Welcome to Collective, your back-office support team for all things taxes and accounting.
During this call, we will cover:
- the answers you provided during the questionnaires
- talk more in-depth about life with an LLC and S Corp tax classification election
- how to make the most of your Collective team!
If you'd like a refresher on this content, reach out on your slack channel and reference this article.
Section 1: Your business info
During Section 1, we’ll make sure we have defined the service you provide, discuss your goals, and estimate revenue for the current year.
First, we define your service as accurately as possible to ensure we’re utilizing the proper benchmarks for your tax planning, reasonable compensation, and industry nuances.
We’d like to understand your goals and expectations for your small business, and how long you’d like to be self-employed.
In order to properly determine your tax plan, we start with an estimation of your business income and expenses for the current year. With your “Net Revenue”, (Gross Revenue - Expenses), we can determine the size of your business, tax rates, and target salary amount.
Section 2: Compliance
Residency, Tax Compliance, Foreign Accounts
In section two, we quickly confirm our three compliance questions:
- Are you a resident of the US?
- Do you have any unfiled tax returns or unpaid tax debts?
- Do you have any foreign bank accounts?
Collective membership is designed for S Corp elected businesses, and in order to be a shareholder of an S Corp, you must be a resident of the US.
Because Collective is focused on helping your business move forward with proper tax planning in the most efficient and cost effective way possible, we are unable to assist with past due tax filings or liabilities.
Foreign bank accounts require special filings; filing is dependent on the maximum balance at any point during the year. (under $10,000, $10,000-$50,000, or over $50,000)
Section 3: Domestic Operations
During section 3, we verify your location and various operational qualities.
Understanding your State of Formation (LLC) and State of Operation are essential to ensure annual legal and tax compliance.
Certain instances require compliance filings outside of your state of formation or operation, such as profits, personnel, or property.
- Clients outside of your state: Some, like CA and NY, will tax foregn entities for income sourced in their state. A Non-Resident tax return may be required.
- Having employees in other states means a Employer Registration requirement in that state, and possibly a Foreign Entity Registration.
- Business property in other states can also require Forein Entity Registration.
If your business meets any of these requirements, we will need to verify your business is properly registered in each state that apply. If you are not registered as a forieng entity, we may need to engage our Registered Agent partner RASI to complete the compliance assessment.
Business ownership in Real Estate or Other Business
If your business owns real estate or equity interests in another business, you could have needs that would be out of scope for Collective. Please let your Advisor know!
Section 4: Foreign Operations
Foreign operations, employees, property, or compensation
We will need to know if you have clients outside of the US, if you are paid in foreign currency, if you have business property outside of the US, or if you have foreign employees.
- Clients, profits, employees, or property in other countries can cause foriegn tax liability. Some examples are GST (Goods and Services Tax) and VAT (Value Added Tax). Foreign taxes are out of scope for Collective.
- If you are paid in foreign currency, exchange rates significantly complicate bookkeeping. In this case, we require a manual bookkeeping plan. Please get info on Bookkeeping Plans from your Advisor.
Section 5: Retirement
In section 5, we discuss your retirement plan and accounts that are well suited for S Corp owners. One of the most ideal plans for an S Corp owner is the Solo401k.
A Solo401k is a retirement plan for S Corp owners with no employees. The maximum contribution is $58,000 (2021) and is funded partially through individual contribution and partially through company contribution. The individual limit is $19,500 and the company can contribute 25% of the owners reasonable compensation. (More on reasonable comp soon)
Solo401k plans can be Traditional (Pre-tax, meaning you save tax money today) or ROTH (Post-tax, meaning you pay tax on the principal investment today but no income tax on the interest or gains in the future). Please seek guidance from a Certified Financial Planner or a Certified Retirement Planner for investment advice.
Section 6: Health Insurance
Health insurance for someone who owns more than 2% of the company isn’t a “business expense”, but can be treated as Non-Cash Compensation. This compensation will be reported on the W2, but is not subjected to Social Security or Medicare Taxes.
Paying the premium from the business account will help save money on taxes.
Section 7: Tax Information
During Section 7, we quickly confirm the tax information provided during the tax questionnaire and review the most recently filed tax return.
The items will will confirm are:
- Prior Unfiled Taxes
- Marriage Status
- Filing Status (ie, Single, Head of Household, Married Filing Single or Jointly)
- Spouse’s DOB
- Spouse’s Name
- Dependents Info
Section 8: Business Activity
In section 8, your advisor will indicate if you have already started your business or when you will start your business. They will also indicate how we will gather historical information on the business activity.
Your advisor will confirm your use of a bookkeeping tool, and accounting practices already in place.
Your advisor will inquire about your use of a Business Bank Account, or the presence of commingled transactions if there is no current banking separation.
Section 9a: Entity Details
If an LLC is already present, your advisor will review the entity details and documents.
Documents we will need to review:
- Articles of Organization
- Operating Agreement
- IRS Employer Identification
Section 9b: S Corp Election
During this stage, we will confirm when the S Election effective date will be:
- LLC Formation date
- Next Year
- S Corp election date
- LLC Formation Date
- Later of LLC formation date or 1/1/2021
- Retroactive Treatment
- Later of SC election date or 1/1/2021
Section 10: Reasonable Compensation
As owner and operator of an S Corp, you no longer have to pay Self Employment Tax. That is because the IRS now regards your business as an entity separate from yourself. This means that you own the company and work for the company that you own. When you work for a company, you must be compensated.
The IRS requires a diligent effort in paying yourself a “Reasonable Salary”. Some studies indicate that a healthy business sees ⅓ of it’s revenues going to Expenses, ⅓, going to Profit, and ⅓ going to payroll. While the Federal Government tells us that the average salary in the US is $36,000 per year.
The guidance provided by the IRS is to us “an equation” that takes into account some or all of the following variables:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
Training and Experience, in terms of salary, could be benchmarked by the salary you received for similar work from your most recent full-time employment, if you have already worked in the industry.
We will want to take into careful consideration, Duties and Responsibilities. Example: An experienced CFO who starts a consultancy assisting CFOs may actually be doing the work of a Controller. (No room for ego here)
Time and Effort Devoted to the business. Entrepreneurship isn’t always about the Time:Money ratio, usually we start businesses to improve our Effort:Dollar, or what I call “minimizing the Headache:Dollar ratio”. How many hours are you actually working?
Dividend History isn’t a common variable we use because most businesses are relatively new; but, if a S Corp shareholder is taking more in Distributions than in Salary, the IRS may want to know why. Especially if the salary is less than a reasonable range by demographics.
Are you using Employees or Contractors in your business? Payments to non-shareholder employees yield profits that you didn’t work for, meaning clear business profits.
Timing and manner of paying bonuses to key people, also not a common variable, but something to keep in mind as your business grows!
What comparable businesses pay for similar services is where we most often see mistakes. “COMPARABLE BUSINESS” does not mean you should pay yourself $300,000/yr because that’s what Software Engineers make at Google.
A solo-owned and operated company will pay less than the Fortune 500. Use sites like Glassdoor, Payscale, Indeed, and Salary to determine the salary range in your industry in your area, that’s how the IRS does it. Remember, the range isn’t just based on experience but also company size.
A legitimate company will have Compensation agreements with it’s employees and contractors. As an employee of your company, you should too. The business needs to operate as a legitimate business and a legitimate employer, even if you’re the only one.
The use of a formula to determine compensation = Take variables above to estimate a reasonable salary (Yes, I made this one an equation. It’s punny)
Section 11: The Finale - Collective Recap
In the wrap-up of our Kickoff Call, we will recap the benefits of S Corp and Collective.com’s service.
We will discuss the following on S Corp operations:
- Legal avoidance of the 15.3% Self Employment Tax
- Requirement of a Legitimate Business (ie Entity and Operations) to be an S Elected LLC
- The importance of Quarterly Estimated Tax payments and annual LLC filings
Recap Collective services:
- Personal Tax Return (1040)
- Business Tax Return (1120S)
- Tax Planning
- Accounting Setup and Training
- Quickbooks Online Essentials
Finally, we will mention one more time that you are NOT bound to a contract and are the Owner of your Quickbooks and Gusto Accounts. *Wrapping with the disclaimer that if you upgrade or add tools, we may need to pass on the additional cost.