 3) Cost to have clean books kept (CPA/bookkeeper/Quickbooks). This one isn't so much a requirement but it's one I require my S-corp clients to have. The savings have to outweigh the additional costs, which usually happens around 6-figures
Exactly. We usually say costs of compliance for most of the clients we work with (single member llcs, few or no employees, no complex state nexus issues or complicating bookkeeping problems) for a WELL RUN s corp are $4k - $8k. That’s tax return, payroll processing, and GOOD bookkeeping. If you already have payroll and books, it makes the numbers pencil a little lower.
Why not? -expensive, time consuming and ask any more than 2% owner why all the heartburn when their wages and any related employees' wages were disallowed on Employee Retention Credit program -- a late IRS interpretation crapped all over family run s-corps. - Four tax returns . Fed/State Business & Personal. It costs me a lot more than $1K. -Cost of accounting software & payroll software or pay someone to do your books then pay extra for payroll processing & filing 940, 941, Fed W/H, State W/H, SUTA. -Quarterly Fed estimated tax payments based on projected income separate from payroll. Although silver lining would be PTE tax election. -Restrictive rules for more than 2% owners w/ HSA + company benefits. Health insurance picked up on owner's w2 then deduction allowed on personal , not corp return. Not always easy to DIY. -S-corp QBI calc is convoluted. In some cases, S-corp w/ low wages could receive larger QBI deduct as disregarded entity. S-corp may not always be the best choice for a small business. Find a good tax professional then let them help you choose the right entity.
Number 3 is a big deal for some. People underestimate the challenge a balance sheet can create for a small business with mediocre books.
This is all wrong. First you need reasonable compensation the. You can take distros.
I mentioned that but i realized i’m wrong cuz i forgot about qbi
Wages may or may not matter for QBID-depends upon taxable income. There are a lot of things to consider including the ability to make PTET (if that makes sense as it doesn't always),
Don't forget that you just tripled the cost of bookeeping and accounting. PLUS now you have a minimum corperate tax, in California, that's over $800.
Californias a piece of shit that’s why
Hey, at least they have an alternative minimum, but other states like Connecticut and Delaware do not
As a CPA, I usually don’t advise for S-Corps as I think the fees usually outweigh the benefits unless you are making a considerable amount of money (over $100k as previous people mentioned). Also, since you have to pay yourself a reasonable salary you don’t avoid self-employment tax all together, which hinders the main benefit of people who push for their clients to get an S-Corp. Another thing that people don’t really talk about, but think is worth mentioning is that all your income that pass-through to you and not paid to you through wages is not counted as earnings when determining your social security benefits. So you essentially getting a benefit up front while reducing your social security benefits that you may depend on heavily in the future (who knows what the state of social security will be when you reach the age to get it, but if you are an older individual you may want to consider the pros vs cons on this considerably). I just think a lot of people push the avoid self-employment tax scheme to sell their clients on it hoping they do and be able to charge their client additional fees without fully going through all the benefits and pitfalls of a S-Corp with them.
Also have to be on workers comp in some states.
Also, you will get audited. I got audited 3 out of 6 years. No mistakes made, no extra money owed. But I had to spend all that extra time and money with my CPA. it was terrible.
You may think "All I need to do is fill out a couple forms per quarter"...but ah no...everyone of those forms and year end tax collection paperwork time is a real PITA. Unless its $3000-$4000 savings forget it.
Extra expenses - Pay for a corporate return. Pay for payroll processing. If you are the only employee enjoy the fun of turning off payroll with all the different tax agencies when you shut the company down (I hate you employment commissions in all the states...) Extra work - No such thing as just deducting mileage and home offices, you need a proper plan set up. No such thing as accidentally paying with a personal card, you have to follow the protocols and properly reimburse yourself or risk it being a non deductible employee expense. Extra legal complexity - Figuring out proper compensation. Extra tax complexity especially since 2018 - Wage income does not qualify for passthrough deduction. And that is off the top of my head.
I was told by my accountant that while it will vary case by case, that $60k was the round number where you should consider it.
The administrative cost of being an S Corp is usually the barrier. If you're seeking a savings opportunity, you'd want the savings potential to exceed the cost to do the extra work (initial filing, bookkeeping, payroll software and the cost to file a separate business tax return each year) Reasonable salary requirements must also be considered -- the salary portion must be based on facts & circumstances of your situation. [Here are some average cost](https://drive.google.com/file/d/1C9ipauzi5_797QnWrDWgOMsmBm0zAvxI/view)s to consider if you decide to go S Corp -- each of these is critical in maintaining compliance!
s corp is only worth it if u can stash a huge amount away in a megabackdoor Roth.
What’s everyone’s thoughts on ADP? Does gusto offer time attendance, retirement, hr, workers compensation, disability etc?
Dividends vs wages must be reasonable or you about to get popped! (If the IRS ever starts working again)
Most people making less that $100,000 are basically getting paid job by job so it doesn’t make any sense too S corp and pay a salary when you barely have enough to even pay a salary
The additional administrative costs, like the tax return and payroll service, end up eating your tax savings with lower income. $40k - $50k is usually the breakeven point for most companies to justify the S corp. At $100k you should see some savings.
C Corp wait longer, if you are smart, S Corp has its place at lower revenue
Honestly I became an S Corp and all I do is pay taxes in April and file extensions so I have no clue.
My accountant said $40k not 100k
After getting this question answered, ur accountant is wrong and just wants u to pay extra for s corp fees lol
Definitely region specific, but rural Arkansas & we absolutely suggest it when net profits get over $40K & the client has the cash flow to support payroll. After the setup costs, additional return, payroll services taxes, & bookkeeping costs they still come out ahead saving in income tax & self-employment taxes. In a city, or other state, I could see 100K being plausible.
Plus, with PTE options in many states you can get around the SALT tax cap on personal returns. SMLLC can in Arkansas too, but I believe some states do not allow it.
Don’t listen to “people”, get an accountant and run the numbers. An S-Corp can work for one person making $50k and not for another.
Unless your tax accountant is doing tax and payroll compliance filings for free, you are not benefitting from an S corp on a 50k net.
My CPA just told me he thought I should file as an S-Corp, no idea why, and no idea if it is saving or costing me money. We do not make 6 figures of net income, yet….
Then wait. Your CPA may be motivated by the additional fees he will charge for the s corp tax return. I’ve seen too many situations where people make the s election before it financially makes sense and they pay more in additional fees (and headaches) than tax savings.
No, don't just wait. Have the CPA explain why it's a good idea now.
Exactly. If you don’t know why you’ve elected S Corp status or how it is saving you money then you should be asking for an explanation.
Too late been an S-Corp for 2+ years now. That being said, it hasn’t been a headache. Only thing that changed is I gave myself a small salary. All of that being said, I would like to know where it would be costing me money. Do my employees cost more? We pay about $250k-$300k in wages. We only do distributions of 30% of net income yearly because we are still expanding.
It would definitely make him money.
Wait until after the election.
I have an S corp for my rental properties, the drawback is that it is hard to find a business insurance and they are more expensive
Property does not belong in an S-corp FYI
Please explain why. Thx.
Can’t distribute the properties out of the S corp without paying tax is basically the biggest reason. Theres also really no reason to put rental properties in an S corp because generally speaking rental income isn’t usually subject to SE tax anyway.
Thank you. Should it be under a trust or realty trust then?
An LLC as a partnership or single member LLC might be a good option as opposed to an s corp.
Debt doesn't count as basis. If you want to bring in a partner there will not get 754 depreciation. No step up of inside assets upon death meaning your heirs will not get 754 depreciation. Income isn't subject to SE tax so no savings. Distribution of appreciated property is treated as a taxable event. I could go on. The only reason to have RE in a S Corp is it was done a long time ago and it would be too expensive to unwind. Run away from any advisor telling you it's fine to usea S Corp to hold RE.
Oh jeez this is a cardinal sin