Running Amazon business as S-corp

[Koh]

I've been running a business selling on Amazon for 7 years now, organized as a single member LLC. Up until 2019, it was a simple schedule C, reporting the 1099K as my personal income. Very easy to file without assistance.

Since my profits have been increasing (now over 100k in 2019) , I thought I'd try to be taxed as an S corp for 2019 in order to reduce my self employment tax burden somewhat. I filed a form 8832 a couple months ago to change my tax classification to corporation, and opted for the late election relief, since it should have been done at the beginning of the year.

The problem is that this is all I've done, aside from continuing to make estimated tax payments as always, since I assumed the only difference would be when it came time to file for the year. Did I screw the pooch on this one? I'm reading about payrolls and advanced payments of FICA, etc and I definitely haven't done any of that.

I should probably see a professional but I thought I'd start here. Is it salvageable or will I need to return to the entity disregarded and schedule C for the year? I also haven't heard back on the form 8832 yet, so would simply filing another one to "undo" the election be sufficient?

I've also read somewhere that the IRS will want to assign all income as salary in such a case of single member, no employee business such as mine, so being taxed as a corporation might not even work.

[ColeenD3]

Traditionally, the IRS expected a portion to be salary and a portion to be a distribution. Please see this LINK for a more comprehensive answer.

[ThomasM125]

You would need to pay yourself a "reasonable" salary since you are being taxed as a corporation. A starting point for this is to determine how much money you took out of the business as compensation. The IRS would likely consider this as wages. You should file forms 941 to report your salary each quarter and pay in your payroll taxes.

You do not need to consider all business income as wages, just a reasonable amount, based largely on what you take out of the business.

A schedule C, or regular corporation, you would have the same payroll requirements. The main difference is that distributions to you from a C corporation would be taxed as dividends.

You would have to send a letter to the IRS to revoke your S corporation status. 

Since you haven't paid in salary all year, you may be able to employ a work-around by issuing yourself a form 1099-MISC, reporting your salary as sub-contract pay. At least that way you can pay in your self-employment (FICA) tax. You would deduct the amount on your corporate tax return, then report it as self-employment income on your personal tax return.

I would not recommend you do that going forward, however.

I hope this has been helpful!

[Koh]

Why would you not recommend the 1099-MISC route as a continual solution?

So what you're saying is I could do that without having had paid quarterly SS/Medicare prepayments to the treasury? That seems to be the main hurdle here, since it seems my es-tax payments only cover my own personal income tax liability, I would probably have steep penalties for not having paid those

[AmyC]

S corporation requires the owner be paid on a W2 with a reasonable salary. The last person was suggesting the 1099MISC/1099NEC for 2020 and forward to keep you out of the fire.

I suggest you look at the IRS business center. It shows businesses structures along with pros and cons of each choice.

Next, it tells you the rules, what is expected and how to do things legally.

It has everything a business needs including how to close a business. If you want to go back to being a disregarded nonentity.

The IRS has created a recommended reading list as well. Take a look, do some reading and thinking, then decide to move forward. It is only January.

[Rick19744]

Ok.  Let's summarize the situation and actually respond to the overall issue:

• There are pros and cons to being a Sch C (single member LLC (SMLLC)) and an S corporation.  This discussion is really something that should occur in a one on one with a tax professional.
• Having said that, you have told the IRS that you want to be an S corp for 2019.  It appears they have not responded.  I would not file your tax return until you hear from the IRS regarding an acceptance.  Some states require this acceptance be attached to the initial S corp return.
• As has been stated, as an S corp, you are a shareholder AND an employee.  As an employee you must pay yourself a reasonable salary.  "Reasonable" is a facts and circumstances determination.  A tax professional can help provide some guidance in this area.
• As an employee, you should receive a W-2 for your work.  Do not issue yourself a 1099-MISC.  This may cause more problems.
• As an S corporation, all the income flows to you and is reported on your 1040 and you pay income tax on the earnings.
• I recommend you move forward based on what has occurred, knowing there is some exposure for 2019.  If you do get audited, you can explain that this was your initial year as an S corp and lacked the proper understanding of how you were paid.  Not an excuse, just the truth.  
• Make sure you read the information provided in some of the links in the other posts and get set up to receive a payroll check and file the appropriate payroll tax forms; both federal and state.
• The issue with wages, is the IRS does not like it where an S corporation shareholder does not pay themself a wage and takes out all income via a distribution.  There needs to be a proper balance and that is where a tax professional can help in this area.
• Trying to "undo" the election at this point may be difficult.  What you can do, is terminate the S election for 2020.  Here effectively you would have a one year tax return; initial and final.  But once again, you should get some professional guidance on this.