I do consulting and my client just made his first payment. I would like to use some of this money to register the business in Dec 2020 as a S-Corp. I will not touch the money otherwise, unless it is for some other related business expense like a PO Box or software. I want to be able to divide this money up accordingly and taxed at the rate desired - as a S-Corp and not a Sole Proprietor. Is that still possible or should I have already registered my business before I starting making some revenue? Will this specific payment have to be taxed as a Sole Proprietor or can I still make sure it is taxed as a S-Corp? If it's not too late, when is it too late?
S-Corp Election Deadline
The deadline to elect S-Corporation tax treatment depends on whether your business is newly incorporated or is in its second (or later) tax year.
For a New Business
A corporation or LLC must file an S-Corp election within two months and 15 days (~75 days total) of the date of formation for the election to take effect in the first tax year.
Thank you for your response, it is very helpful. This is a new business and will be newly registered. So I need to go ahead and register it as a LLC now while in 2020. As long as I file S-Corp with in the timeline you provided I can still get the revenue I just earned taxed as a S-Corp when I file my taxes in 2021, is that correct?
Please do NOT make an S-election without sitting down with a good tax professional to determine if that is your best option. In MANY cases it is NOT your best option, especially if you are the only one working for the corporation and the business is a service business ("consulting").
The fact you haven't yet registered your business anywhere really doesn't matter for tax purposes. As far as the IRS is concerned, you are self-employed (which in some states doesn't require any kind of registration - at least not at the state level.) Your business was officially open for business on the date you met with that first income producing client - doesn't matter when they actually paid you.
So if you're producing income in your own business, and that business is not registered as an LLC, then that income is merely self-employment income that gets reported as such on SCH C as a part of your personal 1040 tax return.
In my state I'm not "required" to register my business at the state level. If I don't, then I'm just self-employed. However, for me to be self-employed my county does require me to have an "Occupational License" which cost $22 a year. It licenses me to perform my business or provide my services anywhere within the county. If I go outside the county, then the other county can cite me for conducting business in their county, unlicensed. Of course, I can always get an occupational license in the other county too.
In other words, while licensing at some level may or may not matter in your state, it does not matter to the IRS if you are registered or not. If you are self-employed and produce business income, the IRS expects you to report your self-employment income on your federal taxes.