S-Corp newbie accounting, payroll,estimated Taxes

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jerryicon
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Joined: Tue Jun 24, 2008 8:28 pm

S-Corp newbie accounting, payroll,estimated Taxes

Post by jerryicon » Wed Mar 23, 2011 12:17 pm

S-Corp newbie accounting, payroll,estimated Taxes ( posted in consumer forum by mistake)

Thanks to Bogleheads in getting all my understanding on investing and I have greatly benefited from the advice and reading through the posts, which I can see in the actual numbers over the last three years.

I have been testing waters doing software consulting on the side over the last 2 years, and finally quit the job starting this year started an S-Corp. Here are my questions
I did have a CPA do my taxes this year who charged me $700/ which I thought is on higher side, saved me time and left me with out any understanding on taxes :( , and for running a payroll his charges are $75/month which I want to do with online service), now want to do these by my self considering I am the only employee. Here are my questions

1. Is there any good book that I can get to learn just the basics of accounting, so I can be more informed rather than a specialist.
2. Planning to use quick books and their online payroll and getting a help of a quick books pro to set it up.
3. Will QB help me in calculating my estimated taxes. ( Or do I need a CPA, present CPA is very busy to patiently answer my newbie questions, and don't want to be dependent on him)
4. What other advice / precautions I need to take if going all alone (bookkeeping) and getting the CPA do my taxes at the year end.
5. Also I have read through the posts on the split of 60/40 Paying my self to dividends ( any excel links ?) I tried to search the web so I can play with the numbers and my contributions to on my tax differed accounts.

Again thanks for all your help and I do plan to support this site using the amazon link for all my books...

pshonore
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Post by pshonore » Wed Mar 23, 2011 12:43 pm

Here's a link to some of the pitfalls of not allocating wages/dividends correctly

http://www.racklaw.com/resources/archiv ... r-as-wages

Jack
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Post by Jack » Wed Mar 23, 2011 2:25 pm

One option is to ditch the S-corp and go to a sole proprietorship. You will save yourself a lot of money on accountants and time on bookkeeping. As a consultant, your most valuable commodity is your time and wasting it on unnecessary paperwork is detrimental to your income. No accountants, no payroll, no bookkeeping.

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anthau
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Re: S-Corp newbie accounting, payroll,estimated Taxes

Post by anthau » Thu Mar 24, 2011 8:27 am

I'm not sure if it's what you're looking for as a "book on accounting," but I'm thinking of picking up Frederick Daily's Tax Savvy for Small Business, on the strength of its table of contents.
Best, | | Anth

Polaris
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Post by Polaris » Thu Mar 24, 2011 8:33 am

Jack wrote:One option is to ditch the S-corp and go to a sole proprietorship. You will save yourself a lot of money on accountants and time on bookkeeping. As a consultant, your most valuable commodity is your time and wasting it on unnecessary paperwork is detrimental to your income. No accountants, no payroll, no bookkeeping.
I've found that some larger companies won't even deal with contractors if they are not employees of a corporation.

I have an S-Corp for IT consulting and probably spend about $2500 per year on accounting fees, payroll service, and insurance. I'd rather pay $0 for those things, but spending less than one week's worth of revenue on these expenses allows me to focus my time on my core function: making money. :)

Dagwood
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Post by Dagwood » Thu Mar 24, 2011 2:56 pm

Jack wrote:One option is to ditch the S-corp and go to a sole proprietorship. You will save yourself a lot of money on accountants and time on bookkeeping. As a consultant, your most valuable commodity is your time and wasting it on unnecessary paperwork is detrimental to your income. No accountants, no payroll, no bookkeeping.
This is a fair point to some extent, but it overlooks the fact that a properly formed and run corporation will offer liability protection to the owners. If you respect the formalities of the corporation, and work to properly capitalize it, then in time you will help to prevent exposing your personal assets to the liabilities of the corporation.

Where Jack is correct is that many times, people go to the trouble of forming a corporation because they think they need to do so, or someone tells them to do so, and then what happens is that the person does not respect the fact -- "respect" here being used in terms of observing the legal formalities -- that the corporation is not an alter ego for the person and thus they are paying for a benefit the corporate form may provide -- limited liability -- without receiving that benefit because they are not following the rules and formalities.

In these types of situations, where you would be dealing with typically a start-up business that has little in the way of assets or income, and where any bank or other counterparty will typically request a personal guarantee by the proprietor, I would recommend that the person run the business as a sole proprietorship with a name that is reserved by making the required filing in your state of domicile. Then, if and when the business starts to attain a certain size, consult with a business attorney about operating the business through a legal entity such as a corporation or LLC. The idea would be to incur the costs associated with conducting a business through a legal entity at a time when you are reasonably likely to reap the benefit - -primarily limiting your personal liability for liabilities, legal and financial, of the business.

To the poster's original question, bear in mind that in general terms, an "S-corp" is a corporation where there is no taxation at the level of the corporation. You essentially make an election with the IRS to treat the corporation as a pass-through enetity, and thus the income is treated as the income of the owner. So in this case you should be able to use one of the mainline tax software programs to handle your taxes and a quickbooks style program to set up your books.

Jack
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Post by Jack » Thu Mar 24, 2011 5:03 pm

Liability protection comes at the state level. You can use a sole proprietorship for the IRS and then have your sole proprietorship registered as an LLC at the state level, at least in most states. So you can have the best of both worlds -- a simple sole proprietorship for accounting and taxation purposes and the liability protection of an LLC. You don't need to form a corporation to have an LLC.

I think a lot of contractors way over do the liability thing. For example if you are basically just a contract engineer doing software or IT work, you are no more likely to get sued than a regular employee. The worst that is going to happen is a dispute over a monthly bill. No client is going to come after your house. Most of the sole proprietorships I know don't even bother with the LLC.

Dagwood
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Post by Dagwood » Fri Mar 25, 2011 10:03 am

Certainly you can limit liability through an LLC or a corporation, and of course all of these entities are formed on the state level, but if you elect subchapter S treatment there is no federal tax distinction between the two in terms of the pass-through treatment. I hope that point is clear to the original poster if I wasn't clear previously.

Jack, I don't think we disagree. I take your point that people may over-do the need to conduct a business through a legal entity -- irrespective of whether it is an LLC or a corporation -- and in many cases business insurance may be a more appropriate option. My only point is that if you do feel that you need a legal entity, picking up on your point mine was simply to get the business to a certain size first so that it is worth the trouble and then make sure you observe the formalities associated with whatever form the business takes -- corp., LLC, etc.

Topic Author
jerryicon
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Post by jerryicon » Fri Mar 25, 2011 2:04 pm

Thank you all for the responses.

Here are some things which got me towards S-Corp

1. Liability factor
2. More retirement contribution at lower revenue, In Case of S-Corp you will be able to do a 401k employee contribution of 16.5k and 25% (.25 of 130k =32.5k) of the W2 wages as employer contribution for maxing to 49k. This can achieved at 130K wages vs ~ 250k profit as sole proprietor.
3. In either cases I have to have basic knowledge of bookkeeping which is giving me the initial head hurting, should go away as I read more books :)

Correct me if my online research or my limited knowledge is wrong !

nokkieny
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Post by nokkieny » Fri Mar 25, 2011 2:31 pm

Maybe shop for a new accountant?
I have a pretty complicated S-corp return and my accountant only chares me $500, Also I pay $50 a month for weekly payroll for two employees, I basically do that so I can have a line of communication open since I am paying them on a schedule.

I personally just pay 110% of my prior years returns which cuts out the guess work in preparing quarterly estimates and avoids penalties.

The best attribute of an S-corp is the ability to only pay Self employment taxes on the amount of the salary you can choose to pay yourself. The rest can be held in the company or distributed and you just pay income tax, but not Self employment

If your company is more than just a "hobby" I would highly suggest convincing yourself to use an accountant, I use to do my taxes myself before I elected S-corp, so it was pretty simple as an LLC/sole proprietor.
But, the $1000 I spend a year is only a fraction of what my accountant will save me, and the value that it brings to my business because I have a third party preparing my returns, I think this would be a plus when it comes time to sell the business

nokkieny
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Post by nokkieny » Fri Mar 25, 2011 2:37 pm

jerryicon wrote:Thank you all for the responses.

Here are some things which got me towards S-Corp

1. Liability factor
2. More retirement contribution at lower revenue, In Case of S-Corp you will be able to do a 401k employee contribution of 16.5k and 25% (.25 of 130k =32.5k) of the W2 wages as employer contribution for maxing to 49k. This can achieved at 130K wages vs ~ 250k profit as sole proprietor.
3. In either cases I have to have basic knowledge of bookkeeping which is giving me the initial head hurting, should go away as I read more books :)

Correct me if my online research or my limited knowledge is wrong !
If your accountant didn't suggest that you pay yourself a salary versus taking all income as wages from your s-corp than you need to get a new accountant. The amount of money you will save on self employment taxes by paying yourself a $50k salary will basically be the same as the deduction for maxing out your 401k with a 130k salary. Only difference is that you have tax free money in your bank account versus it being stuck in a retirement account

carpediem
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Post by carpediem » Fri Mar 25, 2011 2:41 pm

My business is an LLC at the state level and an S Corp at the federal level. The former was for the liability protection; the latter was for the financial advantages.

My suggestion as far as the bookkeeping goes is to have your accountant set up a QuickBooks file for your business and give you a session on the basics. For one person, it's easy to do your own payroll. Most important thing is to never miss paying payroll taxes because the penalty is stiff.

Have your accountant check your QuickBooks file periodically during the first year to spot any issues. Once you get to know the program, it's very straightforward.

CD

Jack
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Post by Jack » Fri Mar 25, 2011 2:55 pm

jerryicon wrote:Thank you all for the responses.

Here are some things which got me towards S-Corp

1. Liability factor
2. More retirement contribution at lower revenue, In Case of S-Corp you will be able to do a 401k employee contribution of 16.5k and 25% (.25 of 130k =32.5k) of the W2 wages as employer contribution for maxing to 49k. This can achieved at 130K wages vs ~ 250k profit as sole proprietor.
3. In either cases I have to have basic knowledge of bookkeeping which is giving me the initial head hurting, should go away as I read more books :)

Correct me if my online research or my limited knowledge is wrong !
Maybe you consider it too late now, but for others starting their own simple business and addressing the items above:

1. A sole proprietorship registered as an LLC gives you about the same liability protection as an S-corp.

2. You can use a solo 401k with a sole proprietorship that allows nearly the same annual contribution as an S-corp. Your calculations are wrong. The sole proprietorship can put away the same $16.5K salary deferral plus an additional 20% rather than 25% for profit sharing. You could get the same maximum contribution of $49K with a salary of about $162K instead of $130K. Maybe that difference is significant to you, but it is not $250K. For those saving less than 40% of their income, it really doesn't matter.

3. For a simple solo contractor, you don't need to know bookkeeping. You can literally run your business out of your personal checking account. Not so for an S-corp. For an S-corp you have to keep track of separate corporate accounts and file a separate corporate tax return. You have to deal with W-2s, payroll taxes and withholding. On the other hand, for the sole proprietorship, you have to deal with none of that. It is just another couple pages on your Form 1040. A $29 copy of Quicken and TurboTax will do the job. You don't need accountants or payroll services.

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