USA Single member S-Corp noob questions

[Wilky]

Hello all, I've been looking for a place to discuss the operations of a single member S Corp and how to effectively run the financials. I don't have a super complicated operation with a bunch of assets or multiple employees, etc.

Background: I created an S Corp back in 2015 and it's been a very rough ride so far trying to learn everything. I'm an independent contractor/freelancer on Upwork and make approximately $72k a year from various projects. Those not familiar with the platform, Upwork provides an online workplace, where companies hire, manage, and pay freelancers through their web-based platform.

On Upwork, any freelancer account has to be in your name with an associated personal bank account, but you can also set up something called an agency in your S-Corp name and with your S-Corp bank account and apply under your agency as the sole agency freelancer. Payments then go to the agency."

-Upwork payments are transferred to my S Corp business account every week, around $1,400 a week is added.
-I periodically draw off of the S Corp account and transfer into my personal checking account.

On the S Corp side:
1) I am required to e-file Form 1120-S to the IRS by 3/16 of every year?
2) Should I be filing Form 941 if I'm essentially just paying myself and nobody else?
3) Can I take my S corporation income as shareholder distributions to avoid having to withhold taxes? Or since I'm doing the accounting for my own S Corp, would I be considered doing a service and would be forced into payroll taxes for myself?

On the Individual Taxes side:
1) Do I need to create an actual W2 from the S Corp to myself for the personal taxes?

Thanks for all the help ahead of time, I'm very in the dark of what to do. Wilky

 

[CAentrepreneur]

Not a professional accountant. Like you, looking to be able to discuss info.

What I know is that S-Corps can only have one class of stock, and they cannot exceed 100 shareholders. Profits flow through to people's individual income tax, so there are no corporate taxes.

Local person retired from his retail biz by letting employees convert it to S Corp and buy him out. Only way employees could be getting enough money to life here. Can't be conveying surplus value to some other owner.

No profit in San Francisco helps people set up S Corps.

Maybe there are good books people can turn us on to.

Let us know what you find.

Thanks!

 

[Wilky]

Thanks for the response, yes this current situation can't be easy for a lot of people I imagine, especially in California, I'm over in Denver where prices aren't much less!

The problem I really can't wrap my head around is doing personal individual taxes on the amount I draw off my own S Corp. How to do that, I think it depends on if your collecting a salary/wages from the S Corp or drawing from a shareholder distribution.

I would be interested in some books too, but I've found there is far too much vague information to really get a game plan and specific procedure together without professional accountant help!

 

[Werner Reisacher]

Wilky, the problem is that you are looking at three different issues. And consequently, get confused. Let's go through it step by step.

You are an individual who offers his services as a Contractor. To do that, you don't need a company. You can operate as a sole proprietor, and report your income from your customers and your expenses on Schedule C (sole proprietorship) as part of your personal tax declaration Form 1040.

At the end of Schedule C, you will find a line item that is called "Payroll Tax". This tax is approx. 15% of your net income, (income received from customers less all tax-deductible expenses.) Why? This tax represents your contributions to your Social Security benefits program, the same as every employee has to pay. The only difference is, it is twice the amount of what your employer would deduct from your payroll on the W2 Form because you are acting as both, the employee and the employer. Actually 50% of the payroll tax that you have to pay is a tax-deductible item on your personal income tax on Form 1040.

If it is so simple, why do people do register companies and do business in the name of a company? Unless you need to raise funds from multiple sources to function as a business, the only reason to use a company is to benefit from the legal protection corporations offer. As long as you do carry out your business under the corporate umbrella, your liability is limited to the amount of money you have invested in the company. Your personal assets and your house are not exposed to unlimited personal liability for your activities as a contractor unless such activities were criminal and committed deliberately.

Since you are operating in the name and under the legal protection of an S-Corporation, the money you collect belongs to the company. If you transfer the incoming funds directly into your personal pocket, you bypass the company and consequently lose the legal protection. It’s called, you “lifted the corporate veil.”

Keeping the books of the corporation in the most simple way is by opening one bank account in the name of the company and one Credit Card that you will use for all your business purchases only.

If you need money to pay your own bills don’t use the company credit card because it will create unnecessary and time-consuming accounting work to separate your personal expenses from the tax deducible expenses of the company. Keep the two accounts strictly separate and preferably transfer money from your company account to your personal account, in rounded figures such as 100/200/500 to keep the tracking simple. Avoid whenever possible paying cash for company payments. Nothing worse for a tax accountant than a customer coming in with a shoebox filled with cash receipts.

Comes tax time, ask the Credit Card company to send you their annual detailed summary of all the expenses you paid for with your credit card, line by line, sorted by expense categories, pretty much in line with the type of expenses the IRS is asking on their tax forms. Your accounting for the expense side is done - with one exception, the payments made to you as the employee of the company. Legally, you are an employee of the company. You rendered services to the company and the company must pay you for your services. The IRS requires that employees are paid a “reasonable salary” as remuneration for the economic value they have contributed. Google it under “reasonable compensation IRS”

If your salary is less than the amount of money you draw from the company’s account, the difference will be “shareholders draw” deducted either from the annual or carried forward profits, or lent to you as a shareholder loan. As long as you do not touch the paid-in share capital of the company, you are fine. Otherwise, you “redeemed your share capital” and have to deal with your State”s regulations on corporations.

And yes, the company needs to apply for an employer's ID (Form SS-4 or free online) and give you a W2 for the amount paid to you as a salary (once a year) and report the funds they deducted from you for Social Security and Income Taxes with-holdings. together with their contributions to the IRS (Form). quarterly. The level of the amount they withhold from your paycheck for Income Taxes depends on the number of dependents you report on Form W4 that the company will ask you to complete. The company is not responsible for the number of dependents that you report. Be careful. Once an employer has deducted money from an employee for SS or Tax deductions, these funds are considered “federal property”. Not paying them to the government in a timely manner or not at all lead to very serious legal consequences. (felony)

I let you figure out how you handle the Fixed Asset issue.

The S-Corporation is a legal entity but from a tax point of view, a pass-through entity. The company does not pay taxes but must file taxes(Form 1020-S) annually (March 15th)

It passes the taxable amount of net income on Form K-1 to the shareholder. The shareholder has to report this income on his Form 1040 as taxable business income. No more payroll taxes, you paid your SS contributions as an employee. .

To conclude, since you have saved all the costs for accounting and have a clear picture of the situation, do not try to be pennies smart and $ fool. Paying a professional Tax accountant a small fee is worth every penny to avoid any problems and surprises at a later date that can be much more expensive than the fee. ‘

Having said all that - and assuming that you do have insurance coverage for your professional activities - re-consider whether running your business through an S-Corp is worth the trip.

 

[Wilky]

Hi Werner, thanks a lot for the message, it explains a lot. I'm looking into possibly operating as a sole proprietor now, I looked into it last night and seems more in line with my needs. Thanks again for the advice, I appreciate all of it!