This article answers common questions about how your business is set up, how you get paid, taxes, and business expenses. Most of it applies to S Corp tier members, since it covers payroll, shareholder distributions, and the Business Tax Return (BTR). The General questions section applies to both tiers. If you're on the LLC tier, see LLC Membership Tier Overview & FAQ for guidance written for your setup.
General questions
What is a business checking account?
A business checking account is a bank account opened under your LLC's EIN (Employer Identification Number, your business's federal tax ID). Client and customer payments should be deposited there first. Keeping business money in its own account keeps your books accurate and your business and personal finances separate.
Use your business checking account only for business transactions, plus transfers to your personal checking account. If you've been using a personal account for business transactions, move that activity to your business account as soon as you can. For more, see our article on business checking accounts.
Am I an S Corp or an LLC?
An LLC is a legal entity you form with your state. An S Corp is a tax classification you elect with the IRS, and it layers on top of an LLC that already exists. One is your legal structure, and the other is how the IRS taxes it.
Which term describes you depends on whether you've made that election:
- LLC tier: You have a single-member LLC (SMLLC) and haven't elected S Corp tax classification. Your business income is reported on Schedule C as part of your Individual Tax Return (ITR), and you don't run payroll for yourself.
- S Corp tier: Your LLC has elected S Corp tax classification. You pay yourself a reasonable salary through payroll as an owner-employee, and your business files its own Business Tax Return (BTR) each year. That's a mouthful, so people often say "I'm an LLC taxed as an S Corp."
If you aren't sure which applies to you, check your membership details in your Collective dashboard or ask your Collective team.
S Corp basics
What is my S Corp election date?
Your S Corp election date is the effective date in Box E of your S Corp election form (Form 2553). Collective works on your books from the first of the month of that date.
From that date forward, the IRS treats your business as an S Corp for tax purposes, and your business activity is reported on your Business Tax Return (Form 1120-S). Business activity before that date is reported on Schedule C of your Individual Tax Return (Form 1040).
What are shareholder/owner contributions?
A shareholder/owner contribution is money you deposit from your personal accounts into the business. Contributions increase your shareholder basis, which is, in plain terms, your investment in the company. They appear on your Balance Sheet, not as income on your Profit and Loss statement.
How you get paid as an S Corp owner
As an S Corp owner, money moves from your business to you in three ways: a salary through payroll, reimbursements for business costs you paid personally, and shareholder distributions.
Payroll
The IRS expects S Corp owners who work in the business to pay themselves reasonable compensation, roughly what you'd expect to be paid for the same work at a similar business. It's paid as a regular paycheck through payroll and reported on your W-2. Under current IRS guidance, reasonable compensation should be paid starting in your first year as an S Corp.
- Reasonable compensation varies with location, industry, experience, hours worked, and how much of your revenue comes from your own work versus employees or contractors.
- Collective reviews your reasonable compensation each quarter.
- Fund your first payroll from business income, not personal funds (shareholder contributions). If you're still getting your business started, your first payroll can be delayed, but reasonable compensation should still be paid during your first year.
To run your first payroll:
- Finish payroll setup in Payroll in your Collective dashboard.
- Wait for approval. Our team reviews your setup, usually within 2 business days, and then our payroll partner, Gusto, reviews your company, usually within 2 business days.
- Once Gusto approves your company, go to Payroll, then Overview, and select Review and run.
For each step, see the Payroll Setup Guide. If you'd like a hand, reach out to your Collective team.
Accountable plan for mixed-use purchases
Some expenses are partly personal and partly business, like your home internet, utilities, or rent or mortgage. An accountable plan lets your S Corp reimburse you for the business portion. To use it:
- Pay these expenses from your personal account.
- Each month, enter them in Accounting, then Reimbursements, and submit them by the deadline shown on your dashboard. Submit even if the amount is zero.
- Make one transfer from your business checking to your personal checking for the total. In Transactions, categorize that transfer as Transfer and add a note that it's your reimbursement, so it's recorded as an expense instead of a shareholder distribution.
For more detail, see Getting Reimbursed for Business Expenses with Your S Corp Accountable Plan.
Shareholder/owner distributions
A shareholder/owner distribution is money moved from your business account to you, such as a transfer to your personal checking account or a payment toward your personal credit card.
Distributions generally aren't taxed on their own, because you pay tax on your business profit whether or not you take it out. Distributions do reduce your shareholder basis, and a distribution that's larger than your basis may be taxed as a capital gain. For more, see our article on shareholder basis and shareholder distributions for sole S Corp owners.
Taxes
Why do I have monthly payroll taxes and also quarterly estimated tax payments?
Taxes are due throughout the year, not only when you file. As an employee of your S Corp, income tax on your salary is withheld and paid to the IRS through payroll (Gusto). As the owner, you also earn business profit, which doesn't have tax withheld. You cover that tax with quarterly estimated tax payments.
Federal estimated payments are generally due April 15, June 15, September 15, and January 15, or the next business day if a date falls on a weekend or holiday. Most states follow a similar schedule, though California doesn't have a third-quarter payment.
For how your estimate is calculated, and how to review or change it, see Understanding your quarterly tax estimates (QTE).
How much should I set aside each month for quarterly estimated payments?
Your quarterly estimate in your Collective dashboard is the best number to work from. It's based on your circumstances and the calculation method you choose. For more on the methods, see How Collective supports quarterly tax estimates. To review or change your estimate, see Understanding your quarterly tax estimates (QTE).
What tax returns will Collective file for me?
Collective files your Business Tax Return (Form 1120-S) as part of your S Corp tier membership. If you've opted in, Collective also files your Individual Tax Return (Form 1040), which covers you, or you and your spouse if you file jointly.
Business expenses
Monthly health insurance premiums
If you pay monthly premiums for medical, dental, or vision insurance in your name, your S Corp can pay them and report them through payroll, which in most cases is what allows them to be deducted. This applies even if your partner or dependents are also on the plan. It can include COBRA premiums, as long as they're run through your payroll. See Health insurance for S Corps for the requirements.
Prescriptions, copays, and over-the-counter medications aren't included. To set up your premiums:
- Pay your premiums from your business account.
- Mark that you have health insurance during payroll setup. Our team will ask for your monthly premium, the date coverage started, the plan type, and the carrier, and add it to your payroll as a benefit your S Corp offers.
Meals and entertainment
Under current law, most business meals with clients or prospects are 50% deductible, which means you can generally write off half the cost. Entertainment isn't deductible, even when it's to build relationships with clients or prospects. That includes things like sporting events or golf memberships with customers. For more, see our Meals & Entertainment article.
Car expenses
If your car is purchased in your business's name and used 100% for business, it may qualify as a business vehicle. Otherwise, it's considered a personal vehicle. Even with a personal vehicle, you may still be able to deduct business costs like parking, tolls, and mileage. For the criteria and deductions, see our auto expenses article.
Home office expenses
Home office expenses are paid from your personal account, but you may be able to reimburse yourself for the business portion through your accountable plan. Include them in your monthly reimbursements, as covered in Accountable plan for mixed-use purchases above.
Chart of accounts
Your chart of accounts is the list of categories Collective uses for your books. For each account and examples, see our Chart of Accounts article.
What to expect going forward
Once you're set up, your membership settles into a regular rhythm of ongoing bookkeeping, financial statements and reports, and quarterly tax estimates. Staying connected to your numbers year-round, not only at tax time, helps you make better decisions for your business.
Your financial statements and reports
- Profit and Loss statement: your company's revenue and expenses over a period, such as the month of March or the full year.
- Balance Sheet: your company's assets, liabilities, and shareholder equity at a point in time, such as your business checking balance as of June 30. It also shows money moving between accounts. If you take a shareholder distribution, your business checking goes down by that amount and shareholder distributions go up.
- Transactions: the full record of every transaction behind your statements.
A few common examples of what appears on your Balance Sheet:
- Assets: checking and savings accounts, equipment, furniture
- Liabilities: loans and credit cards
- Equity: shareholder distributions, contributions, and capital stock (your initial contribution)
If you have questions specific to your business, reach out to your Collective team. They're here to help.
Disclaimer: The information contained in this article is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.