Here in our Chicago south loop tax preparation office, and our Homewood Illinois tax preparation office, we often work with clients that want to legally reduce their tax bill, without triggering an audit. For our self-employed clients that realize a net profit of $35,000-$40,000 we sometimes recommend that they utilize the S-Corp taxation option (rather than a disregarded entity taxation status), as the S-Corp option will allow them to take advantage of some pretty awesome tax deductions. Below are 3 end of the year things that S-Corps must make sure to have done.
MAKE SURE THAT YOU HAVE PAID YOURSELF A REASONABLE COMPENSATION VIA PAYROLL, AND THAT YOU HAVE PAID YOUR PAYROLL TAXES.
You likely formed an S corporation to save on self-employment taxes. If so, is your S corporation salary
- too low?
- too high?
- just right?
Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty. Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years. Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes. Make sure to work with your accountant to help figure out your salary. You should also make sure that you corporate minutes name your salary, and have documents that prove your salary is reasonable (you can use the market approach, the income approach, or the cost approach).
RENTAL OF PERSONAL RESIDENCE FOR UP TO 14 DAYS FOR TAX FREE INCOME.
If your S-Corp is paying you (or your spouse) as an individual rent to use your residential space for hosting business meetings, please do the following:
- Research the going rate for conference/meeting room rental in your area. Please view our detailed YouTube video on how to use the 14 day free rental income tax rule, & find the rental rates that your S-Corp can pay individuals.
- Invoice your corporation for room conference/meeting rental.
- Create a conference/meeting room rental agreement, or order one from Howard Tax Prep LLC.
- Write a check, send a zelle, cash app, etc. from your corporate bank account, to your personal bank account.
- Document the business purpose with meeting minutes, & resolutions.
HOME OFFICE & CELLPHONE REIMBURSEMENT
If you operate as a corporation, your home-office deduction does not show on either your personal return or your corporate return if you have the corporation reimburse the office as an employee business expense. To reimburse as an employee business expense, you must do the 5 things listed below.
- Have a written corporate reimbursement policy. We offer plans for home office, travel, and cellphone usage reimbursement.
- Have employee (you) submit a reimbursement sheet, and keep track of cost for reimbursement.
- Pay employee (you) from the corporation’s bank account.
- Document business use of home office. For example, accounting, marketing, emailing clients, creating policies, planning meetings, etc.
LIST OF 12 MEETING IDEAS
|Annual Meeting Minutes.||Recent Accomplishments.|
|Next Quarters Sales Goals.||Industry News.|
|Process Updates.||Customer/Client Feedback.|
|Design/Branding Review.||Marketing Plan.|
|Annual Budget Meeting.||Review of compliance records.|
|Board of Directors Decisions.||Annual Financial Performance Review.|
Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.