Hi, new here. Not a physician, but an independent IT consultant who got a link to this forum from the PhysicianOnFire blog (where this question came up) and wondered if there are any here in a similar situation who can answer a tax question.
Bear with me, but as I understand it, at the time I pay myself “reasonable” wages (since I can’t draw all the profit as a distribution), my LLC has to run payroll for me as its single employee, withholding federal and state taxes according to a W-4 declaration, and FICA contributions, and at the end of the tax year issue a W-2 for the totals paid via payroll, that is used for my personal tax return. In this situation, I am an employee of my own LLC.
Employee payroll can happen on any frequency the LLC decides. If I make it monthly, the LLC is already withholding actual income taxes for me on a monthly basis, so presumably that means I (the self-employed person) should file a quarterly estimate of zero to avoid paying twice?
I assume that in this case is the quarterly estimate is only supposed to cover distributions (profit) I make to myself from the LLC that are not classified as W-2 wages? If this is the case these are virtually impossible to estimate, and I would end up filing quarterly estimates of zero in Apr, Jun and Sep, and paying myself a single distribution in Dec, reporting and paying that quarterly estimate in Jan. I don’t see how the IRS gets it’s quarterly payments any quicker unless you actually take distributions (not wages) periodically throughout the year. Am I missing something?
I work short-term contracts with sometimes long periods of “down time” in between, so it’s very hard to estimate quarterly taxes. In fact what I plan to do is not take anything out of the LLC until the end of the year (Dec), and at that time run a single annual payroll for a “reasonable” salary and then take whatever is left over (minus a small “float”) as a profit “distribution”. Is my assumption about zero quarterly taxes in Apr, Jun and Sep correct?
ThanksNovember 8, 2017 at 2:41 pm MST #73555jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7944Joined: 01/09/2016
In order to avoid penalty and interest, you will need to file a schedule with your tax return showing the seasonal profits to correspond with your estimated tax payments if you make estimated payments. You can also make all of your tax “payments” with your year-end W2 if you want, and only have to pay in once per year.
Is there a good reason to be an S-corp? i.e. how much are your net profits?
This is something you really should consider having a CPA or tax professional assist with throughout the year but to each his (or her) own.spiritriderParticipantStatus: Small Business OwnerPosts: 1859Joined: 02/01/2016
You have a fundamental misunderstanding of S-Corporation distributions. They are not dividends like a C-Corporation. The reason they are called distributions is because in most cases, ordinary business income of the S-Corporation is a virtual pass-thru of income on a K-1 to the individual. This is true whether the distributions are actually made out of the S-Corporation’s accounts before year end.
It is relatively easy for an S-Corporation to calculate estimated taxes on distributions for the quarter. You can do a mock S-Corporation ordinary business income (Form 1120S Line 21) and a K-1. Then combined with estimated or actual W-2 income tax withholding, you can estimate the net marginal income taxes necessary on the additional distribution income.
Your total income tax liability can be met with a combination of W-2 withholding, quarterly estimated tax payment and safe harbors. I have never really understood this; “wait to the end of the year and run a single payroll mentality.” Figure out a baseline salary, pay yourself during the year and “true up” at the end of the year.
You can cover your safe harbor tax liability in some combination of the following:
- Neutral W-2 withholding or enough W-2 withholding to cover the distribution amounts.
- Equal quarterly estimated tax payments based on an estimate of the year’s AGI net of W-2 wages and withholding or quarterly estimated tax payments based on ordinary business income/K-1 net of W-2 withholding.
I’m going to second Johanna’s recommendation that you use a CPA at least for the first year or two. It helps prevent significant mistakes. Someone with a new S-Corporation doesn’t know what they don’t know.November 8, 2017 at 4:30 pm MST #73582November 8, 2017 at 9:46 pm MST #73627
You have a fundamental misunderstanding of S-Corporation distributions.Click to expand…
OK, sorry about that.
For 2017 I worked Jan-Apr and have had no earned income since. I may have more work in Nov and Dec but I just can’t be sure. Next year I probably won’t work until at least Jun or Jul – or not at all for the whole year – not sure how I could “figure out a baseline salary” for 2018 under these circumstances. That’s why I thought it would be simpler to just account for everything in Dec.
Thanks for the input.November 8, 2017 at 9:51 pm MST #73629spiritriderParticipantStatus: Small Business OwnerPosts: 1859Joined: 02/01/2016
When you said long periods of no revenue, you weren’t kidding. I was just thinking you had intermittent revenue.
Given the pattern of your business revenue this year and no estimated taxes to date, a year end payroll probably does makes sense.
I’m not a CPA, so Johanna would have to verify if this would be ok. I think you could do your one year-end payroll and make the withholding large enough to cover at least 90% of your Form 1040 tax liability for the year.
This would be the tax liability based on both your S-Corp W-2 wages and distributions, other income, adjustments, exemption(s), deductions and credits.November 9, 2017 at 12:16 am MST #73659jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7944Joined: 01/09/2016I’m not a CPA, so Johanna would have to verify if this would be ok. I think you could do your one year-end payroll and make the withholding large enough to cover at least 90% of your Form 1040 tax liability for the year.Click to expand…
Yes, a year-end payroll would be fine and save you the hassle of quarterly computations. The benefit is that your withholding is presumed to be spread evenly throughout the year, eliminating the penalty issue (if you withhold enough). The disadvantage is that you pay extra Medicare tax on the additional salary necessary to bump up to cover your tax withholding.
To compute, still suggest you work with an good tax preparer, preferably someone who is experienced with this type of work.November 9, 2017 at 7:48 am MST #73680