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You are here: Home > Taxpayers Guide to LLCs and S Corps > Chap 10 - Operating Your S Corp > New S Corp Puppy, What Do I Do Now

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  • Taxpayers Guide to LLCs and S Corps

    • Introduction

      • About the Author
      • Progressive Updates
      • Introduction Disclaimer
      • Shameless Self-Promotion
      • Book Introduction
      • Quick Reference 2021
      • Quick Reference 2022
    • Chap 1 - Business Entities, LLCs

      • Basic Business Entities
      • Sole Proprietorship
      • Single Member Limited Liability Company
      • Multi-Member Limited Liability Company
      • Partnerships
      • C Corporations
      • Professional Corporations and LLCs
      • S Corporations
      • Section 199A Qualified Business Income Tax Deduction
      • S Corp Versus LLC
      • LLC Popularity (Hype)
      • Formation of an LLC or S Corp
      • Nevada Fallacy of an LLC
    • Chap 2 - Customized Entity Structures

      • Your Spouse as a Partner (Happy Happy Joy Joy)
      • Family Partners
      • Holding Company and Operating Company
      • Parent-Child Arrangement (Income Flows "Up")
      • Parent-Child Arrangement (Income Flows "Down")
      • Multi-Member LLC That Issues Invoices
      • Things to Work Through with Multiple Entities
      • Recap of Benefits with Multiple Entities
      • State Apportionment with Multiple Entities
      • California Multi-Member LLC S Corp Twist
      • Economic versus Equity Interests
      • Structuring Deals with Angel Investors
      • ESOPs and S Corporations
      • Another Employee Ownership Situation
      • Medical C Corp
      • Fleischer Tax Court Case
      • Joint Ventures
      • Loans or Capital Injections
      • Using a Trust in Your Formation Considerations
      • Operating Agreements
      • Exit Plans, Business Succession
      • Liability Protection Fallacy of an LLC
      • Charging Orders
      • Using a Self-Directed IRA to Buy a Rental, Start A Business
    • Chap 3 - S Corporation Benefits

      • Avoiding or Reducing Self-Employment SE Taxes
      • Tax Savings with Health Insurance
      • S Corp Hard Money Facts, Net Savings
      • Officer Compensation with Solo 401k Plan Deferral
      • W-2 Converted to 1099
      • Net Investment Income, Medicare Surtax and S Corps
      • Three Types of Income
    • Chap 4 - The 185 Reasons to Not Have an S Corp or LLC

      • Chapter 4 Introduction
      • Additional Accounting Costs
      • Additional Payroll Taxes
      • SEP IRA Limitations
      • Trapped Assets
      • Distributing Profits, Multiple Owners
      • Other W-2 Income
      • State Business Taxes (Not Just Income Taxes)
      • Deducting Losses
      • Distributions in Excess of Shareholder Basis
      • Stock Classes
      • Vesting and Expanding Ownership
      • Bad Loans to the S Corp
      • Social Security Basis
      • Payroll Taxes on Children
      • C Corp to S Corp Problems
      • Going Concern
      • Recap of S Corp Downsides
      • Growing Business, Debt Service
    • Chap 5 - State Nexus Problems

      • Chapter 5 Introduction
      • Chapter 5 Disclaimer
      • Wayfair Case Part 1
      • Nexus Theory
      • Constitutional and Legislative Standards
      • Sales and Use Tax, Income Tax
      • Physical and Economic Presence, Nexus Attached
      • Wayfair Case Part 2
      • Services and Tangible Personal Property (TPP)
      • Costs of Performance, Market-Based Approach
      • Allocation and Throwback
      • FBA, Drop Shipments, Trailing Nexus Revisited
      • Recap of State Tax Issues
      • State Tax Issues and Nexus
    • Chap 6 - S Corporation Election

      • Formation (Election) of an S-Corp
      • Electing S-Corp Filing Status, Retroactive for 2022
      • Another Option, Dormant S Corp
      • Missing Payroll, Now What
      • Mid-Year Payroll
      • Nuts and Bolts of the S Corp Election
      • Ineffective S Corp Elections
      • S Corp Equity Section
      • Terminating S Corp Election
      • Distributed Assets
      • 5 Year Rule
      • Life Cycle of an S Corporation
    • Chap 7 - Section 199A Deduction Analysis

      • Section 199A S Corp Considerations
      • Calculating the Qualified Business Income Deduction
      • Section 199A Defining Terms
      • Specified Service Trade or Business (SSTB) Definitions
      • Trade or Business of Performing Services as an Employee
      • Services or Property Provided to an SSTB
      • Section 199A Deduction Decision Tree
      • Section 199A Reasonable Compensation
      • Section 199A Pass-Thru Salary Optimization
      • Cost of Increasing Shareholder Salary
      • Section 199A Rental Property Deduction
      • Negative Qualified Business Income
      • Qualified Property Anti-Abuse
      • Aggregation of Multiple Businesses
      • Section 199A W-2 Safe Harbors
      • Additional Section 199A Reporting on K-1
      • Section 199A Frequently Asked Questions
    • Chap 8 - Section 199A Examples and Comparisons

      • S Corp Section 199A Deduction Examples
      • Section 199A Side by Side Comparisons
      • Section 199A Basic Comparisons
      • Section 199A Health Insurance Comparison
      • Section 199A 200k Comparison
      • Section 199A 250k Comparison
      • Section 199A Specified Service Business Comparison Part 1
      • Section 199A Specified Service Business Comparison Part 2
      • Section 199A Phaseout
      • Section 199A Recap
      • Section 199A Actual Tax Returns Comparison
    • Chap 9 - Reasonable Shareholder Salary

      • IRS S Corp Stats
      • Reasonable S Corp Salary Theory
      • IRS Revenue Rulings and Fact Sheet 2008-25
      • Tax Court Cases for Reasonable Salary
      • Risk Analysis to Reasonable Shareholder Salary
      • Reasonable Salary Labor Data
      • Assembled Workforce or Developed Process Effect
      • RCReports
      • W-2 Converted to 1099 Reasonable Salary
      • S Corp Salary Starting Point
      • Multiple Shareholders Payroll Split
      • Additional S Corp Salary Considerations
      • Reasonable Salary Recap
    • Chap 10 - Operating Your S Corp

      • Chapter 10 Introduction
      • Costs of Operating an S Corp
      • New S Corp Puppy, What Do I Do Now
      • Accounting Method
      • 1099-NEC Issued to Your SSN
      • Take Money Out of the S Corp
      • Processing S Corp Payroll
      • Taking Shareholder Distributions
      • Reclassify Shareholder Distributions
      • Accountable Plan Expense Reimbursements
      • Accountable Plan Requirements
      • Shareholder Distributions as Reimbursements
      • S Corp Tax Return Preparation
      • Distributions in Excess of Basis
      • Minimize Tax or Maximize Value (Economic Benefit)
      • Tracking Fringe Benefits
      • Other Tricks of the Trade with S Corps
      • Adding Your Spouse to Payroll
      • Chap 10 - Comingling of Money
    • Chap 11 - Tax Deductions, Fringe Benefits

      • Chapter 11 Introduction
      • Four Basics to Warm Up To
      • Section 199A Deductions – Pass Through Tax Breaks
      • 185 Business Deductions You Cannot Take
      • Depreciation
      • Small Business Tax Deductions Themes
      • Value of a Business Tax Deduction
      • Deductions the IRS Cannot Stand
      • Automobiles and LLCs, S Corps
      • Business Owned Automobile
      • Section 179 and Bonus Depreciation
      • You Own the Automobile, Get Reimbursed By The Mile
      • You Own the Automobile, Take Mileage Deduction
      • You Own the Automobile, Lease Back to Your Company
      • Automobile Decision Tree
      • Home Office Deduction
      • Tax-Free Rental of Your Home
      • Tax Home
      • Business Travel Deduction
      • Deducting Business Meals
      • Sutter Rule
      • Cohan Rule
      • Capital Leases versus Operating Leases
      • Putting Your Kids on the Payroll
      • Educational Assistance with an S-Corp - Section 127
      • Summary of Small Business Tax Deductions
      • Comingling of Money
      • Reducing Taxes
    • Chap 12 - Retirement Planning

      • Retirement Planning Within Your Small Business
      • Self Employed Retirement Plan Basics
      • Retirement Questions to Ask
      • Tax Savings and Tax Deferrals
      • Using a 401k in Your Small Business Retirement Options
      • The Owners-Only 401k Plan
      • Having Staff with a Solo 401k Plan
      • Self-Directed 401k Plans
      • Traditional 401k (A Company Sponsored Plan)
      • 401k Plan Safe Harbor Provision
      • 401k Plans with Roth Option (Roth 401k)
      • Two 401k Plans
      • Rolling Old 401k Plans or IRAs into Your Small Business 401k Plan
      • 401k Loans and Life Insurance
      • 401k Plans and Roth IRA Conversions
      • Turbo Charged 401k Plans
      • SIMPLE 401k
      • SEP IRA
      • SEP IRA, Roth IRAs and the Roth Conversion
      • Controlled Groups
      • Owner Only 401k Plans in MMLLC Environment
      • Non-Qualified Deferred Compensation Plan
      • Exotic Stuff
      • Expatriates or Expat Tax Deferral Planning
      • Small Business Retirement Planning Recap
      • Personal Defined Benefit Plan
    • Epilogue

      • WCG Fee Structure
      • More About WCG
      • Consultative Approach
      • Core Competencies
      • No BS
      • Expectations of Our Clients
      • Final Words
      • Tax Consultation Business Advising, S Corp Consult
    • Chap xx - Health Care

      • Disclosure and Updates
      • Gaming the HSA System
      • Health Care Summary
      • Health Savings Accounts (HSAs)
      • Long-Term Care
      • Multiple Employees
      • One Person Show or Husband-Wife Team, S Corporation
      • Section 105 Health Reimbursement Arrangement (HRA)
      • Section 125 Cafeteria Plans and Flex Spending (FSA)
      • Sole Proprietors and Single Member LLCs
    • Chap yy - Business Valuations, Sale, Exit Planning

      • Business Valuation Techniques
      • Buy-Sell Agreements
      • Deal Structure
      • Debt Service
      • Exit Plans, Succession
      • Purchase Price Allocation
    • Chap zz - Other S Corp Thoughts

      • 1099 Income as Other Income, No Self-Employment (SE) Taxes
      • Audit Rates and Risks with an S-Corp
      • Recap of S-Corps
      • Rental Losses with an S-Corp
      • Rentals Owned by an LLC Fallacy
      • W-2 or 1099-MISC That Is The Question
  • Expat and Expatriate KB

    • Expat FAQs

      • Are there any downsides to claiming the foreign earned income exclusion?
      • Are there exceptions to the bona fide residence or physical presence tests?
      • As an ExPat, do I need to file a State tax return?
      • Can I deduct mortgage interest paid on my foreign home?
      • Do I have to pass the same test each year?
      • Does voting through an absentee ballot mess up my bona fide foreign residency?
      • How do fluctuating currency values affect my taxes?
      • How do I handle my foreign rental property?
      • How do I qualify for the foreign earned income exclusion?
      • How do moving expenses affect my exclusion?
      • How do partial years work with the foreign earned income exclusion?
      • How do tax treaties affect my ExPat situation?
      • How does the foreign housing exclusion or deduction work?
      • If I am a self-employed ExPat, what taxes am I responsible for?
      • If I don't qualify for the housing deduction, can I still deduct expenses?
      • May I still make contributions to my IRA as an ExPat?
      • What amount can I deduct for foreign earned income exclusion?
      • What happens if my host country has a form of social security?
      • What is a tax home or abode, and how do they relate to each other?
      • What is considered foreign earned income?
      • What is foreign earned income exclusion?
      • What is the bona fide residence test?
      • What is the difference between foreign tax credit and deduction?
      • What is the physical presence test?
  • Rental Property KB

    • Rentals FAQs

      • Can I claim my residence as a rental, sell it for a loss and deduct the loss?
      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • Can I deduct the taxes associated with public improvements?
      • Can I rent out half a duplex or a room in my house?
      • Do I need receipts for my rental expenses?
      • Do rental properties offer good tax sheltering?
      • How are repairs and improvements different?
      • How do I handle my foreign rental property?
      • How do passive loss limitations affect me?
      • I purchased a rental property last year. What closing costs can I deduct?
      • If I don't have any rental income can I still claim a loss?
      • If I move back into my rental, how does that work?
      • If my employer provides a cell phone, is that income?
      • Is depreciating my rental a good thing?
      • My rental sale was a huge loss. What can I do?
      • Rentals Owned by an LLC Fallacy
      • What are tax issues with an LLC owning a rental property?
      • What are the exceptions to rental activities?
      • What are the rules on a home office deduction?
      • What is active participation versus material participation?
      • What is considered rental income?
      • What rental property expenses can I deduct?
    • Real Estate Pros

      • Are rental activities always passive activities?
      • Are there downsides to the real estate professional designation?
      • Are there specific material participation tests for real estate professionals?
      • Do I need to group my rental activities together?
      • How do I record the hours spent as a real estate professional?
      • If I meet the 750-hour test, do I also meet the 500-hour material participation test?
      • What activities count and don't count?
      • What are some of the IRS tricks to deny my real estate professional designation?
      • What are some of the tax court cases for real estate professionals?
      • What are the general tests for material participation?
      • What is active participation versus material participation?
      • What is the definition of real estate professional?
      • Why designate myself as a real estate professional?
  • Other Tax Information KB

    • Audits

      • Can I ignore an IRS notice or claim I never received it?
      • How can I pay my taxes or my notice of deficiency?
      • How can I prepare for my face to face or interview field audit?
      • How do I appeal the collections of unpaid taxes?
      • How does a joint return get handled during an audit?
      • How does bankruptcy affect my unpaid taxes?
      • How much is interest and penalty on taxes owed?
      • How should I respond to an IRS notice or letter?
      • What are my chances of being audited?
      • What are some of the types of IRS notices and letters?
      • What can the IRS do if I don't pay my taxes- what is the collections process?
      • What causes or triggers an IRS audit?
      • What if I cannot pay my taxes?
      • What IRS publications deal with audits?
      • What is the appeals process?
      • What is the period of limitations for an audit?
      • What types of audits could I face?
      • Who can be with me at my IRS audit or conference?
    • Charitable Contributions

      • Are there ways to earmark money for an individual?
      • Do I need receipts for my donations?
      • Does deducting charitable contributions cause an audit?
      • How do I determine the value of my donation?
      • What are some of the donations I can deduct?
      • What are some other charitable deductions?
      • What are the limits of my donations?
      • Who qualifies as a charity?
      • Why give to charities?
    • Education, Tuition Deductions

      • Are Educational Savings Accounts Worth It
      • Are There Tax Breaks for Going to College
      • Are There Tax Savings When My Employer Pays for My Education
      • Can I deduct the cost of sports, games or hobbies while in college?
      • IRAs and Savings Bonds To Help With Higher Education Costs
      • What College Expenses Can I Deduct From My Income
      • What constitutes a full-time student for tax purposes?
    • Homes and Real Estate FAQs

      • Can I deduct the loss on my primary residence?
      • Can I deduct the taxes associated with public improvements?
      • Can I exclude the gain on my home sale?
      • How does a Federal Disaster affect my casualty loss?
      • My home was destroyed- what deduction can I take? How do casualty losses work?
      • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
      • What are the rules on a home office deduction?
      • What is Cancellation of Debt? Is it taxable income?
    • Medical, Health Insurance

      • What are qualified medical expenses?
      • Why can't I deduct health insurance premiums?
    • Mortgages, Bad Debts

      • Can I deduct a bad debt on my tax return?
      • Can I deduct the loss on my primary residence?
      • Is cancellation of debt always taxable?
      • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
      • What is Cancellation of Debt? Is it taxable income?
    • Recordkeeping

      • Are there specific records I need to keep?
      • Do I need receipts for my expenses?
      • How does proper recordkeeping affect my audit results?
      • How long do I have to keep records?
      • How should I maintain my tax records?
      • What are the requirements for mileage records?
      • Why should I keep tax records?
    • General Tax Questions

      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • If my employer provides a cell phone, is that income?
      • Tax Brackets Misconceptions- Should I earn more money?
      • What is the marriage penalty and how does it affect our tax returns?
  • Small Business KB

    • Small Biz FAQs

      • Hobby Versus Business

        • 3 out of 5 Test
        • Hobby Versus Business Testing
        • Philosophy of Business Losses
        • Private Track Coach Deducts Business Losses for Eight Years, Court Says OK
        • WCG (formerly Watson CPA Group) Philosophy on Hobby Losses
      • Independent Contractors

        • Behavioral Control
        • Colorado's Criteria for Contractor Status
        • Employee or Independent Contractor
        • Employee or Independent Contractor Status
        • Financial Control
        • IRS Determination, Form SS-8
        • Misclassified Workers Can File Social Security Tax Form
        • Salespeople As Contractors
        • Sample Response to CO Unemployment Claim
        • Statutory Employee and NonEmployees
        • Tax Court's Checklist
        • Type of Relationship
      • LLC and S-Corps (superseded)

        • As a one-person show, should I still form an LLC? An S-Corp?
        • Automobiles and LLCs, S Corps (superseded)
        • Can I call my 1099 other income which avoids employment taxes?
        • Determining the S-Corp Payroll Amount
        • Estimated Tax Payments, Withholdings Issues for an S-Corp
        • How do I convert my LLC to an S-Corp?
        • How does an LLC or S-Corp's income affect my taxes?
        • If the S-Corp taxation is what I ultimately want, should I form an LLC or C-Corp?
        • Is there a way to avoid Self-Employment tax?
        • Should I convert my LLC to an S-Corp (Sub-S Election)?
        • Should I form an LLC with my spouse?
        • The S-Corp Grind, Operational Hassles
        • The Zero Dollar Paycheck
        • What are the operational hassles of an S-Corp LLC?
        • What is an Accountable Plan?
        • The Money Trail for S-Corp Elections
        • 185 Reasons NOT to S-Corp, Downsides to S-Corp Election
      • Can I call my 1099 other income which avoids employment taxes?
      • Can I deduct country club dues as a business expense?
      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • Health Care Expenses, Premiums, HRAs, HSAs - Section 105
      • Hobby Versus Business Article
      • How can I avoid or reduce Self-Employment (SE) taxes?
      • If I am a self-employed ExPat, what taxes am I responsible for?
      • If my employer provides a cell phone, is that income?
      • LLCs and S-Corps
      • Retirement Planning within an S-Corp
      • S-Corp Hard Money Facts, Net Savings
      • Turn Your Vacation Into a Tax Write Off
      • What are tax issues with an LLC owning a rental property?
      • What are the rules on a home office deduction?
      • What business or corporate expenses can I deduct?
      • What do I do with a 1099-K?
      • What is the difference between a hobby and a business?
      • What is the difference between an LLC, S-Corp and a C-Corp?
      • Why can't I deduct health insurance premiums?
  • Archive

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New S Corp Puppy, What Do I Do Now

Created OnOctober 10, 2021
UpdatedOctober 21, 2021
byJason Watson, CPA
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By Jason Watson, CPA
Posted Sunday, October 10, 2021

The following is a reprint from a blog post and is a quick glance at some of the housekeeping that is required after bringing home your new S Corp puppy.

Open a Business Checking Account

You will need a separate business checking account for two big reasons. First, most payroll processors (ADP, Paychex, Gusto, etc.) require this per Bank Secrecy Act and Homeland Security rules. Second, compartmentalizing your personal and business worlds is just good accounting practice. If necessary, WCG can rebuild your financial statements and prepare tax returns based on bank statements. If your Nordstrom’s is mixed in with Staples, it gets messy.

Yet another reason for the compartmentalization is preserve the separation of you, the personal, from the business. This might, heavy on “might,” help you in a lawsuit or legal matter.

Set Up Payroll Accounts and Processing

As a shareholder of an S corporation, you wear two hats. One as an investor, and another as an employee. Well, that’s a lie. As a business owner, in general, you wear a million hats… but two of them are investor and employee. Therefore, the IRS requires all S Corp shareholders who materially participate in the business activities to be paid a reasonable salary.

A salary is more than simply writing a check or making a transfer from your business checking account to your personal checking account. With a corporation or LLC taxed as S corporation those payments are owner draws and are now considered shareholder distributions. Payroll is payroll… complete with quarterly payroll filings (941s) and annual payroll filings (940, W-2 and W-3). Let’s not forget the state equivalents.

Of course, WCG can handle all this for you, but if you choose to process your own payroll, we strongly recommend ADP or Gusto. WCG uses ADP.

Alert Clients to Payment Changes

You might have been receiving payments under your name and / or into your personal checking account. You will want to notify your clients or customers accordingly. You will also want to supply a W-9 to them alerting them that as an LLC or corporation taxed as an S corporation, you do not need to be issued a 1099-MISC or 1099-NEC (unless you are an attorney… seriously).

However, this is not a rock you want to push up that hill. If a client or a customer, or some ambitious accountant on the other end of the email thread wants to issue a 1099 to your S Corp, don’t fight it. Simply ensure they are using the business’s EIN and not your SSN. It’s just not worth the brain damage to convince someone otherwise.

Understand Mileage, Home Office, Cell Phone, Internet Expenses

If you previously reported your business activities on Schedule C of your Form 1040 individual tax return, there are some things to understand. As we just mentioned, as an owner of an S corporation you are both investor and employee. Investors cannot typically deduct mileage, home office, cell phone and internet expense. And! Employees can no longer deduct these expenses as well thanks to the Tax Cuts and Jobs Act of 2017 (Form 2106 as part of Schedule A was eliminated).

As such, your S Corp must reimburse you, the employee, for these expenses through an Accountable Plan reimbursement program. While it sounds fancy, the big takeaway here is that these expenses were commonly deducted on your individual tax return, but with an S Corp, these expenses are now employee reimbursements and are deducted on your business entity tax return. We will spend a lot of time on this and Accountable Plans in a bit.

Why does this matter? We commonly prepare and file a business entity tax return just to later have the shareholders want to deduct mileage, home office, cell phone and internet expenses on his or her individual tax return. This is a problem and requires amending the business entity tax return. Yuck.

Please don’t wait until the preparation of your individual tax return to let us know that you have mileage expenses or a home office to deduct.

Understand SEP IRA / 401k Limits and Handling

This can be a big surprise, so please pay attention on this one (pretty please). With business activities reported on Schedule C, SEP IRAs and 401k company contributions are based on net business income after expenses. With an S Corp, they are based on W-2 wages paid to the shareholders. Big difference!

One of the reasons for leveraging the tax benefits of an S corporation is to reduce the amounts of Social Security and Medicare taxes (self-employment taxes)… and that is accomplished by paying a reasonable shareholder salary which is less than the net business income (see our wonderful chapter on Reasonable Shareholder Salary). Here is some math-

A business reported on Schedule C earns $100,000 after expenses. A SEP IRA contribution is based on this $100,000 and generally will be close to $18,587 for the sake of argument (20% of net business income after deducting the employer portion of self-employment taxes and adjusting for the contribution factor).

Next assume that this same business being taxed as an S Corp pays out a $40,000 salary to the shareholder. Your SEP IRA contribution is now limited to 25% of W-2 wages, and would be limited to $10,000.

So, if you are used to putting away large chunks into a SEP IRA, you will be in for a surprise.

Sidebar: SEP IRAs are old school and were used in crisis mode since solo 401k plans had to be set up during the tax year. Thanks to the SECURE Act, solo 401k plans can be set up in March, but contributions may be made and deducted as if the plan existed the year prior. Also! Keep in mind that solo 401k plans are way better than SEP IRAs with higher contributions (basically solo 401k = SEP IRA + $19,500 for the 2021 tax year). See our chapter on Retirement Planning.

Wait! There’s more. Similar to mileage, home office, cell phone and internet expenses, SEP IRA and 401k company contributions are deducted on the business entity tax return. Read that again. Before your corporation or LLC became taxed as S Corp decision, you might have been used to calculating a maximum SEP IRA contribution on your individual tax return; with an S Corp, this calculation and the decision to deduct the contribution is done on the business entity (S Corp) tax return.

Know the Filing Deadlines, Business Tax Payments

March 15. There it is… and this seems to sneak up on small business owners who have not filed a business entity tax return in the past. S Corps (Form 1120S) and partnerships (Form 1065) tax returns are due March 15, or the next business day. C Corps (Form 1120) tax returns are due April 15, or the next business day.

Also, your individual tax return cannot be filed until the business entity (S Corp or Partnership) tax return is completed. Why? An S Corp or Partnership tax return creates a K-1 which must be reported on your individual tax return. Therefore, if you are a DIYer and prepare your own Form 1040, please do not file until you’ve added the K-1 to the tax return.

Some states have a franchise or corporate tax that affects S corporations and other business entities. For example, if you were a sole proprietor last year and this year you created an entity in California and elected to have that taxed as an S Corp, the business will be required pay a franchise tax on April 15. The business might also pay estimated tax payments throughout the year for California’s franchise taxes. Texas also has a franchise tax which is due May 15. Other states have other rules.

Again, there are a bunch of additional due dates and whatnot that might come with your new S Corp puppy.

Attention Late S Corp Filers

Things change a bit if you are filing a late S Corp election during the first few months of the year. Let’s use some dates-

February 1 Send late S Corp election (Form 2553) to IRS
March 15 S Corp tax return (Form 1120S) is due
May 1 IRS gives you the green light for S Corp status
May 2 S Corp and individual tax returns are efiled
July 4 IRS ruins weekend with late S Corp filing penalty

Note the problem here… you cannot electronically file the S Corporation tax return (Form 1120S) on-time since you do not have approval from the IRS by March 15. No biggie! One option is to paper file the tax returns, but we’ve seen a ton of problems with that. The other options that WCG uses often is this-

Electronically file a tax return extension on March 15 which is naturally rejected (since the S Corp doesn’t exist yet as a tax election).

  • Mail a paper extension to the IRS on March 15 which is probably tossed by an otherwise friendly IRS agent.
  • Electronically file the S Corp tax return when greenlighted by the IRS.
  • Wait for the nastygram from the IRS saying we were late.
  • Submit documentation to the IRS showing the sequence of events, and ask for first time penalty abatement. WCG is batting 100% for over a decade on this.

Your mileage might vary, but this gives you a broad perspective of the sequence when we are close to filing deadlines.

Adjust Estimated Tax Payments

One of the primary reasons, if not the only reason, to elect S Corp status is to reduce self-employment taxes (Social Security and Medicare taxes). If your previous accountant or tax return created estimated tax payments based on the previous year’s data, and before your LLC taxed as S corporation election was made, those vouchers will include the full amount of self-employment taxes. In addition, with an S Corp election and the processing of payroll, self-employment taxes now become Social Security and Medicare taxes and are handled directly through payroll processing.

As such, your estimated tax payments will be way too high and will need adjustments; in most cases, we can eliminate the need of estimated tax payments completely and handle all estimated income tax payments within payroll processing by inflating your withholdings to land on tax neutrality (more on that in a bit).

Accounting, Recording Financial Activity

This is an easy one since whatever you’ve done in the past to memorialize your business transactions remains the same. No, you do not need to instantly add a QuickBooks subscription to your world. While we love QuickBooks Online (QBO) since we can collaborate directly with you, if you have historically used Excel, bar napkins or some other accounting platform, then keep on keeping on.

Nothing changes from an accounting perspective with an S Corp. Yes, there are some minor differences when it comes to Capital Stock and the recording of employee reimbursements, but we can chat about that at tax time.

Let’s dive into this a bit more.

Jason Watson, CPA, is a Senior Partner of WCG, Inc., a boutique yet progressive tax and
consultation firm located in Colorado and South Dakota serving clients worldwide.


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Taxpayer's Comprehensive Guide to LLCs and S Corps 2021-2022 Edition

This KB article is an excerpt from our 430-page book (some picture pages, but no scatch and sniff) which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information at-

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Taxpayer's Comprehensive Guide to LLCs and S Corps 2021-2022 Edition

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