September 30, 2020
Becoming an S-Corp: Step-by-Step
Okay – you’ve learned that self-employment taxes are killing your bottom line, you’ve heard about the mysterious S-Corporation, you’ve googled it and now – you’re lost and don’t know where to get started!
Don’t worry, here at Formations we’ve got you covered. Many self-employed professionals are overwhelmed by all the steps, rules, and obligations that being an S-Corporation requires. My answer to them is don’t be afraid of something new. Just like everything you’ve learned in life – once you’ve informed yourself and put that education to work – it starts to all make sense.
Becoming an S-Corp take 5 simple steps:
- Open an LLC – get the legal structure set. Choose a name, submit the form, and congrats! You’re a business owner. You can now enjoy the legal protection and credibility of an established business.
- File S Election – file form 2553, requesting the IRS to treat your taxes under the S-Election, and start enjoying those amazing benefits.
- Open a business bank account- you don’t want to co-mingle your accounts. Your private account is for private use. All business-related income and expenses should be done under your business account.
- Define reasonable compensation- You need to pay yourself what's called a reasonable compensation. This depends on a few factors and generally means about the same amount that you would pay another person doing the same job. Paying yourself a salary – monthly or quarterly – gives you a W2 and fulfills the IRS requirement. As long as you pay yourself at least once a quarter, you are good to go!
- Benefits- Start flexing those benefits that your corporate employee friend enjoys. By running health insurance and retirement benefits through the company payroll you can knock your net income down considerably. It also creates more personal tax savings in the form of deferred compensation in a 401k.
Do you want to enjoy the life of an S-Corp, but don’t want to manage it yourself?
Speak with one of our experts. We are here to help!