So you’ve set yourself up as an S-corporation.
As your business grows, it’s great to think about yourself as a separate entity from the business, so you’re not muddying the waters between personal and work finances, and you’re protected personally from liability.
While you’re legally a separate entity from your business under S-Corp, it’s important to consider yourself an employee in the business. We get a lot of questions about the details of this structure, and how best to conduct business – so we’ve listed the five most important rules to follow once you’ve chosen to take this route.
1) You must file 1099-MISC forms.
The 1099-MISC form is a must for anyone who hires independent contractors or has vendors they pay with cash, check, or debit card. The form is used by the IRS to verify the income you paid to someone else and provides proof of a deduction. If you’ve paid someone over $600 in fees, compensation, rent, or prizes in the year, you’ll be required to record it. If you’ve paid someone who is a corporation, or through credit card, or third-party vendor, such as Paypal, you aren’t required to issue them a Form 1099-Misc even if you paid them over $600.
How you do it: Get a W9 form for any vendors or contractors you’re working with. The form will ask for their name, address, and social security number, and will identify for you whether or not they are a corporation. Keep the form for your records or for tax purposes and record your payments via the 1099 form, due January 31st of every year.
Be mindful that if you don’t file these forms, you could be subject to hefty penalties – and we don’t want that!
We recorded a really helpful tax tip Tuesday based on a client question about 1099 deductions – give it a watch to see what you can write off.
2) Keep clean records!
Trust me, you’ll thank yourself for keeping clean and accurate records throughout the year (and your accountant will thank you too). If you’re not already, get yourself set up with a cloud accounting software like Quickbooks Online or Xero. These software options do a great job of keeping track of your income and expenses for you, meaning you’ll have an accurate record for the IRS but also making it easier for you to see how well you’re running your business.
Digital record-keeping is the most efficient and least time-consuming way to keep track, and there are some brilliant add-on tools like Expensify and Hubdoc to help you keep expenses clean and categorized. At the very least, set up some columns in an excel spreadsheet so that you’re on top of it.
Here’s another Tuesday Tax Tip on how to keep your business and personal records separate and documented digitally.
3) Paying yourself is part of the deal.
Paying yourself a wage is a requirement of forming an S-Corporation. As far as the IRS is concerned, you should be paying yourself a “reasonable” compensation for the work you do – who’d have thought it?
This is where you really need to think about yourself as an employee. Imagine you were hiring someone to come in and do your job – what would you pay them? Whatever that figure is should be your salary.
If the IRS audits you and they see that you’re not paying yourself a reasonable salary, then you could get yourself into a mess. Any distributions you’ve taken will most likely be converted into a salary, and you’d have to pay the delinquent payroll taxes, interest, and penalties to go along with it.
Be good to yourself – and pay up!
4) Remember, your taxes won’t come out automatically.
Although we say ‘think about yourself as an employee’ when you’re an S-corp, you must remember that you are your own employee – so you are solely responsible for your taxes. The IRS says that you have to pay tax as you earn your income, so you’ll need to make estimated tax payments every quarter since they aren’t being withheld for you on your behalf.
It’s very important to estimate what your liabilities are going to be, and pay those safe harbor estimates, so you don’t face underpayment penalties. On the plus side, you’ll have a far better grasp on your finances and a clearer idea of what you’ll need to pay at the end of the year.
We’ve covered everything you need to know about how to actually make those estimated payments online through our Tax Tip Tuesday video.
5) Be smart about the future and contribute to your retirement.
Setting up a retirement account and saving money for the future isn’t required by any means, but it is the smart and proactive thing to do. Not only is it really important to start young and save a good amount over the 30-40 years of work, but you’ll also benefit from a deduction for your business.
If you’re an independent contractor, you don’t have the safety net of saving through employment – so you’ll need to set up your own account. There are a bunch of options available to you – a Simplified Employee Pension (SEP), a Solo 401k, a Business 401k, a simple Individual Retirement Account (IRA), a Keogh plan.
My go-to in most situations is a 401k if you are a solo practitioner. This allows you to not only put away $57K (2020) a year into retirement, but also to participate in a Backdoor Roth for another $6K a year.
Not all retirement accounts are a one-size-fits all. It’s really important to consider all the factors (size of income, age, how much you want to put away, pre-tax vs post-tax, etc).
Bonus tip: Listen to your tax advisor – we’re here to make things easier for you.
If you’re working with an Advisor (especially a proactive one), it’s crucial to listen to them and follow their instructions throughout the year. We really do have your best interests at heart, so running your business with our advice will ensure you’re compliant with the IRS, you don’t experience any nasty surprises, and you’re aware of what’s coming up on your tax return.
Plus we’re always here to give you clarity on these kinds of questions! So if you have anything further you want to ask, feel free to reach out to us!