I have started an LLC and plan to file as an S-Corp. Does the LLC need to file estimated taxes on/before April 18? If so, can I file an extension on behalf of the LLC?

[Ashwin-K-]

The LLC is new as of April 2016. My question is whether I have to file estimated taxes for the earnings until middle of April 2016. Also, the first payment to the LLC won't occur until May 1st. Do I need to pay estimated taxes on earnings I don't receive?

[Critter]

An S-Corp is a pass thru entity and  doesn't pay taxes so it will not pay any estimated tax payments.

[Critter]

If this is something new to you and you don't know the rules for an S-corp you should get educated  so you don't mess things up as the IRS penalties can be stiff.

[Ashwin-K-]

I know that an LLC does not have to file under disregarded status. It can file as an S-Corp, and choose to pay its employees. I think your other answer is more suitable. Thank you for responding. I do appreciate the answer, and I also know I can get into trouble. I don't like to, and would like to do the right thing, that is why I asked.

[Rick19744]

Ashwin let's summarize what Critter #2 is saying here:

1. An LLC that has elected to be taxed as an S corporation is a pass-through entity.  These entities, in general, do not pay tax at the entity level.
2. All earnings of the S corp will be reported out to you as a shareholder via a Schedule K-1.  You will use the information on the Schedule K-1 to input onto your personal tax return; form 1040 Sch E.
3. Additionally, any wages paid to you from the S corporation will be reported to you on form W-2.  This will also be reported on your personal 1040.
4. You as the shareholder will pay tax on ALL the income of the S corporation at the personal level.  This is true regardless of whether it is paid out in the form of a distribution.
5. Since you the shareholder will be reporting all the income, you the shareholder need to project out what you believe this income will be and you the shareholder will need to make estimated tax payments to the IRS.  You will do this via the 1040-ES or you can pay them online.

[Critter]

Thanks Rick for that well worded summary.

[Critter]

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made. The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes. From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes. Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions . The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.)

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.

[Ashwin-K-]

Thanks, but I didn't say I would not pay myself a reasonable salary. If after paying myself a reasonable salary, commensurate to my experience, then the corporate taxes that I pay on the remainder, do I have to pay estimated taxes on an LLC filing as S-Corp for that amount (the amount I am paying myself as salary will be on my own W-2, and taxed normally.

So for example, the LLC earns $50,000. I pay myself $30,000 (which is normally taxed). On the $20,000, if I earn only $1000 by April 18, do I need to pay estimated taxes on that $1000. Also, if that money is not "realized" (i.e. in the business bank account) by May 1st, do I still have to pay estimated taxes on that $1000?

Thanks.

[Critter]

You pay personal estimated payments on the income as you have constructive use of it so if the corp doesn't make the distribution to you  in any quarter then you don't need to file any estimated payments.

To locate 1040-ES in TurboTax click on the following tabs:
• Federal Taxes (personal in the Home & Business version)
• Other Tax Situations
• Other Tax Forms
• Form W-4 and Estimated Taxes, click Start, Update or Revisit
We'll automatically prepare estimated tax payment vouchers (Form 1040-ES) if your tax payments put you at risk for an underpayment penalty next year, based on the safe-harbor rules.
You can also enter projections for next year's return by searching for 1040-es inside your TurboTax program. Answer No if asked if you want to change your W-4 withholdings (unless you want to step through the withholdings interview first).
Then, on the Review Your Estimates screen, select Review Now and start entering next year's info. If it looks like you may get hit with an underpayment penalty based on your estimated projections, we'll prompt you to print out next year's estimated tax vouchers.

[Ashwin-K-]

Thank you again. The situation is that I have an LLC - let's call it LLC B. Corporation A, who is LLC B's client pays LLC B. Then LLC B pays me a salary which is a sizeable portion of the earnings. The question is not about the salary, but the amount that the LLC retains above that salary -
(A) Does the LLC B have to pay estimated taxes on that amount, (which in my example was the $20,000) and
(B) Does that estimated tax have to be paid before LLC B gets that amount in its business account if it is invoiced but not "realized" (the funds are not yet there).

[Critter]

Stop thinking about the LLC (it is a separate entity)  and instead think in terms of you personally.  How or when the LLC gets paid has no bearing on what is in  your pocket to be taxed.  When you get the distribution in your own pocket it then becomes your income (since you have constructive use of it)  and that is when the estimates are due.

[Ashwin1]

Thank you, Critter. You answers helped. Appreciate it.