Author Topic: S-Corp  (Read 3276 times)

joenorm

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S-Corp
« on: May 01, 2022, 08:15:02 AM »
I have a basic understanding of what an S-Corp is and why it is used as a tax status.

My question is why would a small business NOT be an S-corp. Is it because you can only reap the tax benefits at a certain profit level?

If so, is there a penalty for filing as an S-corp if you're not in that higher profit area?

thanks

Smokystache

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Re: S-Corp
« Reply #1 on: May 02, 2022, 01:32:52 PM »
My understanding that it is mostly from a certain profit level. For example, ff you earn $25,000 after expenses with your photography business, I don't think you can justify to the IRS that you only pay yourself $15,000 in salary and then not pay self-employment taxes on $10,000. The other piece of the puzzle is that your additional tax filings (i.e., if you have pay someone to complete hose extra tax forms) and setting up a payroll may cost more than your tax savings.

Archipelago

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Re: S-Corp
« Reply #2 on: May 02, 2022, 01:39:12 PM »
Posting to follow. Expected to hit $100k in profits this year and am looking into the viability of setting up and S-corp.

SeattleCPA

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Re: S-Corp
« Reply #3 on: May 05, 2022, 03:42:57 PM »
Operating as an S corp costs maybe $2K to $3K a year. (The tax accountant, the payroll service, extra taxes, etc.) And sometimes a lot more.

If you're really small, the benefits may not be much more than this. Which is why you need to check the cost benefit analysis. And why not everyone does this.

BTW if you're big, the costs to electing S status can be much larger. Like tens of thousands annually. But then the benefits can be massively huge. We have clients who save hundreds of thousands of dollars annually with an S corporation. And a few save millions annually basically because they're an S corporation.

Note: Our firm does a couple hundred S corp returns a year...

And a caution to close: Severe tax accountant shortages exist right now. So you need to be sure you can find good help. S corp returns are not DIY projects. And you may not be able to find someone competent to do the work.

Archipelago

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Re: S-Corp
« Reply #4 on: May 07, 2022, 11:09:52 AM »
Operating as an S corp costs maybe $2K to $3K a year. (The tax accountant, the payroll service, extra taxes, etc.) And sometimes a lot more.

If you're really small, the benefits may not be much more than this. Which is why you need to check the cost benefit analysis. And why not everyone does this.

BTW if you're big, the costs to electing S status can be much larger. Like tens of thousands annually. But then the benefits can be massively huge. We have clients who save hundreds of thousands of dollars annually with an S corporation. And a few save millions annually basically because they're an S corporation.

Note: Our firm does a couple hundred S corp returns a year...

And a caution to close: Severe tax accountant shortages exist right now. So you need to be sure you can find good help. S corp returns are not DIY projects. And you may not be able to find someone competent to do the work.

Hey @SeattleCPA , is there a resource you could recommend online for doing that cost/benefit analysis? I'm thinking our company is on the fringe of whether it makes sense, but some concrete analysis with numbers would help.

SeattleCPA

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Re: S-Corp
« Reply #5 on: May 07, 2022, 02:57:09 PM »
Operating as an S corp costs maybe $2K to $3K a year. (The tax accountant, the payroll service, extra taxes, etc.) And sometimes a lot more.

If you're really small, the benefits may not be much more than this. Which is why you need to check the cost benefit analysis. And why not everyone does this.

BTW if you're big, the costs to electing S status can be much larger. Like tens of thousands annually. But then the benefits can be massively huge. We have clients who save hundreds of thousands of dollars annually with an S corporation. And a few save millions annually basically because they're an S corporation.

Note: Our firm does a couple hundred S corp returns a year...

And a caution to close: Severe tax accountant shortages exist right now. So you need to be sure you can find good help. S corp returns are not DIY projects. And you may not be able to find someone competent to do the work.

Hey @SeattleCPA , is there a resource you could recommend online for doing that cost/benefit analysis? I'm thinking our company is on the fringe of whether it makes sense, but some concrete analysis with numbers would help.

I don't think there are good resources. Sorry.

BTW if you're on edge or fringe I'd say skip the s corp thing. You want the s election to be a no brainer. E.g., you know you're saving at least six, eight, ten grand per year per owner.

joenorm

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Re: S-Corp
« Reply #6 on: May 20, 2022, 05:30:42 PM »
Is there a rule of thumb to use?

SeattleCPA

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Re: S-Corp
« Reply #7 on: May 23, 2022, 01:34:00 PM »
Is there a rule of thumb to use?

Well, first, I don't like rules of thumb for tax questions because with taxes you really can do the math and come up with an optimal number.

But, second, that range I gave above actually is a sort of rule of thumb. I.e., I think to do an S corp right, you're going to pay maybe $2K to $3K in addtional expenses: CPA to prepare return, payroll service, a handful of extra payroll taxes. Also you're going to personally go to more work. So I think you need to be saving something significantly more than $2K to $3K in payroll taxes or income taxes.

I would never set up an S corp for somebody so they can save $3K or $4K but then lose most of that to fees and extra costs. You want to net several thousand dollars per year per shareholder in savings.

joenorm

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Re: S-Corp
« Reply #8 on: May 23, 2022, 11:33:22 PM »
Thanks.

I just started a small business in the trades and a couple people said S-corp is the way to go. But they have no idea how much I will earn. And that's the thing, I don't know how much I'll earn.


SeattleCPA

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Re: S-Corp
« Reply #9 on: May 26, 2022, 07:16:22 AM »
Thanks.

I just started a small business in the trades and a couple people said S-corp is the way to go. But they have no idea how much I will earn. And that's the thing, I don't know how much I'll earn.

If you've already made the S election, the toboggan is already on its way down the hill. So now I'd just think you want to get best value from choice as you can. And BTW if you're successful--and you probably will be--your S corp will save you a lot.

These blog posts might help. First is for Washington state but similar tasks would probably be required for other states:

https://evergreensmallbusiness.com/first-year-checklist-for-washington-s-corporation/

https://evergreensmallbusiness.com/year-end-s-corporation-accounting-checklist/

https://evergreensmallbusiness.com/quickbooks-housekeeping-checklist/

P.S. You do want to have a good accounting system. Like QuickBooks. Or Xero. With an S corp you basically need to have not just a profit and loss statement but a balance sheet.

dandarc

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Re: S-Corp
« Reply #10 on: May 26, 2022, 09:36:20 AM »
Simplicity to being a proprietor is one reason to not go the S-Corp route. When I first went self-employed (I do contract IT work) I also found I was making enough that I'd have to call so much "profit" vs. "salary" to get down to the larger self-employment tax savings that I just wasn't comfortable with it, plus I'd have lost some SoloK space doing that that would more or less off-set the S-Corp tax savings on the portion above the social security cutoff. Fast forward to 2021 and I was able to take 40% less money for 40% less time commitment for work and all of a sudden the numbers became more compelling for me since I'm now starting under the social-security wage base. I'm a true one-person shop, so about as simple a case as there is for these sort of things.

I handle taxes on my own, but as mentioned I'm the simplest case there is for this and while I'm not a professional accountant, I do hold a BA in accounting (sometimes wonder how things would be different if I had taken that accounting job vs. the computer programming one back at the end of 2005), and have done bookkeeping for some organizations I volunteer at over the years. So I don't know that "have to hire an accountant" is 100% true - I bought SeattleCPA's LLC taxed as S-Corp guide for my state and have found the whole deal quite manageable for myself. You might prefer hiring it out for yourself for a lot of reasons.

SeattleCPA

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Re: S-Corp
« Reply #11 on: May 29, 2022, 07:30:07 AM »
Simplicity to being a proprietor is one reason to not go the S-Corp route. When I first went self-employed (I do contract IT work) I also found I was making enough that I'd have to call so much "profit" vs. "salary" to get down to the larger self-employment tax savings that I just wasn't comfortable with it, plus I'd have lost some SoloK space doing that that would more or less off-set the S-Corp tax savings on the portion above the social security cutoff. Fast forward to 2021 and I was able to take 40% less money for 40% less time commitment for work and all of a sudden the numbers became more compelling for me since I'm now starting under the social-security wage base. I'm a true one-person shop, so about as simple a case as there is for these sort of things.

I handle taxes on my own, but as mentioned I'm the simplest case there is for this and while I'm not a professional accountant, I do hold a BA in accounting (sometimes wonder how things would be different if I had taken that accounting job vs. the computer programming one back at the end of 2005), and have done bookkeeping for some organizations I volunteer at over the years. So I don't know that "have to hire an accountant" is 100% true - I bought SeattleCPA's LLC taxed as S-Corp guide for my state and have found the whole deal quite manageable for myself. You might prefer hiring it out for yourself for a lot of reasons.

So regarding @dandarc 's post above and in particular the part I boldfaced, I agree with that. I'm just saying that I don't ever really see accurate or optimized S corp tax returns that are self-prepared or accurate or optimized S corp tax returns that are prepared by a low-skill tax accountant.

What I see are situations where you have inexpert folks prepare 1120S return are situations where people bungle the payroll or the pension choice or the 199A optimization.


joenorm

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Re: S-Corp
« Reply #12 on: June 11, 2022, 06:40:15 AM »
Simplicity to being a proprietor is one reason to not go the S-Corp route. When I first went self-employed (I do contract IT work) I also found I was making enough that I'd have to call so much "profit" vs. "salary" to get down to the larger self-employment tax savings that I just wasn't comfortable with it, plus I'd have lost some SoloK space doing that that would more or less off-set the S-Corp tax savings on the portion above the social security cutoff. Fast forward to 2021 and I was able to take 40% less money for 40% less time commitment for work and all of a sudden the numbers became more compelling for me since I'm now starting under the social-security wage base. I'm a true one-person shop, so about as simple a case as there is for these sort of things.

I handle taxes on my own, but as mentioned I'm the simplest case there is for this and while I'm not a professional accountant, I do hold a BA in accounting (sometimes wonder how things would be different if I had taken that accounting job vs. the computer programming one back at the end of 2005), and have done bookkeeping for some organizations I volunteer at over the years. So I don't know that "have to hire an accountant" is 100% true - I bought SeattleCPA's LLC taxed as S-Corp guide for my state and have found the whole deal quite manageable for myself. You might prefer hiring it out for yourself for a lot of reasons.

So regarding @dandarc 's post above and in particular the part I boldfaced, I agree with that. I'm just saying that I don't ever really see accurate or optimized S corp tax returns that are self-prepared or accurate or optimized S corp tax returns that are prepared by a low-skill tax accountant.

What I see are situations where you have inexpert folks prepare 1120S return are situations where people bungle the payroll or the pension choice or the 199A optimization.

So you did or didn't become an S-corp? What is the earnings range you're operating in if you don't mind me asking?

dandarc

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Re: S-Corp
« Reply #13 on: June 12, 2022, 12:00:19 PM »
Assuming that is directed at me vs. SeattleCPA - I'm set up as an LLC taxed as S-Corp. My bill rate is currently $100 / hour at ~60% time so about $120K per year top line revenue. Would range between $100K and $130K depending how excited I am for projects / making up time for weeks I take fully off.

Expenses in my case are pretty minimal - payroll software runs $41 / month, professional liability is $33, then the registration fee annually is $140 here. There's also employer FICA, but of course that's where the tax savings come from - lower than 1/2 self employment tax if you go this route.

I pay myself a $60,000 annual salary, reimburse ACA health insurance and max out family HSA for sure out of the business each year. My current internal debate us whether to do the SoloK employee vs. employer side - employee side minimizes taxes while employer-side minimizes audit risk (by reducing S-Corp profit that passes through) and this is first year in quite a while it looks like I'm not going to be able to max out both - see "60%" time above.

Ives

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Re: S-Corp
« Reply #14 on: July 14, 2022, 04:18:44 PM »
So I don't know that "have to hire an accountant" is 100% true - I bought SeattleCPA's LLC taxed as S-Corp guide for my state and have found the whole deal quite manageable for myself. You might prefer hiring it out for yourself for a lot of reasons.

How can I get this book for my state?

dandarc

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Re: S-Corp
« Reply #15 on: July 16, 2022, 09:18:51 AM »
So I don't know that "have to hire an accountant" is 100% true - I bought SeattleCPA's LLC taxed as S-Corp guide for my state and have found the whole deal quite manageable for myself. You might prefer hiring it out for yourself for a lot of reasons.

How can I get this book for my state?
Link to SeattleCPA's website is in their signature line.

 

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