What's the Primary Purpose of an S Corporation?
An S Corporation has one primary job that it's very good at. An S Corporation primarily exists to reduce self-employment taxes. That's it. There are no secret deductions, no magic write-offs, and no loopholes.
S Corporations tend to have more structure and cleaner reporting, which often reduces gray areas compared to many self-prepared Schedule C returns.
Cool, so what does that mean with numbers?
When an S Corp Usually Makes Sense
When an S Corp Usually Doesn't Make Sense
When an S Corp Usually Doesn't Make Sense
Net income is above the $50,000 range, assuming income is sustainable.
Why $50,000? This is where the tax savings of around $4,500 outweigh the additional fees associated with forming an S Corporation. More on those in the next section!
You're willing to run payroll correctly. Processing officer payroll can be the S Corporation chore that causes the most pain. But we are here to help and guide you in the right direction!
You are in an S Corporation friendly state. Generally if you're in Florida, you have a green light! If you're in a high tax state or locality such as New York City, an S Corp can increase overall taxes.
You enjoy tax planning and looking ahead. S Corporations require more attention throughout the year to stay in the reasonable officer compensation sweet spot. If income is moving up or down, we often need to shift officer compensation along with it.
When an S Corp Usually Doesn't Make Sense
When an S Corp Usually Doesn't Make Sense
When an S Corp Usually Doesn't Make Sense
If your income is low or wildly fluctuates from year to year, an S Corporation may not be a good idea for you. There are a couple workarounds for variable income, but processing payroll without income is no fun.
Your business is brand new and you are unsure of what the future holds. Setting up an S Corp can be fun and exciting, but no one thinks of when its time to tear it down. Closing down payroll accounts and filing final tax returns can be sticky and add additional fees.
You want to be overly aggressive with your officer compensation. As the tax professional and person signing your tax return, we will recommend a reasonable officer salary to you. Of course there is room for discussion, but we must take a supported and defensible tax position.
You have a high outside W-2 that minimizes the amount of taxes savings from the S Corporation. This one can get technical, but once your W-2 wages cross the Social Security wage base, the tax savings of an S Corporation come to a crawl.
Additional Chores from an S Corporation
Additional Business Tax Return Filing - The S Corporation requires a separate tax return filing, Form 1120-S. And check this out, the S Corporation tax return is due on March 15th each year, an entire month before your personal tax return. This catches many business owners off guard.
Payroll Setup and Processing - As mentioned earlier, we must pay a reasonable officer salary through payroll when we have an S Corporation. Often forgotten is the process of setting up payroll accounts with your state which creates additional fees. This creates another layer of business administration some small business owners aren't ready for.
More Intentional Tax Planning - With an S Corporation, it's important to hit the officer compensation sweet spot to achieve maximal tax savings. This requires intentional tax planning throughout the year to make adjustments to payroll as necessary.
How Anderson Core Helps with S Corporations
Anderson Core will evaluate whether an S Corporation is a right fit for the goals of your small business. While the tax savings can seem black and white, it's best practice to review your overall tax picture and future goals. When discussing your overall tax picture, we will cover items like projected income, reasonable officer salary, and your personal goals.
Anderson Core is here to guide you through the S Corporation process and can assist with filing the S Election with the IRS.
Tax Return Filings - Form 1120S
S Corporations tax returns are one of our specialties at Anderson Core. We will ensure your 1120-S tax filing journey begins on the right foot. We will carefully prepare the business tax return make sure you understand the tax return.
Income will flow from tax form K-1 produced form the S Corporation tax return and then be reported on your personal tax return. We are here to make sure this is reported properly and educate you during the process.
Tax and Payroll Planning
As mentioned earlier, tax planning is important to ensure we are maximizing the tax savings produced by the S Corporation. We are here to provide a comprehensive tax plan and answer any questions you have during the process.
Part of tax planning for S Corporations is creating an officer compensation payroll plan. We are here to help with this too! While we don't directly process payroll, we will provide a payroll plan and make sure everyone is on the same page.