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I recently completed forming an S-Corporation and getting licenses for my business. I want to pay myself a salary, but how do I create a W-2 for myself? Basically I am asking is how to do my own payroll for myself.


Eh? You create a W-2 form by filling out form W-2 and giving it to the employee by the end of January every year, and having the employer file the summary report (W-3) with the IRS.

Are you asking a step-by-step process? That's been covered somewhat before in the forums. Basically:

1) Obtain an EIN, if you haven't done so
2) Register with your state dept of revenue, if you haven't done so
3) Check for any local (county/city) registrations and do that, if you haven't done so
4) Have the corp hire you (minutes of internal resolution to hire by the board)
5) Start paying yourself a salary, witholding FICA/FUTA, and state taxes
6) Report witholding on the proper forms, both to the federal revenue service (IRS), and the state/city agencies.

Or, if you want to save some hassle, pay money to a payroll service. Software like Quickbooks has some wizards and help for doing payroll and figuring out taxes and whatnot.

Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

Thanks,

I have completed steps 1-3. I have not "hired" myself yet. I think I will look into MS money for small business.

I have used quickbooks in the past, but I can get MS Money dirt cheap because of a friend that works at Microsoft.

GTKeeper said: [Q]Thanks,

I have completed steps 1-3. I have not "hired" myself yet. I think I will look into MS money for small business.

I have used quickbooks in the past, but I can get MS Money dirt cheap because of a friend that works at Microsoft.

I think MS Money 2004 small business has this promo payroll service for $10/month for a year. They calculate everything and send paperwork and payments on time. Might be worth your time to outsource it. I think if you do payroll yourself, use Quickbooks or an accounting program. Money is lacking for keeping track of payroll. It's meant for personal use.

If you want to sit down and figure out the workings of payroll, then do all the forms yourself. If you'd rather pay to have it all done and have peace of mind, outsource it.

But yeah, for payroll, you send a report to the state (they handle unemployment and that's part of the reason the state receives payroll info), and quartely reports to the IRS.

Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

Since you sound real new, have you even paid yourself a salary yet? What would help is for you to think of yourself in 2 jobs: employER and employEE. As employEE, complete a W-4 form for your withholding status, married or single, and # of exemptions. As employER, keep the W-4 on file, and pay you the employEE a monthly paycheck, withholding or in reality directing part of your gross pay to federal taxes and state taxes based on the information on the W-4. As employEE, you work. As employER you pay the payroll and file govt. forms. It helps to ask yourself which role you are in when you do a task.

Thanks,

The part I am confused about though is the "witholding" of salary for taxes/FICO etc. I read on the IRS website that companies should use the electronic transfer system to systematically pay the witholdings to the IRS. Is this hard to set up?

Any reason why you formed an S-corp and not an LLC? It seems that if you were making enough money and had a complex enough business that corporate taxation was beneficial, you'd already know all this stuff, or at least have an accountant. Any reason you want to pay yourself as an employee and not just pass through the profits without having to go through all that paperwork every month and the (potential) tax hit?

I have done this successfully for a while, by myself, with no outside training. It boils down to keeping records of all that you do, complying with S Corp requirements like the shareholder/officer meeting, and being sure to file reports and payments on time.

Small payroll, such as one employee would generate, tends to fall below the amount required to setup electronic deposits, or even monthly deposits. Reading the specific instructions related to each form will tell you those filing deadlines, and gives enough information to know how to fill out the form properly. Your mileage may vary from mine- read the forms and use what you learn before accepting what I will now list:

Quarterly IRS 941. How much withheld for Federal taxes and for social security and for medicare witholding. Submit the $$$ with the 941 form.

IRS 940, related to unemployment. I have forgotten how often this is generally required, but in my situation it is annual. Look at my charts and meet the deadlines. Submit $$$ with the form.

W3 each year. W2 each year. I just find a typewriter and type it in. They are hard to find but local libraries seem to have one.

State Quarterly withholding form, varies by state. Submit $$$ with the form.

Annual state unemployment form, varies by state. Fill out a list of employees and the total wages paid. Compute the $$$ owed and send it in.

Form 1120S, annual. If nothing more is happening than paying an employee or two, there ends up being no tax paid by the corporation. Why? Because all interest earned and all corporate profits are paid by the S corp as distributions to the shareholders. That is the essential nature of an S corporation- to pay employees as normal but also to pass through to shareholders monies collected above and beyond payroll and expenses.

All this has been sufficient in my case. I discovered that after the hassle of finding and filling out these things the first time or two, the IRS and state each started sending my corporation all the forms automatically. When I have missed a deadline by accident, I have received notification and then I answered back politely with apology and submitted whatever I missed. Naturally I know that I might get hit with a penalty but that has not happened to me yet. It just seems if the dollars are small and the employee(s) are getting paid then the government entities are low key.

Everything can be handwritten and mailed in with envelope and stamp. Nothing needs to be electronically filed unless you want to do that.

Caveat- any employee that complains to a government agency will be a big headache to the S Corp, and any form not sent in will trigger bad things eventually. The one I will never be late on again was the state unemployment people. I honestly forgot their deadline (annual) and within one week I had a stern letter in the mail with penalty already assessed. Not until I complied and they received everything they expected did they relent on the penalty. With them it was 'you get one time on this but next time no forgiveness.' Seems I have heard that once from my credit card company, also!

Good luck

One more thing I forgot about: Workers Compensation Insurance must be handled properly. I don't know much about that, myself, because my S Corp is exempt. To obtain the exemption I had to file a form, basically saying that the only employee (me) was an officer and shareholder. If my S Corp hired any other employee that was not officer and shareholder, then I am pretty certain that my S Corp would have to file forms and pay money for Workers Compensation.

Forms W2 and W3 can be filed online at http://www.ssa.gov/bso/bsowelcome.htm. This is on the official Social Security Administration site. I believe you may web file with up to five employees. The completed forms are provided as a pdf file. The process is described here Creating Forms W-2 Online.

I don't think you're looking for this answer, but see an accountant or CPA to at least help get you started.

The government (including both the State and Federal) have no sense of humor. If you don't dot the "i's" and cross the "t's" the penalties can be draconian.

I know many people do their own payroll, but in my opinion, you are being penny wise and dollar foolish not to at least consult with an accountant/CPA to get you off on the right foot.

Edited for typo - thanks synk

least

Penguinator said: [Q]I have done this successfully for a while, by myself, with no outside training. It boils down to keeping records of all that you do, complying with S Corp requirements like the shareholder/officer meeting, and being sure to file reports and payments on time.

Small payroll, such as one employee would generate, tends to fall below the amount required to setup electronic deposits, or even monthly deposits. Reading the specific instructions related to each form will tell you those filing deadlines, and gives enough information to know how to fill out the form properly. Your mileage may vary from mine- read the forms and use what you learn before accepting what I will now list:

Quarterly IRS 941. How much withheld for Federal taxes and for social security and for medicare witholding. Submit the $$$ with the 941 form.

IRS 940, related to unemployment. I have forgotten how often this is generally required, but in my situation it is annual. Look at my charts and meet the deadlines. Submit $$$ with the form.

W3 each year. W2 each year. I just find a typewriter and type it in. They are hard to find but local libraries seem to have one.

State Quarterly withholding form, varies by state. Submit $$$ with the form.

Annual state unemployment form, varies by state. Fill out a list of employees and the total wages paid. Compute the $$$ owed and send it in.

Form 1120S, annual. If nothing more is happening than paying an employee or two, there ends up being no tax paid by the corporation. Why? Because all interest earned and all corporate profits are paid by the S corp as distributions to the shareholders. That is the essential nature of an S corporation- to pay employees as normal but also to pass through to shareholders monies collected above and beyond payroll and expenses.

All this has been sufficient in my case. I discovered that after the hassle of finding and filling out these things the first time or two, the IRS and state each started sending my corporation all the forms automatically. When I have missed a deadline by accident, I have received notification and then I answered back politely with apology and submitted whatever I missed. Naturally I know that I might get hit with a penalty but that has not happened to me yet. It just seems if the dollars are small and the employee(s) are getting paid then the government entities are low key.

Everything can be handwritten and mailed in with envelope and stamp. Nothing needs to be electronically filed unless you want to do that.

Caveat- any employee that complains to a government agency will be a big headache to the S Corp, and any form not sent in will trigger bad things eventually. The one I will never be late on again was the state unemployment people. I honestly forgot their deadline (annual) and within one week I had a stern letter in the mail with penalty already assessed. Not until I complied and they received everything they expected did they relent on the penalty. With them it was 'you get one time on this but next time no forgiveness.' Seems I have heard that once from my credit card company, also!

Good luck

Thanks for the info. Looks like I am in the same situation as you as far as 1 person S Corps go. The reason I am going with S Corp is the fact that I will have 1 employee (me) and that will help reduce my taxes.

Before this I as just Self Employed, and I can save a good ammount on taxes by switching to S Corp.


GTKeeper said: [QBefore this I as just Self Employed, and I can save a good ammount on taxes by switching to S Corp.

According to who? Cant' be your accountant or your lawyer since you obviously don't have either. I'm neither of those, but I have both and have also read all the Nolo books on small business and it is almost never true that you will save taxes by being an S corp.

marabout said: [Q]GTKeeper said: [QBefore this I as just Self Employed, and I can save a good ammount on taxes by switching to S Corp.

According to who? Cant' be your accountant or your lawyer since you obviously don't have either. I'm neither of those, but I have both and have also read all the Nolo books on small business and it is almost never true that you will save taxes by being an S corp.

Yes and no. He can avoid SE tax by issuing dividends and paying salary.


Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

pavcherny said: [Q]marabout said: [Q]GTKeeper said: [QBefore this I as just Self Employed, and I can save a good ammount on taxes by switching to S Corp.

According to who? Cant' be your accountant or your lawyer since you obviously don't have either. I'm neither of those, but I have both and have also read all the Nolo books on small business and it is almost never true that you will save taxes by being an S corp.

Yes and no. He can avoid SE tax by issuing dividends and paying salary.


Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

Exactly!

you do have to pay yourself a "reasonable" salary though or else IRS will hit you up for all your taxes and accuse you of avoiding payroll taxes.

also you will be taxed on dividend income, and will have to pay quarterly estimated taxes as well, so it's not like you get away with it all. But you're right in that you will save on SE taxes.

pavcherny said: [Q]He can avoid SE tax by issuing dividends and paying salary.

We are talking about an S-corp here, right? (for those following along, an S-corp is basically a corporation that has decided to be taxed like an LLC: Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then). It's true that an S-corp, inlike an LLC, can pay dividends to shareholders. The OP could work for his corporation as an employee, for a reasonable salary (I don't think you can cheat and pay yourself $1, it has to be a reasonable amount for what you were doing), and receive dividends. The OP will end up paying about the same taxes on the salary, some paid by him as an individual and some picked up from his corporation (but that's also his money). The dividends he receives as an employee are taxed as well, though at a lower rate than the salary. However, it's my understanding that the coproration can't deduct the dividends - the corp will pay tax on them as well. You'd have to calculate whether a $25k dividend being taxed twice ends up in paying less tax than just having that $25k taxed as profit passed through to the owner.

I'm not saying it's impossible to save money by being an S-corp instead of an LLC, but it's not as cut and dried as you are making it sound. For example, employment taxes are high (15% or so) on the first $90k of salary but after that it's like 2%. If the owner of the corp can legitmately claim that his labor contribution to the corporation is worth less at market rates than a 90k salary, then maybe it makes sense to pay himself less and take the rest as dividends. There are other things to consider though.

Overall, there must be a reason why LLCs have risen in popularity over S-corps in recent years. The OP may be an exception but if I were him, I'd let a lawyer and CPA tell me that, not fatwallet!

Marabout,

The reason I am doing this, is the fact that I am using my S Corp as business on the side, and I will not have more than 25-30k in profits in a year. (I am still in college)

It is not worth it for me to pay 15.3% flat on the 30k in profits that I will most likely make. Then I will have to pay income tax on that. It is just not worth it for me...

I think the popularity of LLCs though is the fact that you do not have to hire U.S Permanent Residents or Citizens, you can hire people with H1B/H1 Visas.

I took accounting classes in school so I am not clueless about how accounting works. I just wanted some clarifcation on the W-2/W-4 issue when you are doing it yourself.

Personally I trust FatWallet more than other websites and probably even some CPAs! People can be crooks, and I like to hear advice from personal experiences. Plus this service is free <img src="i/expressions/face-icon-small-smile.gif" border=0>


We are talking about an S-corp here, right? (for those following along, an S-corp is basically a corporation that has decided to be taxed like an LLC: Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then). It's true that an S-corp, inlike an LLC, can pay dividends to shareholders. The OP could work for his corporation as an employee, for a reasonable salary (I don't think you can cheat and pay yourself $1, it has to be a reasonable amount for what you were doing), and receive dividends.


Reasonable, from experiences of people on this board who've been in audits and from my experience, is a 50/50 split between dividends and salary as paid from the net profits.

The OP will end up paying about the same taxes on the salary, some paid by him as an individual and some picked up from his corporation (but that's also his money).


Yeah... probably a little more money overall because of the paperwork and possible state taxes for the business (like B&O. That varies by state)

The dividends he receives as an employee are taxed as well, though at a lower rate than the salary.


That depends... might not be lower. They're taxed at the current divident rate. In these times, that's a very favorable rate.

However, it's my understanding that the coproration can't deduct the dividends - the corp will pay tax on them as well.


Huh? Read what you wrote above: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then". The S corp entity is never taxed at the federal income level. It's pass-through to its shareholders. Dividends, or what is paid out as profit to shareholders, is taxed at the individual shareholder level. It doesn't even fit the idea of a deduction, because a deduction is supposed to reduce your tax liability. Dividends are profits passed through. The S corp owes nothing, except for an informational return, like a partnership.

You'd have to calculate whether a $25k dividend being taxed twice ends up in paying less tax than just having that $25k taxed as profit passed through to the owner.

Once.

I'm not saying it's impossible to save money by being an S-corp instead of an LLC, but it's not as cut and dried as you are making it sound.


In this case, it almost is. He's not making that much, and wants to save 15% by not paying the SE tax. However, I don't know the full story.

For example, employment taxes are high (15% or so) on the first $90k of salary but after that it's like 2%. If the owner of the corp can legitmately claim that his labor contribution to the corporation is worth less at market rates than a 90k salary, then maybe it makes sense to pay himself less and take the rest as dividends. There are other things to consider though.

Overall, there must be a reason why LLCs have risen in popularity over S-corps in recent years.


There are, but it doesn't have all that much to do with tax law. You can run an LLC and have it be taxed as an S-corp.

The OP may be an exception but if I were him, I'd let a lawyer and CPA tell me that, not fatwallet!


<img src="i/expressions/face-icon-small-smile.gif" border=0>



Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

Have the S-corp hire you as a contractor. Issue yourself a 1099 at year end. Less paperwork headaches. No worker's comp tax either.

pavcherny said: [Q]Huh? Read what you wrote above: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then". The S corp entity is never taxed at the federal income level. It's pass-through to its shareholders. Dividends, or what is paid out as profit to shareholders, is taxed at the individual shareholder level. It doesn't even fit the idea of a deduction, because a deduction is supposed to reduce your tax liability. Dividends are profits passed through. The S corp owes nothing, except for an informational return, like a partnership.

Of course you are totally right. What was I thinking?! Are there any general guidelines to figure out which is beneficial from a tax perspective? How about these three cases:

1) sole-proprietor earning $100k profit
2) LLC earns $100k profit and passes all to owner
3) S-corp with one shareholder. $50k paid as salary, $50k taken as pass-through 'dividend'

What if the numbers were $50k instead of $100k?

-Slim

marabout said: [Q]pavcherny said: Huh? Read what you wrote above: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then". The S corp entity is never taxed at the federal income level. It's pass-through to its shareholders. Dividends, or what is paid out as profit to shareholders, is taxed at the individual shareholder level. It doesn't even fit the idea of a deduction, because a deduction is supposed to reduce your tax liability. Dividends are profits passed through. The S corp owes nothing, except for an informational return, like a partnership.

Of course you are totally right. What was I thinking?! Are there any general guidelines to figure out which is beneficial from a tax perspective?


It's tough. I don't think some generalization can be made. Each situation is specific. I figure it out by having real, or projected numbers, and then preparing the tax return. Then, I include the costs for keeping payroll, licenses, and so on, to get some sort of breakeven analysis.

How about these three cases:

1) sole-proprietor earning $100k profit


Note, that for each of these cases, I am assuming

1) No state tax, no state FUTA tax except for the s-corp scenario (unrealistic, especially for FUTA because fed gives credit for paid state unemployment taxes)
2) No contributions to retirement plans, which can significantly reduce tax liability
3) Standard deduction taken, not married, no dependents
4) No consideration of any fringe benefits
5) No AMT
6) No loss carryovers, passive activity losses, or anything fancy that would alter the results.


at 100 K profit

SE FICA (employer + employee)= 87,900*12.4 = 10,900
SE Medicare (employer+emploee)= 100,000*2.9 = 2900

7,950 for exemption+standard deduction (at 2004 rates)

so, 92,050 taxed at orinary rate = 14325+ (92,050-70,350*.28)= 20401


thus, 10,900+2900+20401 = 34,201

roughly an effective tax rate of 34%

2) LLC earns $100k profit and passes all to owner


Same as above scenario, assuming single-member LLC operating as a sole prop. SMLLC entities are disregarded and file Sched C. Same taxes paid.

3) S-corp with one shareholder. $50k paid as salary, $50k taken as pass-through 'dividend'




SE FICA (employer + employee)= 50,000*12.4 = 6200
SE Medicare (employer+emploee)= 50,000*2.9 = 1450
FUTA at 6.2% (700 max base)= 434

7,950 for exemption+standard deduction (at 2004 rates)

so, 42,050 taxed at orinary rate = 4000+(42050-29050 *25%)= 7250

thus, 7250+434+1450+6200= 15,334

plus 50,000 taxed at 15% dividend rate = 7,500

15334+7500= 22834

net tax savings= 34201-22834=11367

give about $500 for the licenses and fees, and you come out something like 11,000 ahead.

What if the numbers were $50k instead of $100k?

-Slim



They'd be similar, except there wouldn't be as big of a difference between S-corp and sole prop, because the tax brackets in the sole prop wouldn't reach 28%. I don't have the time to run the numbers. Do it yourself with my brief outline <img src="i/expressions/face-icon-small-smile.gif" border=0>

Cheers! <img src="i/expressions/face-icon-small-smile.gif" border=0>

LowBlow said: [Q]Have the S-corp hire you as a contractor. Issue yourself a 1099 at year end. Less paperwork headaches. No worker's comp tax either.

worker's comp might be avoidable. An officer can waive coverage in some states and not pay. Also, a 1099-MISC is back to filing Sched C and paying SE tax. Also, hiring as a contractor for running the corp might be problematic with employee/contractor definitions. But it's a solution, yeah <img src="i/expressions/face-icon-small-smile.gif" border=0>


Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

thanks pavcherny! it looks like i better do some calculations to see if the tax savings would be similar for me and if so, heck, it's worth the extra paperwork and corporate rules and whatnot.

"Dividends" from S corporations do not get special 15% tax treatment...they are taxed just like ordinary income.

You will at times need the advice of professionals. Don't wait until problems arise, find an attorney and an accountant that can work with you and each other. Handle the payroll the way they recommend. If you want accounting software, use the software your accountant likes.

Payroll is constant source of complaints with accounting software. IRS ( and other ) requirements change every year and the software must be updated ( in time ) to comply with changes. Many companies are racing the deadlines to make the changes, it is no fun waiting until the last minute for them to get on the ball.

Penguinator said: [Q]One more thing I forgot about: Workers Compensation Insurance must be handled properly. I don't know much about that, myself, because my S Corp is exempt. To obtain the exemption I had to file a form, basically saying that the only employee (me) was an officer and shareholder. If my S Corp hired any other employee that was not officer and shareholder, then I am pretty certain that my S Corp would have to file forms and pay money for Workers Compensation.

Hi, Can you tell me what form to file for the exemption ? Also how does one issue stock in S corp ? - is it enough to just record it in the meeting minutes..

Thanks

Don't play at home alone with this stuff. This thread proves the fact that you need professional advice and it is worth it. If you want S corp benefits you must taken on all the S corp responsibilities. This is serious stuff and should not be taken lightly. Why? Here are a few items from this thread that could get you into hot water fast.

1) S corporations do not issue dividends unless they have E&P from prior C corporation years. http://www4.law.cornell.edu/uscode/26/1368.html Rather, "virgin S corporations" make distributions. The difference is significant.

2) Making yourself an independent contract of your S corp has serious issues. Why? See this http://www.irs.gov/pub/irs-pdf/p1779.pdf

3) Thinking of avoiding self-employment tax by passing through income? So did this guy (and many just like him): Joly v Comm. 2000-1 USTC 50315 (6th Cir., 2000) http://www.ustaxcourt.gov/InOpHistoric/JOLY.TCM.WPD.pdf

Here is more information: http://www.icpas.org/icpas/sia/compensation.asp and http://www.irs.ustreas.gov/businesses/small/article/0%2C%2Cid=104468%2C00.html

4) Here is a whopper I read: "An S-corp is basically a corporation that has decided to be taxed like an LLC."

Basically, that is wrong. For example, see sec. 1371 http://www4.law.cornell.edu/uscode/26/1371.html

5) And another: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then."

Wrong again, see sec. 1374 (http://www4.law.cornell.edu/uscode/26/1374.html) and 1375 (http://www4.law.cornell.edu/uscode/26/1375.html).

6) And another: "It's true that an S-corp, inlike an LLC, can pay dividends to shareholders."

See item #1 above

Again, what you should get from this is not to play at home alone with this stuff, hire a professional. Penalties & interest are available for those who steer seriously afoul of the Code. Professional advice is much cheaper in the long run (just ask Mr. Joly).


The portly Angels pitcher seems to be correct: S-corp dividends do not get the 15% rate but are taxed normally. They do avoid the employment taxes of course but we'll have to rerun the numbers to see the real tax savings.

This means that in the calculations by Pavcherny, we have to adjust. If dividends are considered regular income, I assume that the tax bracket is figured by the total $100k received by the owner/employee in my example (and not two separate $50k calculations as he did in his example).

So, as an S-corp, all you save are the 14% employment tax on the $50k of income you take as dividends instead of taking it as salary. Actually, since employment tax is for the first $88k of income, not the full $100k, the S-corp paying half as salary, half as dividends scheme only saves the tax on 88k-50k, or 38k x 14% = $3800.

S-corp will pay unemployment tax of .8%, while LLC owner will not have to pay this. In our example, .8% times a $50k salary is $400, bringing our potentital tax saving down to $3400.

What else is out there that might even the score even more?


attadeal said: [Q]4) Here is a whopper I read: "An S-corp is basically a corporation that has decided to be taxed like an LLC."
5) And another: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then."

Wrong again, see sec. 1374 (http://www4.law.cornell.edu/uscode/26/1374.html) and 1375 (http://www4.law.cornell.edu/uscode/26/1375.html).


I don't think you are reading your links correctly. It clearly states, for example, that the subdivision 1375 does not apply to corporations that have always been an S-corp. I still stand by my statement that an S-corp is basically a corporation that is taxed like an LLC with pass-through.

We have already discussed the other issues you have brought up and agree. And as for Mr. Joly, he was doing a lot of other illegal things in addition to paying himself a salary (paying money to relatives, covering personal expenses from the company checkbook etc.). It actually says they found the salaries paid out to be accurate. But they failed to properly adjust their shareholder interest in the company etc. This case has little to do with what we are talking about here: a one-shareholder S-corp vs. one-person LLC.

BartoloColon said: [Q]"Dividends" from S corporations do not get special 15% tax treatment...they are taxed just like ordinary income.

Thank you for catching my mistake. <img src="i/expressions/face-icon-small-smile.gif" border=0>

then the savings would be 10,900-6,200 - whatever unemployment tax would be for federal and state. Around $4000, then? 4,700 - unemployment?

That still seems to be reasonable savings. But this is on 100K of profit.


attadeal said: [Q]Don't play at home alone with this stuff. This thread proves the fact that you need professional advice and it is worth it. If you want S corp benefits you must taken on all the S corp responsibilities. This is serious stuff and should not be taken lightly. Why? Here are a few items from this thread that could get you into hot water fast.

1) S corporations do not issue dividends unless they have E&P from prior C corporation years. http://www4.law.cornell.edu/uscode/26/1368.html Rather, "virgin S corporations" make distributions. The difference is significant.


That, I did fumble up. They are distributions.

2) Making yourself an independent contract of your S corp has serious issues. Why? See this http://www.irs.gov/pub/irs-pdf/p1779.pdf


I agree, and said so.


3) Thinking of avoiding self-employment tax by passing through income? So did this guy (and many just like him): Joly v Comm. 2000-1 USTC 50315 (6th Cir., 2000) http://www.ustaxcourt.gov/InOpHistoric/JOLY.TCM.WPD.pdf

Here is more information: http://www.icpas.org/icpas/sia/compensation.asp and http://www.irs.ustreas.gov/businesses/small/article/0%2C%2Cid=104468%2C00.html


I disagree that this case law can be applied like a blanket to S-corp situations. With resonable compensation as salary, an individual can have distributions from S-corp net profits. The problem would arise if distributions were unreasonable.

4) Here is a whopper I read: "An S-corp is basically a corporation that has decided to be taxed like an LLC."

Basically, that is wrong. For example, see sec. 1371 http://www4.law.cornell.edu/uscode/26/1371.html



For many cases, it is not wrong. It's misleading to say "taxed like an LLC" because LLCs can choose taxation structure, but the point here was that an S-corp has filed for status under subchapter S of the Code, and is not treated the same way as a C corp. That is, it is pass-through.

5) And another: "Profits are not taxed at the corporate level, and all profits pass through to the owner and are taxed then."

Wrong again, see sec. 1374 (http://www4.law.cornell.edu/uscode/26/1374.html) and 1375 (http://www4.law.cornell.edu/uscode/26/1375.html).


If I narrow the scope of the word "profits", and have it to mean no passive activity, but what is done in the normal course of business, as I meant by what I wrote, then it is still applicable. Especially considering: "during a reasonable period of time after it was determined that it did have subchapter C earnings and profits at the close of such taxable year such earnings and profits were distributed, the Secretary may waive the tax imposed by subsection (a) for such taxable year"

Of course if there is retainage, it should be bloody taxed. If it's not passed through, then the entity isn't pass through. The IRS likes to look at what's actually going on. The scope of subchapter S was to provide pass-through taxation, as long as the entity adhered to the regulations of S corps.


6) And another: "It's true that an S-corp, inlike an LLC, can pay dividends to shareholders."

See item #1 above


That's a very significant difference, and one with which I agree, and that I didn't write in here. But your other points haven't universal applicability, though they should be considered.


Again, what you should get from this is not to play at home alone with this stuff, hire a professional. Penalties & interest are available for those who steer seriously afoul of the Code. Professional advice is much cheaper in the long run (just ask Mr. Joly).


I think he should do both, so that professional advice isn't taken blindly but understood and learned with profit.

Cheers ! <img src="i/expressions/face-icon-small-smile.gif" border=0>

marabout said: [Q]The portly Angels pitcher seems to be correct: S-corp dividends do not get the 15% rate but are taxed normally. They do avoid the employment taxes of course but we'll have to rerun the numbers to see the real tax savings.

This means that in the calculations by Pavcherny, we have to adjust. If dividends are considered regular income, I assume that the tax bracket is figured by the total $100k received by the owner/employee in my example (and not two separate $50k calculations as he did in his example).

So, as an S-corp, all you save are the 14% employment tax on the $50k of income you take as dividends instead of taking it as salary. Actually, since employment tax is for the first $88k of income, not the full $100k, the S-corp paying half as salary, half as dividends scheme only saves the tax on 88k-50k, or 38k x 14% = $3800.

S-corp will pay unemployment tax of .8%, while LLC owner will not have to pay this. In our example, .8% times a $50k salary is $400, bringing our potentital tax saving down to $3400.

What else is out there that might even the score even more?

Pavcherny also forgot to subtract half of the Self Employment tax to derive a lower AGI. Taxable income after exemption and deductions would be $100,000 - $6,900 - $7950 = $85,150

I recommend this book:
J.K. Lasser's - Taxes Made Easy for Your Home-Based Business (5th ed)
Link

It doesn't cover every nuance, but it covers the basic concepts that people in this thread are struggling with, along with many others that you'll encounter. I found it surprisingly easy to read given the complicated subject.

nevermind...me=idiot, and too bad NYC doesn't even recognize S-Corp status =(
oh headaches, oh headaches...
So...anybody here have a full blown C status Corp. without pass-through or such? I guess you'd have to pay the full Corporate tax then, but on the upshot you can issue 15% taxed dividends no?



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