So You’re an S-Corp...Now What? [Essential Tax Tutorial]

did you recently convert an existing business into an S corporation if so you might be feeling completely overwhelmed about what you need to do next to make sure that you're running your business and filing your tax returns correctly in order to make sure that you're optimizing your profits while remaining in compliance with the IRS if you fall into this category then don't worry because in this video I'm going to go over everything that you need to know about getting your S4 up and going many as Corporation owners do not even know how to operate as s-corporations because many tax providers are not teaching their tax payers how to actually go about running their businesses like real business owners make sure you stay all the way until the end of this video because missing out on any of this information in this video could result in you failing to get the full tax savings that you deserve without further Ado let's dive in alright guys the very first thing I need to teach you is you're going to need to open a business bank account the first thing that you're going to need to do to get your S Corp up and running is to open a business bank account having a business bank account for your S Corp will allow for you to receive and to make pay payments there are a number of things that you will need in order to set up your bank account for your S corporation in fact you will need all of these things that I'm going to tell you you're going to need a form of identification with you you're going to need your s corporation's nine digit tax identification number AKA your EIN number that was given to you when you created your business with the IRS you're going to need the incorporation paperwork from your state that verifies that your S Corp was approved to be an S corporation and you're going to need the funds necessary to meet the bank's minimum fund requirement so you can actually open up the bank account now some banks might also require for you to bring additional corporate documents such as operating agreements corporate bylaws stock certificates shareholder certificates but most banks won't require anything additional other than just that operational agreement so please make sure that you also have that in your paperwork when you show up to the bank if you do feel like carding all of these documents with you down to the bank you can always call the bank ahead of time and ask them exactly Which documents you will need so just know that these are the minimum requirements in order to get your business bank account open you should also ask them what their minimum fund requirement is for your S corporation business bank account whether you're using a bank account such as like Chase or B of A now using the business bank account is the number two step to making sure that you're operating your S corporation correctly there are very strict rules about business bank accounts and they are put in place to prevent business owners from co-mingling personal funds with their business funds I'm going to call out a lot of business owners that are watching this right now because I am responsible for making sure my taxpayers are doing things correctly you need to be aware of these rules to prevent yourself from getting in trouble with the law so I really want you to listen up here are some of the rules that you need to be aware of when it comes to using your s Corps business bank account correctly number one whenever a client pays your business you need to make sure that the payment is deposited into the business bank account not your personal account this is true even if you're the only person working inside of your S corporation I get this all the time Carlton but I'm the only owner of my business can I just put it over in my personal account no we set up an S corporation for a reason and that's to separate our business from ourselves all deposits go inside of the business bank account that are business related number two whenever your business has to pay for things like utility or things like rent payroll Etc please make sure that you pay these from your business bank account these do not get paid out of your personal account number three never use your business bank account to pay for personal expenses ever this is a big one guys so for example you should not use your business bank account to buy a new flat screen TV or artwork for your home business owners fail to comply with this Rule and it hurts their business so much when they get into lawsuits you need to make sure that you use your business accounts to pay for business expenses and that your personal expenses are paid out of your personal accounts so you're not becoming a dangerous legal Minefield to yourself do yourself a favor guys and just follow this rule extremely carefully now the purpose of keeping your personal funds and your business funds separate is to show the government that your business is separate from you okay you want to show the government that your business is separate from you and you're running two different legal entities it may seem annoying to comply with all of these regulations about keeping your business funds and your personal funds separate but trust me if your business is ever sued then you'll be very glad that you took this lesson so seriously now the next thing that I want you to understand stand is understanding when and how to pay yourself as an S corporation owner at this point you might be wondering Carlton if I can't use my S Corps business account to pay for personal expenses then how am I supposed to actually get paid from my business so that I can spend money that I earned from my business on things I need personally like um to live Carlton well there are three options for paying yourself as an S corporation owner number one you need to take a reasonable salary and I know some of you guys have been on my channel for a while so you understand what reasonable salary means so we'll explain that number two you need to take distributions and number three you need to take both a reasonable salary and distributions hold on a second Carlton did you just go over three ways to get paid yes I did I said number one you need to take a salary number two you need to take reasonable distributions and number three you need to take both of a reasonable salary and reasonable distributions let's quickly go over these three options number one taking a reasonable salary you are required to take a re reasonable salary if you perform employee like functions at your S corporation which by the way if you're the CEO of your own company and you're working inside of your company you're picking up the phones you're making phone calls you're ordering stuff aren't you acting like an employee inside of your own company so in other words if you are a part of the daily operations of the business then you have to pay yourself a reasonable salary now this reasonable salary thing gets so confusing when I'm talking to taxpayers so I really want to simplify why the IRS came up with this a reasonable salary is a salary that would be reasonable for a person with a similar job in a different business that's how the IRS defines it so for example let's say you do car sales at your S Corp if a reasonable salary for a call car salesperson in your area is 60 000 and you could take a reasonable salary of sixty thousand dollars the salary does not have to be an exact match for someone working at a similar job at a different company so for example you do not have to go on a job site get the salaries of 10 different similar jobs at average and average them out the salary just has to be in the same ballpark and cannot be conspicuously low if the salary is too low then the IRS might be considered to be unreasonable part of the reason why we set parameters in my office is because we've done a lot of research on reasonable compensation Audits and that's part of the reason why we've determined that reasonable salary should start off around 30 percent of a business owner's net income now the second way for you to pay yourself is taking distributions taking distributions means that you're periodically paying yourself money from the business this method is also commonly referred to as like an owner's draw if you are not actively involved in the operation of the business then this can be your only form of payment from the company but even if you are actively involved as a business owner you have the ability to take owner's draws whenever you'd like this is important to know that when you're taking business distributions you do not have to pay yourself in even intervals you can pay yourself whatever you want however you want so for example one month you could decide to take an owner's draw of three thousand dollars or the next month you can decide to take an owner's draw of fifteen thousand dollars this is completely up to you to decide how much money of your owners draw could be and how frequently you should take them out now you can take your owner's draw by simply transferring money from your business's bank account to your personal checking account the most common way to take an owner's draw is to Simply write a check or make a money transfer online with your bank account however sometimes S corporation owners prefer to take their owner's job with non-cash business assets for example an S corporation owner might choose to take an owner's draw in the form of a business vehicle or in the form of equipment or in the form of computers so it doesn't always have to be cash however most owners take their draws with cash so it keeps things more clean let's talk about taking a reasonable salary and let's talk about taking distributions this is option number three when it comes to paying yourself you have the ability to take not only a reasonable compensation but you have the ability to take a distribution as well and many as Corporation owners prefer this hybrid method you will only be able to use this method if you are both a shareholder in the company and also have an employee related responsibility in the company if you use this method you can take part of your pay as a salary and you can take the rest as a business distribution let's just say for example that you expect to make two hundred thousand dollars from your S corporation this year if this is the case and you want to use the hybrid method of getting paid then you could take like a hundred thousand dollars of salary and then take the rest in the form of distributions this would work as long as one hundred thousand dollars is considered a reasonable salary for the job that you're doing for your company but you're probably wondering what about taxes Carlton we have covered how to set up your business bank account how to use the business bank account correctly and and how to pay yourself as an S corporation owner now let's talk about the taxes after all even if you find them tedious and miserable it is still absolutely critical to fully understand the tax implications of your business otherwise you will be stuck in a situation where you're going to end up overpaying because you chose not to put any attention onto your taxes so let's talk about that pass through entities the first thing that I want you to know about the S Corp from a tax perspective is that the S corporation is a pass-through entity a pass-through entity is a business structure in which taxation is not done at the business level but instead passes through the business onto the individuals or individual who owns the business so this prevents it prevents the business owners from getting taxed twice once at the business level once at the individual level this does not happen other examples of past serenities are sole proprietorships Partnerships and llc's the less Corporation owners do not have to deal with double taxation unlike C corporation owners c-corp owners have to deal with double taxation because C Corps are not past their entities so if you own an S corp congratulations you're already saving some money on taxes by avoiding double taxation now the form that S corporation owners have to file is going to be called form 1120s as a matter of fact you should be able to see it right here the next thing that you need to know about taxes in regards to S Corps is that the S corporation owners are required to file form 1120s tax return by March 15th of every year the 1120s lets the IRS know the incomes the losses the gains the deductions the tax credits that the S Corp was taking during the tax year so in other words this is the form that the IRS uses just to keep tabs on the key tax information of your S Corp this form is due every year on March 15th you can file it yourself or have a tax professional file it for you but do your best to make sure that you never miss this deadline you do miss the deadline you can always go on next extension that's part of the reason why the IRS allows for you to go on extension you'll need to file form 7004 this form can help you to extend the deadline for filing your taxes by six months now what about payroll taxes one of the benefits to being in an S corporation is that you get to avoid self-employment taxes if you have employees at your S Corp including yourself then you're going to have to file form W-2 and form W3 form W2 is the tax form that you'll use to report General employee information and wages and the taxes paid during the year for each employee you will need to make sure that you file form W3 which is just an overview of all the W-2s that you filed that year for any employees that you had so this is it's an essential summary of all the payments and tax information for all the employees that the government just needs to know you're also going to have to pay payroll taxes for all of your employees that you hire as a part of paying payroll taxes you'll be required to file form 941 on a quarterly basis with the IRS on this form you report the total wages and payroll taxes paid for each employee in your business including yourself you are required by the IRS to file this form every quarter even if you're the only employee at your business now if you're thinking Carlton do I have to actually pay myself payroll every quarter no but you do have to file every payroll tax return every quarter additionally you'll be required to file form 940 every year which is just the annual version of the form 941 this form is due January 31st every single year so if you're an S corporation owner I hope that you wrote that down now let's talk about the interesting parts of payroll taxes for S Corps which is paying your payroll taxes for yourself having an escort means that you can actually save a significant amount of money in self-employment taxes which are sort of like payroll taxes that self-employed people have to pay for themselves except just a little bit more expensive both payroll taxes and self-employment taxes cover Social Security and Medicare costs but if you are self employed then the amounts that you have to pay for payroll taxes are far less than you had to have to pay for self-employment taxes if you're an LLC owner versus an S corporation owner the self-employment tax is 15.3 percent so this includes 12.4 percent for Social Security and 2.9 percent for Medicare so if you're a self-employed individual and you have an S corporation owner you pay 15.3 percent in self-employment tax or payroll taxes on whatever you choose to pay yourself this can really start to stack up but s Corps allow us to dramatically reduce this amount this is because as we discussed before with an S corp you have the option to take a reasonable salary so when you take a reasonable salary and of course take distributions for payment if you take part of your income as a reasonable salary and part of your income as a distribution you only have to pay self-employment taxes on the part of your income that you're taking the reasonable salary on so let's say you made one hundred thousand dollars with your S corporation and you took a forty thousand dollar reasonable compensation salary your new net income inside of your business will be sixty thousand dollars this forty thousand that you decided to take in the salary would be subject to Fifteen point three percent which would effectively be roughly about six thousand one hundred and twenty dollars in taxes Which is far less than what you would have paid had you had been an LLC in this case you would be saving roughly nine thousand one hundred and eighty dollars in taxes because you wouldn't have to pay 15.3 percent on that remaining sixty thousand which you would take in distributions so as you can see if you structure your S corporation payments so that you take a large portion of your income as distributions you can save quite a substantial amount of money in self-employment taxes this is very critical guys this does not mean that your distributions are not subject to any taxes in fact your distributions are still subject to ordinary income tax rates AKA federal taxes and state taxes they're just not subject to self-employment taxes so you will still have to pay some taxes on your business's distributions but you'll still be able to save yourself tons of money if you pay yourself correctly it is for this reason that I highly recommend that if you're an S corporation owner that you use your business to pay yourself correctly and you take distributions but don't overdo it if you work actively in running your business you will still need to pay yourself a reasonable salary don't set your reasonable salary for anything less than 30 percent of the overall net income from your Escort any amount less than this might be rejected by the IRS and could definitely end up in a reasonable compensation audit now the last thing I want to talk to you guys is about annual state fees in addition to filing all the required tax forms and paying all the relevant taxes S corporation owners will also most likely be required to pay an annual fee to maintain the legal operation of your S corporation and file any annual reports for your S corporation the particular amount for the fees that varies from state to state so you can find out what your State's S corporation fees are by checking with your State's Secretary of State office or you can just Google search it online usually if they post this information on the official website for the office here's the thing you are required to pay your State's S corporation fees even if your business did not make any money you might find this to be very annoying but unfortunately those are just the rules of the game so if you fail to pay these fees then your state might automatically dissolve your business or eliminate its ability to operate legally in the state so this is something that you just want to be aware of when you go into business you can imagine the type of headaches this causes for business owners who don't find out about this until three or four years later and then they end up having penalties and interest fees that they have to pay because they never decided to actually pay their state filing fees or their s corporations until their business was actually profitable please don't make that mistake we reached the end of this video guys and here is what I want you to walk away with switching a business such as a sole proprietorship or an LLC or a partnership over to an S corp is an excellent way to save money in self-employment taxes to reduce your liability and to avoid the double taxation that c corporations face but if you want to keep your S corporation operating legally and efficiently there are a number of things that you need to make sure that you do opening a business bank account is just one of those things using your business make account correctly is probably the next thing you need to adopt paying yourself correctly is always the third step and filing the key tax forms always will be the routine every single year aka the form 1120s and the form 940 which is your payroll tax forms if you have any questions about any of these things any of these documents how to go about doing this correctly with your S corporation please click on the link below and schedule a complimentary consultation that is what my tax team is here for I have over 40 Tax Professionals in my accounting firm that are ready to assist you please utilize them during these next couple of days I'm going to be posting more videos as it pertains to ex-corporations and it pertains to utilizing real estate as a means to avoid taxes or as Corporation owners yes that's correct if you're an S corporation owner you can invest in real estate create a loss on the tax return from Real Estate and avoid taxes that flow over from your S corporation you can click on the link below to learn about tax Alchemy which is my program that teaches you about how to strategically invest in real estate to reduce your overall tax bill I am truly trying to work off of Robert Kiyosaki Tom real Wright's teachings to put together you guys something that will help you continue to grow your wealth strategically something that you can truly grasp and understand my name is Carlton Dennis you know what you need to do like comment subscribe you know what it is I'll see you on the next video over and out laughs [Music]

Channel: Karlton Dennis

Views: 18,745

Keywords: taxes, tax help, tax expert, how to file taxes, karlton dennis, karla dennis inc, taxes made simple, taxes 101, cpa, certified public accountant, accountant, accounting, tax deduction, tax strategies, tax planning, how to pay less taxes with an llc, tax savings tips, how to save on taxes, tax tips, llc, rental property, youtubers, how to avoid taxes, cars, s-corp, s-corp tutorial, s-corp taxes, how to s-corp, s-corp basics, s-corp essentials, s-corp tax savings, s-corp 2023

Id: x-fhR6kSTa0

Length: 19min 43sec (1183 seconds)

Published: Mon Apr 17 2023