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Business & farm
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.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
Also keep in mind the date of replies, as tax law changes.
‎January 30, 2020
5:27 PM