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February 11, 2021

Frequently Asked Questions About Incorporation

In our dedication to providing you with all the help and service we can in your self-employment journey, we have gathered some FAQs we hear from our customers and webinars attendees about the incorporation of your business:

1. I'm an LLC in real estate for over 1 year. Not sure how to assign a salary when income is always different. Any advice?
Salary is defined as reasonable, and we will provide you with a reasonable compensation study. If income fluctuates month over month, you can always define one per Qtr, and make an adjustment late in Q4 once you have more clarity about the annual income.

2. Does net income include spousal income?
Only if your spouse is part of the business. When we refer to net income, we usually ask for business activity only. Therefore, net income will be the gross revenue, minus relevant qualified, deductible business expenses.

3. How many employees do I need to establish a corporation?
To be a qualified S-Corp you should have at least one employee – which is you, the owner shareholder. There are no requirements to have any other employees on the payroll.

4. What happens if I have an S-Corporation and I do not use it?
If the S-Corp is established but you run very little to no activity, you will have to pay the state to maintain the license, and file form 1120S to the IRS even if all numbers are zero. The cost to maintain a zero S-Corp usually should be very inexpensive.

5. Is it too late to set up an S-Corp for 2020 in December 2020?
No. Late S-election can be filed up to three and a half years, after the end of the year. You will need to be incorporated as an LLC to file for a late s-election

6. What is the average cost to form an LLC and an S-Corp?
Usually, the cost to establish a single-member LLC, file form 2553 to elect S status, is less than $500, one time, but it depends on the state you operate in.

7. Why wouldn't your accountant encourage you to form an LLC or S-Corp?
There are two main reasons why accountants do not encourage S-Corp: They do not understand the concept, and It is too expensive for them to run it for you, therefore not financially make sense, as they “eat” all tax savings and benefits. Read our blog “why your CPA says NO to your S-Corp” for more information.

8. If I set up a salary, is my salary taxed weekly?
The reasonable compensation, (a fancy name for payroll, salary, wage) needs to be defined annually and run on a monthly or quarterly basis. 

9. I have an LLC but not an S-Corp. Is it too late to open an S-Corp to apply to the entire year, 2020?
S-election can be still filed all the way to December 31st, and sometimes even later, as the IRS allows for a late S-election under some circumstances.

10. Will changing from an LLC to an S-Corp affect how much I can put into my retirement account?
You can contribute to retirement plans the same way if you were to make the S-Corp tax election for your LLC. In some cases, you're able to contribute towards retirement contribute more towards retirement - by contributing to a Solo 401k, for example.

11. If my spouse and I are in separate industries, but both 1099 earners, can we use the same S-Corp for both activities?
It depends on how separate the industries are, but in most cases, it's best to maintain separate LLCs and have each respective business entity taxed as an S-Corp.

12. Do you need to file quarterly taxes with S-Corps?
To avoid penalties and interest you need to ensure you are paying enough tax throughout the year. This can be done via payroll or quarterly payments. It is difficult to know your tax bill early in the year if your income fluctuates. Ongoing tax planning should be completed to avoid penalties and interest.

13. Don’t LLC’s in California have to pay a flat $800 in tax a year?
Each state has special rules if there are amounts due on the state level. In CA there is a minimum franchise tax fee that starts at $800. This should be accounted for when you are evaluating the amount of tax savings the S-Corp has.

14. How does part-time employment affect the owner of an S-Corp?
Part-time employees can increase your cost of operation because payroll needs to be run for hourly employees instead of just owners. This takes more time to reconcile hours worked and pay payroll taxes for your employee. The benefits of the help can outweigh the burden, but it is important to discuss these options before hiring employees. Also, if you use a solo 401k retirement program – you cannot have employees who work over 1,000 hours in the year so be mindful of that.

15. I am a notary and we don't pay self-employment tax on our notary fees so how will S-Corp benefit me?
Earnings not subject to self-employment taxes would not have a tax savings benefit of being an S-Corp. There are still benefits to having someone manage your books, allow more retirement, and have peace of mind. But in this case, it would not be the tax savings driving the reason to be an S-Corp.

Not a Formations customer yet? 

Rather than get overwhelmed know that our team here at Formations are experts in helping self-employed professionals to incorporate and manage their S-Corps. We’re here to help so give us a call today

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