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Second opinion] My partner & I have set up an LLC with SCorp…

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Second opinion] My partner...

Second opinion] My partner & I have set up an LLC with SCorp filing. However, we need to quickly decide on the best tax benefit. He has been an independent contractor for 9 months with no tax filings. He has 3 months left of larger pay coming in. Would it be better to bill the last three months through the company or as an independent contractor. He is the only employee right now. He has no dependents and few deductions

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I will be contributing to the company eventually but there is no capital in the co now.

Submitted: 9 months ago.Category: Finance
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Customer reply replied 9 months ago
If 50% of the amount is via salary and 50% is via owners draws what type of tax is imposed on the draws?For instance the income to-date as an independent contractor is approximately $72,000 and no taxes have been paid yet on this. The remainder of the billings for the last three months may be $30,000-$40,000. Would it be possible to take $10k-$15k in salary and $15k-$20k in draws? I'm just wondering the tax liability that will be placed on the draws and worried about the taxes due on the $72k.
Answered in 1 hour by:
10/17/2017
Financial Professional: Lev, Tax Preparer replied 9 months ago
Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 33,123
Experience: Personal Investment, Tax Preparation
Verified

There is NO pre-set percentage how income should be divided between W2 and K1.

Yes - it is possible to divide equally.

Both types - reported on W2 and reported on K1 will be subject to income taxes - so for income tax purposes - there will not be any difference.

The difference will be with employment taxes only which are handles by S-corportaion.

Employment taxes are applied ONLY on wages reported on W2 and will be 15.3% for both portions paid by the employer (S-corportaion) and by the employee (withheld from wages)

.

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation.

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Customer reply replied 9 months ago
Is there a tax benefit of the accountable plan? Flowing expenses through a plan for home office etc instead of incurring the 2% of undeductable expenses
Financial Professional: Lev, Tax Preparer replied 9 months ago

The accountable plan allows to deduct business related expenses directly by the S-corporation.

That will cover employee business expenses as well which are reimbursed by the employer (S-corporation).

If reimbursed under not- accountable plan - such reimbursement should be included into taxable wages - subject to both - income and employment taxes.

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Financial Professional: Lev, Tax Preparer replied 9 months ago

To be an accountable plan, the reimbursement or allowance arrangement must include all of the following rules.

  1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services.

  2. You must adequately account to the payer for these expenses within a reasonable period of time.

  3. You must return any excess reimbursement or allowance within a reasonable period of time.

Otherwise - these payments are added to your taxable income.

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Financial Professional: Lev, Tax Preparer replied 9 months ago

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.

If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.

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