LLC, elected to file as an S-Corp don’t know what I’m doing with taxes

J

jack1998

New member
So I started a small marketing agency in June of this year. I’m the only employee and I’m not sure how taxes work. Forgive me for being naive, I’m 21 years old and followed my previous bosses advice to start freelance work under my own name and he specified S corp being what I wanted. I still work 40 hours a week and the marketing business has been my side hustle. I’ve got one client that will have paid me $5,500 at the end of the year. I’ve bought equipment, a computer, and spent well over $5,500 from my savings to get everything off the ground and have not taken a paycheck or draw. I understand I’m probably doing things wrong and I am extremely lost. I plan on going full time with the business after Q1 of 2024 and have contracts lined up after that for a projected $72,000 in 2024. In the meantime, what do I do for taxes this year? What have I done wrong? Thank you in advance for any feedback!
 
@jack1998 You get a CPA to tell you how to do things right for your specific situation. That is the ONLY answer that makes any sense for you. Given your current anticipated scale, the S election was probably not a great plan and adds complexity. Most importantly, have you been paying yourself as a W2 employee since you started? As an S corp, you have to do that, which includes filing quarterly payroll reports.

You’ll be fine. You’re esrly days and all of this is fixable. But you need professional guidance to make damn sure you do it right.

Edit: If your first thought is that CPAs cost too much, it’s incorrect. The right CPA saves you money while helping you avoid fines and penalties from taxing authorities.
 
@suepreme I'm chiming in as a guy who started as an LLC and went to S-Corp 2 years ago - ClassyCatMan is giving you the 100% right answer. The accountant will save you time, money, and stress. Some will even teach you how to do it yourself, but I find mine to be worth every cent. As an S-Corp you are required to pay yourself something as a W2 employee.
 
@jack1998 S Corporation is great for small businesses, especially if you have a high net profit. You can save a lot on self-employment taxes. The only caveat is you need to have a net profit over $50,000 to see the advantage, and paying yourself a reasonable salary.
 
@jack1998 Same. Also a 1 person company. I’m relying heavily on my tax lawyer that helped me file the paperwork to guide me. A little worried about the upcoming tax season because I made more money than I expected to and will probably end up owing back healthcare marketplace subsidies on top of regular income taxes, and I’m not even sure what bracket I’ll end up in. I’m stressing about picking a payroll provider for next year, too. Looking at Quickbooks and Gusto, and also health insurance options. Once I get through all of this change, I’m sure it will all be fine, but OMG the uncertainty right now is killing me. Find a good account or tax lawyer to help you. They are cheap compared to the alternative. Hope it all goes well!
 
@nancyfromsc On the payroll side, I paid my CPA to do all of it. Then they had what they needed at tax time as well. Was a little more expensive but anytime I got anything from the state or IRS, I just sent it on to them.
 
@jack1998 My CPA advised me against S-Corp. Its become a bit of a trend as CPAs make more money from it due to its complexity, I've been getting a huge amount of targeted ads trying to get me to become an S-Corp, when in fact 90% of LLCs are fine doing there taxes normally.
 
@jack1998 The S election can be useful at a certain revenue level, but you’re nowhere close yet. If you revoke an S election, you can’t make a new S election for 5 years under that or any “successor” entity.
 
@jack1998 You can convert it to a new entity type but it’s not trivial as in you’ll probably need a lawyer and accountant to help you do it correctly. It would probably be more cost effective to shutter/throwaway your s-corp and make a new entity. Although that involves paperwork too. So maybe it’s a wash.

There’s nothing wrong with keeping the s-corp though, it should be fine the only differences between llc and s-corp is additional paperwork requirements which are not that hard to satisfy. Basically hold an Annual Board meeting and keep minutes. It’s just you so that’s pretty easy to setup and accomplish.

It sounds like your company will be net negative for the year so I think you’re probably fine having not taken a draw or salary. Next year you will need to pay yourself a reasonable salary, then you can take the rest as dividends.

A lot of people will quote 50/50 rule or 60/40, in terms of how to divy the money between salary and dividends, but those aren’t actually defensible methods if audited. I would recommend looking at https://www.bls.gov/oes/current/oes_nat.htm to help you determine a reasonable salary. Alternatively if you were going to hire someone to do the work and you just provided capital what would you pay them? You want to make your salary as low as you can and still have it be reasonable/defensible.
 
@jack1998 No idea. This is just the info I got from my CPA whose very by the book and trust worthy with 20+ years of experience. I think it really depends on what type of business you have. I run a design / creative studio so its pretty basic accounting wise compared to someone dealing with inventory for example.
 
@jack1998 Ask the CPA who you hire which he recommends for your type of business and why.
The state where you registered your S Corp, the Secretary of State's website should have a Conversion Form to convert from S to LLC and you pay a fee.
 
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