This is Part 6 in a series of ours. If you have not read our previous articles do that first:
In this article we are going to talk about what you need to know now that you are organized and operating as an S Corporation.
Lets recap where we have been the past couple weeks.
- Pass Through Entity: An S Corp is a pass through entity meaning that you pay taxes on the profit from the business on your personal return.
- Annual Business Tax Return: You file S Corp activity on Form 1120S which will have a K1 to report that activity on your personal return.
- Benefit of the S Corp: Eliminate a portion of the self employment tax you pay. Instead of paying self employment tax on 100% of your income you only pay it on your salary.
- Electing S Corp Status: To elect S Corp status you would need to meet a few requirements and then file Form 2553.
- Reasonable Salary (Payroll): The owners of an S Corporation are required to take a reasonable salary (W2 Payroll as an Employee)
2. S Corporation Owner Health Insurance
As the owner of an S Corporation you need to treat health insurance payments for yourself in a special way to ensure you get the deduction.
- Step 1 – Have The S-Corp Pay the Insurance: This should be done directly out of the business bank account. You will deduct the expense as wages on the business side.
- Step 2 – Gross Up Payroll: You will take that insurance expense paid and gross up the payroll wages for the owner(s). If the plan is non-discriminatory then no FICA needs to be withheld. This will also help you hit that reasonable salary amount. Note: You will need to ensure your payroll provider knows about this so it can be included in your W2. Typically we make this adjustment at year-end.
- Step 3 – Deduct On Personal Tax Return: Finally, that income that was reported to you in wages for the insurance will now be deducted on your personal tax return.
As you can tell there are a few hoops you need to jump through but the net result is you get a deduction for it.
You deduct on the business side, include in wages on payroll, and then deduct on the personal side.
3. Accountable Plan (aka Reimbursement Policy)
A way to get a business deduction for expenses paid personally or expenses that are a mix between both business and personal.
- Expenses that are 100% business related, simply run them through the business.
- If you mistakenly run a 100% business expense on your personal account, use the accountable plan to reimburse yourself.
- For items that are not 100% business related (Example: Home Office, Automobile, Travel, etc) you use an accountable plan to reimburse yourself for the business portion (Business Use Percentage x Amount).
- To implement an accountable plan you just need to create a plan agreement and put it on file for your business.
- We also recommend using an accountable plan worksheet to help track those items that are business and personal mix.
It is important to reimburse yourself through an accountable plan because if you do not, that money may be considered taxable income.
That’s it! This concludes our series on S Corps where we walked through all aspects surrounding this tax election and what you need to know.
If you don’t have a tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.