What is a Business Checking Account?

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

  2. Client and customer income gets deposited here first before you transfer it out.

Am I an S Corp or an LLC?

  1. LLC is a legal formation.

  2. S Corp is a tax classification that LLC's can elect.

  3. You are an LLC that is electing S Corp tax classification, but that is a mouthful so people often say "I'm an S Corp".

What is my actual (or expected) S Corp election date?

  1. The S Corp, or Subchapter S, tax election date is the effective date listed on IRS Form 2553. From this date forward, the IRS will regard your business entity as a pass-through entity for tax purposes. (-DT)

What are shareholder distributions?

  1. Shareholder Distributions are the disbursement of funds from the business account to the shareholders. For more information on shareholder distributions, and how shareholder distributions are different than wages, click here.

Do shareholder distributions get taxed?

  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.

What is reasonable compensation, how is it determined, and how often do you look at it?

  1. Reasonable compensation is the amount of money you would expect in exchange for the work you perform if you were doing it for another business of similar size, i.e. personnel and revenue.

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

  3. We will review this for you quarterly! (-DT)

What is the difference between shareholder contributions and reasonable compensation?

  1. Shareholder Contributions are personal deposits of funds from the accounts of the shareholder to the business. These Contributions will increase the Shareholder's Basis in the company.

  2. Reasonable Compensation is the amount you would expect to earn for the work you perform for the business, paid as a paycheck, and reported on Form W2. (-DT)

Does my reasonable compensation have to be paid as of the first of the year?

  1. Yes, Reasonable Compensation must be paid by the company to anyone working for the company, including in the first year. (-DT)

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

  1. 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.

  2. As an employee, your income taxes are withheld and remitted to the IRS by the payroll provider. 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".

  3. The deadlines are April 15th, June 15th, September 15th, and January 15th, or the following business day. (-DT)

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

  1. Please consult with your Tax Advisor

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

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

  4. 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) (-DT)

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.

When will I receive quarterly estimated tax payment instructions?

See here.

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.

What is the status of my 1040 Individual Tax Return for 2021?

See here for an explanation of how to track the status of your tax return.

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