Contents

General Questions

Getting Paid as a Shareholder

Taxes

Business vs. Personal Expenses - Examples

What to Expect Going Forward

General Questions

What is a Business Checking Account?

  • It's opened with the EIN of the LLC we are helping you with

  • Client and customer income gets deposited here first.

  • NOTE: Do not use your business checking account for personal transactions other than transferring money to your personal checking account. Stop using personal checking accounts for business transactions ASAP.

Click here to learn more about business checking accounts.

Am I a S Corp or an LLC?

Your LLC is a legal formation that is electing S Corp tax classification, but that is a mouthful so people often say "I'm an LLC based S Corp".

What is my S Corp election date?

  • The S Corp tax election date is the effective date listed on IRS Form 2553 Box E. Collective will work on your books from the first of the month of your Form 2553 Box E date.

  • From this date forward, the IRS will regard your business entity as a pass-through entity for tax purposes, and require you to report the S Corp business activity on its own Business Tax Return called the 1120s.

  • Any business activity before this date will be reported on the Schedule C of your Individual Tax Return called the 1040.

What are shareholder contributions?

Personal deposits of funds from the accounts of the shareholder (you!) to the business. These Contributions will increase the Shareholder's Basis in the company. This will be reflected on the Balance Sheet and will not be shown as income on the Profit & Loss Statement.


Getting Paid as a Shareholder

  1. Payroll

    The reasonable compensation or amount of money you would expect in exchange for the work you perform if you were doing it for another business of similar size. Beginning in the first calendar year, the reasonable compensation must be paid by the company to anyone working for the company (paid as paycheck) which will be reported on Form W2.

    1. This amount varies based on geographic location, industry, experience, hours worked, and attribution of revenue to employees or contractors.

    2. Collective will review the reasonable comp on a quarterly basis

    3. To run first payroll, it should be funded via income and not personal funds (i.e. Shareholder Contributions). Therefore, the first payroll can be delayed if you’re still getting your business started, but reasonable compensation should still be paid during the first year.

    4. Your Onboarding Accountant will help you run your first payroll via Gusto

  2. Accountable Plan for Mixed-Use Purchases

    There are mixed purchases that can be considered both personal and business (i.e. your home’s internet, utilities, rent/mortgage).

    1. All of these expenses will be paid from your personal account

    2. On a monthly or quarterly basis you’ll fill out the accountable plan, and the Total Employee Reimbursement Expense will be the amount you transfer from your business checking to personal checking

    3. Don’t forget to upload the spreadsheet to your Member Dashboard, so we can categorize it as an expense rather than a Shareholder Distribution!

    4. Your Onboarding Accountant will go over this article during your Training Call

  3. Shareholder Distributions

    The disbursement of funds from the business account to the shareholders’ account (i.e. your personal checking account or your personal credit card payment)

    1. Shareholder Distributions are not taxed. You pay tax on the business profits whether they are distributed or not. Distributions do, however, impact your shareholder basis. A negative shareholder basis can be subject to capital gains tax. For more information on shareholder basis, click here.

    2. For more information on shareholder distributions, and how shareholder distributions are different than wages, click here.


Taxes

Why do I have monthly payroll taxes and also quarterly estimated tax payments?

  • It is a common misconception that taxes are paid annually by some and monthly or quarterly by others. All taxes are due throughout the year.

  • As an employee, your income taxes are withheld and remitted to the IRS by the payroll provider (i.e. Gusto). As the owner of the company, you receive additional income in the form of business profit. These funds don't automatically have taxes withheld and remitted, so you must pay in the form of Estimated Tax Payments "quarterly".

  • The deadlines are April 15th, June 15th, September 15th, and January 15th, or the following business day.

  • See our QTE article on how the estimates are calculated or when you will receive the estimates from Collective.

How much should I set aside each month to have enough for the quarterly estimated payments?

  • Please consult with your Tax Advisor

  • There are two methods for calculating Estimated Tax Payments: (a) Safe Harbor or (b) Actual Tax

  • Safe Harbor is the payment of at least 90% of the taxes you owed last year, broken down by quarter

  • Calculating your Estimated Actual Tax is done with your "Effective Tax Rate". This is the rate after calculating your Adjusted Gross Income and applying your Marginal Tax Rate, and adding additional taxes or subtracting credits (that's why we suggest consulting with your Tax Advisor)

Why do you want me to put single on the federal and state tax setup in the employee profile for Gusto?

Entering “single” and “0” tells Gusto to withhold the maximum amount for federal and state income tax. Withholding the maximum is beneficial to you because your exact tax liability for the year is not known until your individual tax return is prepared. By withholding more money during payroll, you minimize the risk of incurring penalties for underpayment of tax. If it turns out that you withheld too much, you will get a refund after your individual income tax return is filed.

You are NOT breaking the law or “lying” by entering “single” and “0” during payroll setup. Choosing your withholdings is separate from electing your filing status. When it comes time to file your individual tax return, rest assured it will reflect your correct filing status.

Why do you file both my 1040 and 1120s?

  • A form 1120-S is the tax return form for businesses that are taxed as s-corps.

  • A form 1040 is the tax return for an individual (or married couple).

  • Collective will file both of these tax returns for you, but you do have the option of "opting out" of having Collective file the 1040 if you would prefer to file that on your own.

  • See here for more information on the tax return filing process at Collective.

  • For any questions regarding timing of your tax return see here for an explanation of how to track the status of your tax return or email [email protected]


Business vs. Personal Expenses - Examples

Monthly Health Insurance Premiums

If you pay a monthly premium for medical, dental, or vision (and it’s under your name), it’s considered a business expense! There are a few exceptions like COBRA. You may be asking, “what if it’s under my name but I have my partner and/or dependents under the plan?” You can still include it as a business expense!

Prescriptions, copayments, OTC medications, etc. are not considered as a business expense.

For more information, see here. Your Onboarding Accountant can help you set this up in Gusto to reflect this as a benefit that your S Corp offers.

Meals & Entertainment

This Meals & Entertainment article will go into more detail, but meals with 2 parties involved (i.e. you and your client) can be paid using a business account and will be 100% deducted.

However, entertainment is 0%. What’s entertainment? This includes sporting events you go to with customers, golf memberships you pay to go golfing with customers, etc.

Car Expenses

If your car is purchased in your business name AND it's 100% for business use, your car qualifies as a business vehicle. If it doesn't meet this criteria it would be considered personal vehicle which there are still deductions that you can write off like parking, tolls, and mileage. This article will go into more detail with the criteria & applicable deductions.

Home Office Expenses

These types of expenses will be paid via your personal account, but you will be able to reimburse yourself for the business portion. As discussed above, this will be included in your Accountable Plan for Mixed Use Purchases.

Chart of Accounts

We've created this Chart of Accounts article to go over the different accounts (or categories) Collective will use for your financial books as well as examples for each account.


What to Expect Going Forward

  1. Monthly Bookkeeping

  2. Monthly Financial Statements

    1. Profit & Loss Statement - Company’s revenues and expenses during a particular period (i.e. the month or March or the entire year)

    2. Balance Sheet - A company’s assets, liabilities, and shareholder equity. Unlike the P&L, the Balance sheet will represent a point in time (i.e. Your Business Checking account balance as of June 30th). The balance sheet can show the transfer of money. For example, if you made a shareholder distribution, you’ll see your business checking account be reduced by the amount and shareholder distribution increase.

      A few common examples of each type:

      1. Assets - checking/saving accounts, & equipment/furniture.

      2. Liabilities - loans & credit cards

      3. Equity - Shareholder distributions, contributions, and capital stock (initial contribution amount)

    3. Cash Flow Statement - shows the inflows and outflows of the Company’s cash in three different categories (operating, investing, and financing) during a period of time.

    4. General Ledger

  3. Quarterly Tax Estimates

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