Business CPA

S Corporations: Operations and Filing Taxes

Business owners often wonder which business entity makes the most sense for their situation. An S Corporation (S Corp) is a popular choice because it offers both personal liability protection and certain tax benefits for corporate and personal income tax.

This article covers the basics of becoming an S Corporation, including the election process for business tax purposes.

1️⃣ How to Become an S Corporation

Two business entities can elect to file business taxes as an S Corporation: Inc and LLC. The election process is the same for both.

1.1) Complete IRS Form 2553 Within Two (2) Months and Fifteen (15) Days

The business must complete IRS Form 2553 (Election by a Small Business Corporation) within a certain timeframe.

For current businesses: no more than two months and 15 days after the beginning of the tax year when the election goes into effect. For new LLCs and C Corporations: two months and 15 days from the date of formation to choose the S Corporation election status.

1.2) What Happens If You Miss the Deadline for the S Corp Election

If you miss the deadline, you will follow these tax guidelines for the current tax year:

Corporations are taxed as C Corporations.
Single-member LLCs are taxed as sole proprietorships.
Multi-member LLCs are taxed as partnerships.

1.3) Requesting a Late Election from the IRS

If you miss the timeframe to file Form 2553, you can request a late election from the IRS.

2️⃣ S Corporation Business Operations

S Corporations operate a little differently from other business entities.

Here are the key differences to consider.

2.1) How to Pay Yourself as an S Corp Owner

One of the benefits of an S Corporation is the lack of double taxation. It’s important that owners pay themselves correctly to avoid triggering an audit from the IRS.

Any S Corporation owner who is active must pay themselves a reasonable salary. All employee-owners must take a reasonable salary via W-2. The remaining profits are then taxed on your 1040, saving you payroll tax on the owner-draw portion not paid as a W-2 salary.

2.2) Ongoing Compliance Requirements for S Corporations

Both LLCs and C Corporations may elect S Corporation status if they meet IRS requirements. However, the process can be complicated. The ongoing compliance requirements vary from state to state, but here are the basics:

LLC Requirements

✅ Initial Filing: File articles of organization to form an LLC. Pay filing fees.
✅ Initial Report: Some states require a statement of information with the initial filing.
✅ Publication Fees: Some states charge a publication fee.
✅ Annual Report: Most states require an annual report to maintain LLC status.
✅ Maintaining a Registered Agent: An LLC is required to record a Registered Agent with each state in which they do business. This person (or entity) is notified in the event of a lawsuit.

C Corporation Requirements

✅ Initial Filing: File articles of organization to form a C Corporation. Pay filing fees.
✅ Initial Report: Some states require an initial report.
✅ Publication Fees: Some states charge a publication fee.
✅ Annual Report: Most states require an annual report.
✅ Annual Meetings: C Corporations are required to hold annual meetings.
✅ Meeting Minutes: A written record of meetings is required.
✅ Maintaining a Registered Agent: A C Corporation is required to record a Registered Agent with each state in which they do business.

Get Help Filing Taxes and Ongoing Operations for Your S Corporation

We understand that navigating the complexities of S Corporation taxes and operations can be overwhelming. Let us lighten the load. We’ll help you determine a reasonable W2 salary and ensure you avoid overpaying unnecessary payroll taxes.

Reach out to us today for personalized assistance with your tax strategy—because your success is our priority. Let’s work together to make your financial journey as smooth as possible. Contact us now and let’s start saving you money!

Employee Bonuses: The Tax Implications of Paying Bonuses to Employees in 2024

Bonuses are taxed differently as “Supplemental Wages”. A bonus is always a welcome bump in pay, but it’s taxed differently from regular income.

Instead of adding it to your ordinary income and taxing it at your top marginal tax rate, the IRS considers bonuses to be “supplemental wages” and levies a flat 22 percent federal withholding rate, unless your employer pays bonuses alongside regular wages. Then, the tax withholding on your bonus is calculated at your regular income tax rate, which is based on your tax bracket.

When taxed this way, your initial tax withholding is higher. In general, bonuses of any kind, including signing bonuses and severance pay, fit into the supplemental wages category.

What Does the IRS Consider to be "Supplemental Wages"?

Other examples of supplemental wages include:

✅ Accumulated sick leave
✅ Certain commissions
✅ Overtime pay
✅ Prizes and awards
✅ Back pay
✅ Reported tips
✅ Retroactive pay increase
✅ Payments for nondeductible moving expenses
✅ Specific forms of equity compensation (like restricted stock units and exercises of non-qualified stock options)

Employee Achievement Awards - The Exception to the Supplemental Wages Rules

The IRS will expect its cut of any bonus you receive, whether it’s in cash, gift cards, a vacation, or other benefits. The exception to this rule is if your bonus can qualify as an employee achievement award.

You might be able to avoid paying federal income taxes under the following conditions:

💡 The award isn’t cash, a cash equivalent (such as a gift card or money order), tickets to events, vacations, stocks, bonds, or other prohibited items.
💡 The award is tangible personal property.
💡 The total value of the award doesn’t exceed $1,600.

📜 Tax withholdings aren’t the end of the story.

The method used to calculate the federal withholding on your bonus can have a big impact on your take-home pay. Still, you won’t know how much you actually owe the IRS until you file your tax return the following year.

📉 Reducing the Risk of Owing the IRS Money

You can reduce the risk of owing the IRS money by reviewing your W-4 withholdings. The IRS Tax Withholding Estimator is a good place to start. Also, if you receive a large bonus or your financial circumstances change, it may be best to talk to us for advice.

💵 Lowering Your Tax Withholding on Bonuses

Want to lower the amount of taxes withheld from your bonus? Consider paying a bonus separately from a regular paycheck. From there you can see if you should calculate its tax withholding at the 22 percent flat rate the IRS allows for supplemental wages.

Need help? 👋

As a small business owner, understanding the tax implications of employee bonuses is crucial. Need help navigating these waters? Schedule a chat with us today, and let’s make sure your bonuses benefit both your team and your bottom line.

12 Common Tax Problems to Avoid in 2024

If you’re one of those who gets worked up over filing your tax return, there are steps you can take to ease the struggle and avoid common tax issues reported each year.

Here are the top 12 tax issues, broken down into categories for business owners and individual taxpayers, and how everyone can minimize their impact this year.

1️⃣ Avoid penalties and fines by understanding the rules about deductions.

Tax deductions are a great way to minimize taxes when used correctly, but they are frequently abused and overused. Deductions should cover business-related expenses, including capital expenditures, client gifts, and business travel. Vacation expenses don’t count just because you discussed business. The IRS has rules on what and how much can be deducted. Include only legitimate expenses to avoid penalties.

2️⃣ Failing to keep track of business expenses that can be deducted.

Many business owners miss out on deductions because they don’t track their expenses properly. This often happens when personal and business expenses mix or when cash is used without proper documentation. Deducting legitimate expenses can save significant money, so keep all receipts and consult a tax professional to understand allowable deductions.

3️⃣ Failing to choose a reputable professional tax preparer.

It’s nice of your cousin or neighbor to help, and you might save money with a storefront tax preparer, but many taxpayers end up in trouble due to incompetence or fraud. Unreliable preparers can cause penalties, fines, or even steal your refund. Choose a professional with a solid reputation. Beware of those promising specific refunds without reviewing your documents or charging fees based on refund amounts.

4️⃣ Filing after the deadline.

Filing late can result in fines and penalties and increases the risk of errors, audits, and delays. If you’re perpetually late, it can affect the accuracy of your current return and delay any refund or credits due. Always aim to file on time.

5️⃣ Failure to file a return at all.

Ignoring tax laws and not filing a return is a big mistake. Even if you can’t pay the owed amount, you can request an installment agreement to spread out payments. Failing to file results in harsher penalties than filing and paying in installments or requesting an extension.

6️⃣ Simple mathematical errors.

Double-check your math before submitting your return. Small mistakes can lead to big headaches. Better yet, consider using a professional tax preparer to avoid these errors entirely.

7️⃣ Administrative errors.

Ensure all forms are filled out correctly. Common mistakes include incorrect Social Security numbers, bank account details, and missing signatures. These errors can delay your return processing and lead to additional scrutiny. Double-check:

- ✅ Social Security Number
- ✅ Bank Account Numbers and Routing Numbers
- ✅ Signature and Date Lines

8️⃣ Not staying current with updates to tax laws.

Every year, there are new updates to the tax code that can make a big difference, and every year there are taxpayers who fail to take advantage of them because they simply weren’t aware that they existed. If you’re going to do your taxes yourself, take the time to stay up-to-date. Alternatively, you can work with a tax professional: part of their job is to know all the new laws and apply them to your best advantage.

9️⃣ Don’t use the wrong filing status.

Single. Head of Household. Married filing jointly. Married filing single. It can be very confusing to know which benefits you most, and choosing wrong can make an enormous difference. There are a lot of things that married couples are entitled to if they file jointly, and a lot of disadvantages to filing single. Take the time and do the math so that you know you’re doing the right thing.

1️⃣0️⃣ Clutter may be bad, but you should hold on to your old tax returns.

No matter how much you try to keep it simple and purge old paperwork, your past tax return is one thing you really need to hold on to in case the IRS comes back and asks questions or you realize that you’re entitled to a refund if you file an amended return. Having the paperwork handy means you can give it to attorneys, mortgage brokers, accountants, and the IRS itself in case they ask for it or if providing it would help your situation.

1️⃣1️⃣ Learn about and take advantage of every potential deduction.

Of all the painful mistakes that taxpayers make, overpaying is at the top of everybody’s list. What could be worse than giving the government more of your hard-earned money than you needed to? The best way to avoid this mistake is to go through the lists of possible deductions and write down everyone you might be able to take, then see if you can use it.

1️⃣2️⃣ Not using the right tax forms for your needs or status.

Though most people are familiar with the 1040 form, it’s not necessarily the right one for everyone. While 1040 works for those who itemize or who own their own business, people who are W-2 employees without a lot of complicating factors may be better off using the 1040EZ form. Likewise, you need to make sure that there aren’t mistakes on any of the paperwork that you’re handing in, whether it’s your W-2 or information from any of your banks. Finally, many people are taking advantage of electronic filing to get their returns in on time and get their refunds more quickly, and if you’re doing that too, make sure that you’ve input the correct.

If there are errors on your W-2 Forms or other financial forms, make sure you address them sooner rather than later, or else the IRS will become involved. If you’re filing electronically, double-check every digit of your information to avoid delays.

What if you can’t avoid a common tax issue?

No matter how hard you try, at some point, you may find yourself facing one or more of the issues cited above (or something entirely different that we haven’t included). If that happens to you, contact us immediately for expert professional help.

Need a hand with your taxes? Our friendly, CPA team is here to help you navigate any tax challenge with ease. Reach out today and let’s tackle those tax issues together!

What to do after you get your LLC or INC?

Congratulations on setting up your new LLC or Incorporation (Inc.)! Now that your business entity is officially active, it’s time to take a few crucial steps to ensure everything runs smoothly and efficiently.

These steps will help you establish a strong foundation, maintain compliance, and set your business up for success. Here are 6 essential steps to consider now that your LLC or Inc. entity is active:

1️⃣ Create articles and a bank resolution document for your new business checking account.
2️⃣ Set up a business checking account under the new entity, using its EIN number.
3️⃣ Complete an IRS W9 form with your new entity info. Give this to your customer(s) so they pay you using the EIN number and not your SSN number.
4️⃣ If you plan to purchase and resell materials/products, you’ll need to apply for a sales tax permit with your state (TX link here).
5️⃣ Be prepared for potential spam. What you get from the State of Texas is legit; read that. Anything else may be trying to convince you to spend money. Avoid those emails.
6️⃣ If you have a partner, we highly recommend contacting a business attorney and getting an Operating Agreement everyone agrees to with notarized signatures, so all partners are financially protected. We have witnessed too many partnership disputes over the last decade that all started in good spirits and ended in turmoil once the money started flowing in. (Full Disclosure: We receive no financial compensation for this legal referral)

How Can We Help with Your LLC, INC, and Business?

Once your operations are up and running, let us know. We offer ongoing monthly services customized to your needs, including accounting, payroll, W2 reasonable salary, 401K/IRA contribution planning, business and personal taxes, virtual controller services, budget and cash-flow forecasting, fractional CFO services, and unlimited CPA resources.

Our Basic 1-Owner CPA Monthly Services Agreement Includes:

✅ Helping set up and run payroll;
✅ An onboarding call to learn more about your goals;
✅ Assistance with contributing to and maximizing retirement savings;
✅ Conducting an S Corp Salary Test to determine your “reasonable” salary required by the IRS;
✅ Filing 1040 estimated tax payments;
✅ Business Tax Returns – IRS and State(s): 1120C, 1120S, and 1065;
✅ Personal Tax Returns – IRS 1040, and state(s) if applicable – including a Schedule A, B, C, D, and E (for rentals);
✅ Audit assistance protection with your personal tax filings;
✅ Ongoing CPA resource for any questions you have throughout the year.

Ready to Optimize Your Business Finances?

Based in Austin, TX, we serve businesses with year-round accounting, tax strategy, and wealth-building services. We create customized monthly packages to help grow your business and assist with individual taxes too.

Contact us today to learn how we can help you minimize taxes and maximize your business potential. Let’s make your financial goals a reality!

How to reduce S-Corp Tax as an S Corporation Shareholder in 2024

As an S Corporation, one of the best ways to minimize taxes is by compensating shareholders fairly. This article reviews setting appropriate compensation levels for your S Corp in 2024.

S Corporation Compensation 💰

S Corporation compensation requirements are often misunderstood and misused by owner-shareholders.

An S Corporation is a type of business structure where the business doesn’t pay income tax at the corporate level. Instead, it passes income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are seen as a return on investment and are not subject to self-employment taxes.

Reasonable Compensation in an S Corp 💸

If shareholders also work in the business, they should take reasonable compensation for their services as wages. Wages are subject to FICA (Social Security and Medicare) and other payroll taxes. Some owner-shareholders make the mistake of not paying themselves reasonable compensation, either out of unfamiliarity with the rules or to avoid payroll taxes.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee for federal employment tax purposes. S corporations should not try to avoid paying employment taxes by treating compensation as cash distributions, personal expenses, or loans rather than wages.

If the S Corporation doesn’t pay the working shareholders reasonable compensation, the IRS can treat a portion of the S Corporation’s distributions as wages and impose Social Security taxes on those deemed wages.

Determining Reasonable Compensation in an S Corporation

There’s no specific method for determining what constitutes reasonable compensation—it’s based on facts and circumstances. Generally, it’s an amount that unrelated employers would pay for similar services under like circumstances and considering the cost of living in the area where the business is located.

Here are some factors considered when determining reasonable compensation:

✅ Training and experience
✅ Duties and responsibilities
✅ Time and effort devoted to the business
✅ Dividend history
✅ Payments to non-shareholder employees
✅ Timing and manner of paying bonuses to key people
✅ Comparable businesses’ pay for similar services
✅ Compensation agreements
✅ Formulas used to determine compensation

The problem is that it’s easy for the IRS to list these contributing factors and leave it to the corporation to quantify them into a reasonable salary. However, they can still challenge the amount if an auditor decides the compensation is unreasonable.

The IRS has a long history of examining S Corporation tax returns to ensure reasonable compensation is being paid, especially if no compensation is shown as paid to employee-shareholders.

Reasonable Compensation in the Spotlight 💵

With recent tax reforms, reasonable compensation is crucial due to the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will be included on the shareholder’s income tax return. The QBI for the shareholder of an S Corporation is the amount of net income passed through to the shareholder and designated as QBI on the K-1. However, the shareholder may not include the reasonable compensation (wages) they were paid as QBI. Thus, wages paid to shareholders reduce the QBI because the S Corporation deducts the wages as a business expense, reducing the corporation’s net income and QBI. But wages cannot be arbitrarily adjusted to maximize the Sec. 199A deduction.

IRC Sec. 199A Deduction

Here are some details about how the 199A deduction works and the impact of reasonable compensation wages on the Sec. 199A deduction:

💡 The S Corporation’s employee-shareholders’ wages are NOT included in QBI when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and, therefore, the smaller the 199A deduction, which is 20% of QBI. An S Corporation may pay the shareholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
💡If married taxpayers filing a joint return have taxable income exceeding $315,000 ($157,500 for other filing statuses), the 199A deduction begins to be subject to a wage limitation. Once the taxable income for married taxpayers filing a joint return exceeds $415,000 ($207,500 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S Corporation may pay shareholders less wage income for them to benefit from the Sec. 199A deduction.
💡If an S Corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between \$315,000 and \$415,000 (between \$157,500 and \$207,500 for other filing statuses). Although the wage limitation is used in computing the phase-out, once the taxpayer’s taxable income exceeds \$415,000 (\$207,500 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and would again want to minimize their reasonable compensation to reduce FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services.

Determining Reasonable Compensation 📑

Taxpayers cannot simply pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for those who do not consider the factors related to reasonable compensation. Commercial firms have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.

Need Help Setting Reasonable Compensation in Your S Corp?

If you need additional information related to reasonable compensation, don’t hesitate to call us. We’re here to ensure your S Corporation stays compliant and tax-efficient. Contact us today to discuss how we can help your business thrive in 2024 and beyond.

Guide to S Corp taxes for Small Business Owners: S Corporation FAQs and Tips

While we see a number of questions related to S Corp tax saving strategies, the top question we get from small business owners regarding taxes is:

“Am I paying too much in taxes?”

Are you a small business owner and feel like you’re paying too much in taxes? There’s a very good chance you might be.

We see it in small businesses like yours all the time.

Come tax season, your CPA tells you your bookkeeper missed several chances to save you money. But it’s too late. Your taxes are due, and the IRS is calling. Maybe next year. But you can avoid scenarios like this by being proactive and planning ahead.

The S Corporation Election

What is an S Corporation and how do you make an S Corp election for your business?

Reducing Your Tax Bill

There are a number of different tax reduction strategies for businesses and business owners.

💡 5 Legal Ways to Reduce Your Tax Bill
💡 How Does Combining a Vacation with a Foreign Business Trip Affect the Tax Deduction for Travel Expenses of a Self-Employed Individual?
💡 Why PEO is worth exploring.
💡 How Small Business Owners Can Avoid a Tax Audit
💡 Do You Need to Renew Your ITIN?

Who Is an Employee?

An officer of a corporation is generally considered an employee. Being a shareholder doesn’t change the requirement that any payments to an officer must be treated as wages. Courts have consistently ruled that S corporation shareholders who provide more than minor services to their corporation are employees whose compensation is subject to federal taxes. There’s an exception for officers who do not perform or perform only minor services.

Starting a New Business

Are you starting a new business? If you are an entrepreneur and you are just launching your new business venture, here are some things to consider to make sure that you are set up for success.

Setting Up a LLC

A Limited Liability Company (LLC) is one form of business legal structure. Find out if it’s the right one for you.

Payroll and Compensation

If you have employees, or are even considering paying yourself as a business owner, there are a number of tax implications to consider to minimize your overall taxes.

Accounting for Small Businesses

There are a number of accounting options for small businesses. Explore whether integrated accounting teams, and/or cloud accounting are a good fit for your business needs.

Maximize your tax savings now!

Don’t let another year slip by without maximizing your tax savings. As a small business owner, it’s crucial to stay ahead of the game. Schedule a consultation with our expert CPAs today and let us help you optimize your S Corp tax strategy. Reach out now and ensure your business thrives in 2024!