Preparing Your Year End S-Corp Tax Report
Taxes can be really stressful—you already know that which is why you’re here. We just wanted to take a moment and acknowledge your struggle. Now, we’ll get to the business end of getting your business’ taxes paid. As an S-Corp, you’re likely to benefit from a host of taxation advantages. The perks of owning an S-Corp include:
- Reduced or eliminated income tax in most states
- Additional shareholder asset protections not offered by Sole Proprietorships, Partnerships, etc.
- Pass-through income status- you won’t pay federal income taxes at the corporate level
- Straightforward transfer of ownership (in case you want to sell the business later)
Even though our list isn’t fully comprehensive, you can tell that there are a LOT of benefits to owning your S-Corp. In this blog, you will find a list of information and steps required to prepare your year-end tax report as an S-Corp.
As an owner (and likely employee) of your company, you’ve been paying yourself a salary—because the government says you have to. This obligation is actually an advantage, as it enables you to save on your self-employment taxes! The requirement of taking a “reasonable compensation” means that your company will need to issue you a Form W-2. You should take the time to complete these on a computer. In case of an audit, you’ll want to ensure all of your tax documents from the last seven years are safely stored in at least two locations.
Generate 1099s for each contractor
You’re likely to utilize contractors more than employees as an S-Corp. Contractors generally drive competition up, resulting in more fair pricing for services offered. You are required to file Form 1099 for any vendors you pay over $600 in the calendar year (unless they are a C-Corp.) The 1099 is due to the contractor, IRS, and sometimes state agencies by the end of January for the previous year.
Reconcile your books
Reconciling the books isn’t a difficult process. You’ll just be going over your business’ transactions from the year and then comparing them against your business account financial statements. This type of auditing is simple but tedious. Many people choose to hire a bookkeeper to ensure there are no mistakes in the reconciliation.
Your business will benefit from better spending accountability, more effective budgeting, and a greater ability to prevent or detect fraudulent spending if reconciliation is a regular practice throughout the year. An added benefit? You’ll never be left in the dark with regard to your S-Corp financials.
Make sure all expenses are recorded
Recording all expenses allows you to reduce your tax burdens, increase the amount of profit retained by the business (and therefore, by you!) This process includes keeping and/or storing receipts, saving, and sorting transactions in your preferred accounting software. Be sure to track your miles, meals, and lodgings.
These potential deductions can supplement deductions for home offices. Home office deductions may include utility use percentages (e.g. hours worked multiplied by computer energy consumption, all multiplies by your utility rate (kilowatt-hours, or kwh.)
All your bank documents
By keeping all your bank documents in one place, you can readily see where your money is going (as can the IRS.) If you’ve lost money unexpectedly, your bank documents are an excellent place to track your cashflows—both inbound and outgoing. Keep a record of all documents: K-1’s, 1099’s, mortgage statements, all shareholder or company holdings slips, and proof-of-payment for taxes. Whether you’re selling cryptocurrency, like bitcoin, or selling shares at a premium, you may also need to know when you sold. Factors like timing can drastically impact your taxes. Capital gains are among the best examples of this.
Common S-Corp filing requirements include:
- Form 2553 – This is only filed once. You submit this to become an S-Corp.
- Form 1120S – This is the Standard Federal Income Tax Return for an S Corporation filed annually in addition to your 1040 personal tax return.
- Form 1120S (Schedule K-1) – This is a declaration of income, deductions, credits, and other tax modifiers for each shareholder. Each shareholder is required to fill out a Schedule K-1, every year.
- Form 940 – This is the Federal Unemployment Tax Return. You’re required to submit this form annually if your business has employed at least one employee who works at least part-time for the business at least 20 weeks out of the year.
- Form 941 – This is the Federal Employer’s Quarterly Tax Return. This form is due on January 31, April 30, July 31, and October 31 each year. You will be required to include information such as your share of any employee’s federal income taxes, Social Security payments, and Medicare payments.
In the event that the S-Corp cannot file its tax returns by March 15th, the business can avoid late filing penalties by filing Form 7004. This gives the business a six-month extension to file its annual report. Owners must still pay their personal estimated liability no later than April 15 to avoid penalties, even if their S-Corp return is on an extension.
Author’s Note: S-Corp filings at the state-level will vary for each state. Do your own research with each state’s Department of Revenue, Department of Commerce, and any other applicable offices before filing. Many choose to enlist professional assistance because the state filings required to operate as an S-Corp can be expensive and difficult to track if you’re not used to them.
If the extension end date passes without filing submissions, the business is charged a minimum fee—this fee is assessed for each month the filings are late and multiplied by the total number of shareholders in the business.
With so many details to take into consideration, we understand this may be overwhelming. If you’re already a Formations customer, we take care of everything for you. We take care of your payroll, issue your W2, reconcile your books on a day-to-day basis, and file your S-Corp documents.
Not a Formations customer? Have some unanswered questions about preparing your tax return for this year? Schedule a free consultation with one of our tax experts! We are here to help!