Have a Tax Question? Ask a Tax Expert
Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.
Sure, thanks for taking the time!
I'll have some questions as we go along, so don't disappear on me :]
I wont! :-)
First of all, do you expect to earn 120K between the 2 of you in 2013?
I know the salary, including that
Possibly... I'd say around $100,000 but it could be only $80... varies greatly unfortunately
OK, I understand
Is your accountant a CPA?
Yes, and he's not officially our accountant. We consulted with him to ensure I had prepared our taxes properly and if the $13,500 looked right to him. He said I was so OCD in how I'd done everything that it looked correct and to file it myself to save $500 :-)
Oh you mean the tax was 13,500.................
Yes, that's what we owe federal and state
Well, let me start with this; if you are going to operate as an S-Corp (just based upon your questions), I strongly recommend that you get a CPA involved to both advise you and prepare your S-Corp returns. They are nothing like your personal returns and include all kinds of "fancy" rules; any CPA worth his salt will save you more than you'll ever pay him.
Now on to your questions
Thank you, XXXXX XXXXX certain I'll be doing that. All the taxes and stuff are sooooo flippin confusing and insane! It's a lot more more than I expected and I have no interest in having to learn all of it myself lol
I hope you have a strong stomach for payroll and all that it entails; I sent all my clients to a Payroll Service just because the time consumption of filing all the forms can turn into a nightmare if you make a mistake, just because of the correspondence, etc. You have to make payroll tax deposits at your bank, the frequency of which depends upon your withholding and employer taxes.
Life will be simpler for you if you start the S-Corp business April 1st; as that starts the 2nd quarter for payroll reporting; the first quarter ends 3/31 so you don't want to do a whole set of returns for possibly only 1 pay period.
You won't be paying "self-employment" tax; that's for self-employed individuals, which you were last year and the first part of this year.
Also, when you apply for your federal ID number, you can indicate that your business is starting April 1st.
That's my plan, April 1... and that's for the FEIN tip.
OK, the way the S-Corp works, is that as part of the 1120S (annual tax return) you each will receive a Form K-1 that will report your S-Corp earnings. That plus your W2s is what you'll use to prepare your individual joint income tax returns.
Of course for 2013 you'll also have your Schedule Cs for the 1st quarter of 2013 to report your income & expense before the S-Corp was formed.
I take it you were reporting your income that way, each with your own Schedule C?
So, when you make your monthly distributions in addition to payroll, you'll be distributing this S-Corp profit to yourselves.
Are you going to each own 50% of the S-Corp or is there some other split contemplated?
ok... so that's what it'll be called in quickbooks is just a "profit distribution"... and yes 50/50
OK, well this is IMPORTANT when you make those distributions, they have to be equal to each one of you. This isn't optional. If you don't do that, you run the very real risk of inadvertently creating a second class of stock which automatically terminates the S-Corp election and you revert to a regular corp and have to pay corporate income tax; a giant problem.
Ok, that's no problem... and I did not know that at all so THANK YOU!
You will need to charge those monthly checks to the AAA account which in essence is your retained earnings account.
These are some of the traps you can get into with an S-Corp without a CPA & most of them can't be corrected;
Maybe I need to find someone other than that guy I went to. He acted like it was no biggie to handle all of it myself... which it isn't if you're a cpa lol
By the way, is there some compelling reason why you are going to operate as an S-Corp other than to try & save some Social Security & Medicare Tax.?
Usually that means he doesn't want to do it.
By the way, you realize that what you distribute is not what determines what your taxable income is going to be?
From what I understand when we form an s-corp we want to pay ourselves the smallest salary that makes sense so that we (the employee) and we (the corporation) pay the smallest amount of Med/SS possible. The remaining earnings (K-1) would only pay the one portion not BOTH the ee and er. As far as staying sole proprietors and operating under the schedule C, wasn't aware there was any further way to save above what we were already doing as far as deductions are concerned.
Paying Social Security & Medicare taxes is the cheapest form of disability insurance you can buy & it also has a big impact on your retirement benefits.
You won't be paying any SS&Medicare tax beyond what is paid in your salaries.
LOL, I'm 30 years old. There will be no social security by the time I'm that age.
But point taken, thank you
And we also have long term disability insurance (since we are ourselves insurance agents) :-)
If you try to minimize your salaries unrealistically, the IRS can reclassify all of your income to self-employment income & it's the old accountants saying that "pigs get fat but hogs get slaughtered". :]
You also need to know how to handle your health insurance premiums if paid through the S-Corp.
But the main goal is to reduce overall taxation... no that specific area. I've done some reasearch and have found that the average insurance agent only makes $30,000 per year. I myself only work very part-time so $20,000 is reasonable. I've done a good deal of research on that topic as well... as far as what is reasonable and what is not.
As far as health insurance, we currently have an individual plan that a company plan cannot compete with so we will continue to keep and pay for our health insurance as individuals... which can be deducted on our 1040, correct?
You should pay whatever business expenses you can at the S-Corp level. You can always file expense reports with the corporation and get reimbursed for them.
No. You won't be able to deduct the health insurance the same way because you are no longer self-employed. The S-Corp should be able to pay your existing premiums, but they also wind up on your W2; it gets complicated; You'll need to go over that with your accountant or I believe quickbooks payroll provides for that.
You can't pay for gas thru the S-Corp & deduct mileage on your personal 1040.
All of these things and a host of others should be what you discuss upfront before you decide to do business as an S-Corp
Would a section 125 benefit us? We pay the premium as a payroll deduction, pre-taxed.. or is that 6 in one hand and half-dozen in another?
As you might be seeing, you're about to become an accountant and tax consultant with a sideline business of selling insurance.
A section 125 plan is probably a good idea.
do you have any children?
All of these things are things I've read about and I'm looking for clarrification. I understand my need for an accountant, you've made that clear. I only actually work with the insurance portion about 4 weeks out of the year so it's not a big deal for me to handle this stuff. I need someone I can ask questions of... in the most economical fashion possible which is why I've come to justanswer :-)
I have a suggestion for you to consider;
yes we have 2
OK, I thought you were traveling selling insurance etc., pretty much full time.
No, I actually stay home and homeschool our girls
If you get some help to get things set up properly, you'll probably be able to keep it going;
the reason I asked was in the 125 plan about child care
My suggestion is this:
This probably the absolute worst time to discuss anything with an accountant (not me, as I'm basiclly retired & just do this to keep sharp & fund the entertainment budget); maybe you should consider putting off the S-Corp until next quarter so that after April 15th, maybe the 1st week in May, you can meet with a local CPA & establish a working relationship with him/her.
You could get a reference from one source which would be the Alabama Society of CPAs; their website will have a referral service & you can find someone in your geographical area who lists his areas of concentration as S-Corps & personal income taxes.
I REALLLY appreciate your input on needing to speak to a CPA, and I will but I have no desire to put this off. Reason being we are going to be making payments on last years liability this year and need to ensure we reduce what we owe next year as we can not "make payments" again. I want to get the ball rolling on this. I feel like if you could answer each of my questions as I've asked them, then I'd have the info I need to move forward. I am not trying to be disrespectful, but I didn't come to justanswer to speak with a CPA to be consistently told to go talk to a CPA lol.
Some of these things aren't objective decisions; they are somewhat subjective and you may not get the same advice from everyone; so it is important to have someone that will back up what he says & contemplates preparing your returns that way; it is hard for you to imagine how important this can be now, but trust me you will appreciate it down the road.
At this point, all I'd like to know is when it comes to vehicle mileage... that was always our largest schedule c deduction. I know that you can take mileage as an employee on the 1040 (my sister is a PT who is w-2) and does this on hers. Would I be better to pay for gas or re-imburse mileage FROM the corp to us OR just take the mileage on the 1040? Basically WHERE will I need that deduction the most? Generally speaking if we have $50,000 in w-2 income and $50-60k in K-1.
I understand what you are saying, believe me; but sometimes things are a lot more complicated than they appear on the surface;
It would be easy for me to answer your questions & give 100% accurate answers, but I'd be doing you a disservice; I might make out better, but that's not why I'm doing this; as I'm sure you know, I'm not just giving you quick answers to earn a few dollars, a fraction of what I could be doing, but I've had enough stress in my life; I like to live in a stress free zone these days;
I have absolutely nothing to gain by telling you to see a CPA; in fact I have a lot more to lose; but I can only give you my best advice based upon 40 years of doing this nonsense; I can tell you want to do things the right way;
I can answer questions for you anytime but I can't actually do any work for you in this forum;
So now that I've probably confused you beyond recognition, (:) is there anything else I can clarify or better explain for you, we covered a lot of ground?
By the way, in order to avoid underpayment of estimated tax penalties, you will need to make some estimated payments this year (2013) as your salary withholding won't cover all your taxes.
No, the questions that you gave were clear. I've been researching this for some time so I'm catching on pretty quickly. Yes, I was planning on doing the estimated payments to off-set the tax liability on the k-1 poriton of our income. Is that what you're speaking of?
Yes, plus whatever was earned through 3/31/13
That's due 4/15/13
Also, earlier you said this: "By the way, you realize that what you distribute is not what determines what your taxable income is going to be?" Can you claify that?
What goes on the K-1 is the S-Corp's net income; it doesn't matter whether or not you withdraw the profit, you are taxed on it anyway.
Often, you have to leave some money in the S-Corp for working capital, etc.
It's just that you don't pay any payroll taxes on it.
But you pay personal income tax on it.
Ok, that's what I thought, I just wanted to be sure. The only thing I have any *murkiness* about at this point is the health insurance. On our 1040 each year (not the schedule c) it does ask if we paid any LTC or Health insurance premiums not re-imbursed by an employee. We've always taken those ded on the sched c, but I assumed they could be taken on the 1040 if there is no sched c
Actually, you can't take that deduction on Schedule C; they aren't a deduction for SE tax;
When you are self-employed you can take the premiums you pay on page 1 of the 1040
ahhh so that's no longer an option when you AREN'T self-employed...
The only employee benefits you can take on Schedule C as a deduction would be for employees, not the owners who are self-employed.
You can't take them on page 1 unless you are self-employed
It sounds like you've been taking them on Schedule C, rather than page 1
Of course you can take them on Schedule A, but that's the least preferable place to take them unless you have a lot of medical/dental expenses
Clarified, thank you. Lastly... vehicle mileage deduction. We skipped over where I needed that to be more clear. Our salary will be taxed more heavily than our net profits from the corporation... so in my mind we want to reserve as many deductions for our 1040 as possible (non-reimbursed employee mileage). Why would we benefit by taking those on the Corp side moreso than the more heavily taxed personal side?
Well, your would only be able to take them on form 2106 as unreimbursed employee business expenses, whereas now you can take them on Schedule C; I'd have to check on how they are treated on your state return. If you file an expense report and claim your mileage, the S-Corp gets the deduction & you get the cash tax free from the S-Corp.
Also, you would only get them as a miscellaneous itemized deduction subject to the 2% floor.
Remember, anything you can deduct on the S-Corp reduces your taxable income on the K-1.
So you get the full deduction.
I just had an aneurism... I was thinking about that portion all wrong. I had little partitions in my mind of our salary tax liability and our corporate tax liability... you have moved those to the correct place... thank you. but now I have a headache lol. I TOTALLY get it now, you are a dream :-)
Please don't dream about me; that ESP will find me & I'll never get to sleep;
Erin, is that you?
Just like the "girl" on CNN
Erin Burnett (I think)
I think you have exploded my mind enough for tonight. I thank you so very much. I have a great book that has walked me through a lot of the stuff about setting up the s-corp but it has everything sooooo simplified for the book keeping... I didn't trust it to be that easy, i was right. Thanks so much for all your help!!!
OK, come back when your headache subsides
I'll leave my contact info
Thanks so much!
If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.You may get a short survey from the site; if it isn't too much trouble please answer it; thanks, SEG
Great, will do! thanks!