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I am owner of a single-member LLC elected to be taxed as a

C Corporation. My SMLLC contracts...
I am owner of a single-member LLC elected to be taxed as a C Corporation. My SMLLC contracts with another company to receive calls for their clients through my home office. My SMLLC operates out of my home office (only location). My SMLLC was formed about a month ago. I have been reading a lot about structure and how to pay myself. I am looking at paying myself a salary as a owner/officer of my SMLLC and then also having a separate employee position which takes (the client company's customers) incoming calls. Was trying to figure out if the separate employee position--which the duty is to receive incoming phone calls; would this position need to receive a W-2 form for the work completed. [I would be fulfilling both positions] Also would the owner/officer postion operating the business have salary reported on a different type of form; other than a W-2? I presume both positions would be required to have Federal income tax, FICA, and Medicare withhholdings and the SMLLC would also have to pay into FUTA and possibly state unemployment taxes?
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Answered in 41 minutes by:
6/13/2013
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4,774
Experience: 35 years tax experience, including four years at a Big 4 firm.
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PDtax :

Welcome to the site. I will be helping you today.

PDtax :

I like the SMLLC as a C corp. For non-professional service businesses (doctor, lawyer, CPA) it offers some great tax reduction opportunities.

PDtax :

I do think you may be overthinking the two-position salary, though.

PDtax :

You should take a wage that meets the state unemployment minimum (in New York, it's $8,500 per year, for example, or the state may impute that wage at audit) or exceeds that (IRS will want a wage that reflects services rendered - they know the benefit of the tax savings you are establishing). You don't need two wages, though.

PDtax :

A wage for your services is what you will report on your personal tax returns. The SMLLC will report retained income and pay taxes on its income. Your wage base should be a blend of tax savings (how much profit can I have taxed at low C corp brackets) and payment for services (if your business nets $100,000 per year, a salary of $8,500 per year will be too low).

PDtax :

I normally suggest startups do not even pay a wage until the fourth quarter of their first year. Take payments as advances or draws, then clean up the first year payroll reporting in the fourth quarter. If you aren't making a lot, easy to do and low cost. If your business is doing well, you have time to pay in the withholdings with a sense of your income and tax needs for the year.

PDtax :

Best to engage a good tax pro to assist in this review, likely in November. There will be enough time to look at the numbers, decide on compensation and forecast tax costs.

PDtax :

I hope this gives you a good idea of managing the salary/c corp income split. Ask any follow up questions you may have, and thanks from Just Answer. I'm PDtax.

Customer:

I have been very concerned about this that my SMLLC is paying a wage that is considered standard or above for the services being rendered. For example, the call centers I am aware of usually start a [email protected] employee who is taking inbound phone calls at $9 or $10 per hour. I assume my SMLLC would issue me a W-2 form for the hourly wage position.

Customer:

My question remains as the owner/office who operates the SMLLC. Do I have to pay myself a salary? And if I do, it appears that this could be paid after the first year? or maybe a little longer. I do expect my profits to be thin for the first year. However I was concerned that if no salary is paid to the owner/officer who operates the business--I wouldn't want the IRS to take it as avoidance of paying Federal, FICA and other tax witholdings. Or are you saying that I can possibly wait until a year passes to decide to how pay the wages? I also hope I can find a CPA in my area which will be able to answer my questions. Some people I talked to recently are only familiar with agriculture and regular type businesses. Perhaps I may need to find a CPA in a larger city? or through online services?

PDtax :

The $9 or $10 an hour wage is a good base. If you work full time, $18-$20,000 per year is a supportable wage. Any revenues above that could be retained by the SMLLC. Keep in mind the SMLLC can pay you rent for the space, use of your phone, etc. to increase your income from the enterprise.

PDtax :

You pay yourself a salary, but only for the hourly wage of an operator if you can afford it. If you can't, then take just rent until your business grows, and don't pay a wage. I have successfully argued to IRS in these situations that the business just doesn't make enough to pay wages in low-revenue years, especially starting up.

PDtax :

Finding a good local tax pro can be hard, but what I am proposing is pretty standard. If you have to reach to a larger area, I am sure you can find someone at an affordable cost to provide just the service I recommend. I don't like online offerings, only because I like to meet the people who will be so important to my success. Seeing them in person might be very important one day.

PDtax :

Thanks again from Just Answer. I am a NY CPA, and work specifically with startups like yours. Good luck.

PDtax
PDtax, Certified Public Accountant (CPA)
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Customer reply replied 4 years ago

A couple more questions I have is: The client my SMLLC is currently servicing gives out contracts which are typically three or four months in length. There can be gaps of a month or so in between contracts. I have an FEIN for the SMLCC. I also obtained a withholding tax registration certificate from my State. I stated that I expected to do quarterly withholdings (for my employee incoming phone call position). I do not expect to pay myself anything until after the current contract is completed. Since the current quarter is soon to come to a close, I assume I would need to make a withholdings report (possibly for both Federal and State) even if nothing needed to be withheld at this time? I have found an inexpensive payroll service, but I don't plan to have monthly paychecks at this time; or possibly not for quite some time. May State also does have online enrollment to submit withholding and reports electronically. I am aware of the Federal system in which reports and payments are submitted. I would suppose most companies use a payroll service? Less likely to run into difficulties that way?

My suggestion is not to make estimated tax payments for 2013. Review your income year to date in November, and make wage withholding payments (saves your cash flow early in the year). Pay in your income tax based on your wage only. Your SMLLC won't need to make estimated tax payments in its first year of existence, so just wait until later in the year to pay in.

Your concern about paying in is understandable, but I would just hold onto the cash until you need to pay in. You might want the cash for other needs until things get going.

A payroll service isn't needed, either, if you believe that a tax pro can help you in November. All the payroll and tax issues can be addressed then.

Good luck, and thanks for the excellent rating.

PDtax
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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
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