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.
You'll need to sign in or create an account to connect with an expert.
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.
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!
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
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.
Ok. Let's summarize the situation and actually respond to the overall issue:
Still have questions?
Questions are answered within a few hours on average.
Post a Question*Must create login to post
Ask questions and learn more about your taxes and finances.
ryhartmuller
New Member
ericgbirds
Level 3
shw221
Level 1
hagnus
New Member
flokey
Level 2