"Payroll" help - Any Accountants on the plane?

[Pablo]

After a year+ in business with a decent return, and not even liking last year's sting of paying the pass through taxes (and not netting any money), we are ready to pay ourselves.

=> Should I just stop typing now and see a pro?*

How do I even begin this process? I mean I know in general we will need to set a salary, then figure out Fed tax, SS, etc....

Maybe a good website or book??

*And this tax pro - how much will they charge???

Am I insane? (don't answer that)

 

[CivicFan]

I think you need to see a professional. Putting a process in place may require expertise. In general, if you are a sole entrepreneur, all your taxes go in your tax return.

As a corporation, the corporation can pay either salaries (an expense for the corporation) and the corporation has to pay half of the payroll taxes - the Medicare and the Social Security, while the employee pays the other half. Also, federal, state and local taxes need to be withheld. The other option is to pay dividends to you which is doubly taxed since dividends are not an expense. But since it's not payroll, there is no payroll taxes.

For an LLC, there is no dividend so it is salaries just like above.

 

[Pablo]

Yeah I am worried about double taxation with our LLC, since we are taxed on "profit" this goes directly to our individual 1040's. So the salaries will be an expense.

Luckily we don't have state income tax.

 

[pickled]

Don't forget to set up your SEP-IRA man....you can bury some serious dollars in it and not take a tax hit. The [censored] thing ever for an LLC not electing S-corp taxation is paying the SE tax forever. Go talk to a pro, but realize that cutting payroll typically is not that great of an expense (key word it's an administrative expense). You don't need ADP, but a good CPA typically will hook you up. If they have set billing for the number of payroll sequences just tell them you are ok with monthly pay distributions.

 

[Drew99GT]

Everything depends on what type of legal entity your business is. I believe you did an LLC, which for practical purposes, is a partnership, in which income passes through to you on a K1 and is taxed as regular income on your 1040 regardless of whether you or your partner take any distributions out of the business. Actually, under current law, you and your partner can simply do schedule Cs, which makes things much easier.

So in general, no, you don't "need" to take a salary, as income passes through to you and is taxed.

I don't see how the income passed through to you and taxed as ordinary income could have yielded no net income on your part - that could only happen if the income was taxed at 100%!

Paying yourself a salary becomes important when you operate as a C-Corporation, as the IRS doesn't like when income is passed through to operating owners of a C-Corp as preferred dividends, which, if you structure things correctly, will only be taxed at 5%, vs. the regular income tax rate for an individual.

So if you are an LLC, just think of your portion of the partnership as a sole proprietor for tax purposes, filing a schedule C. You wouldn't take a salary for that, since all your income will be taxed as regular income!

In addition, you must pay self employment tax on your income from the partnership (SS/Medicare). You REALLY don't want to hose yourself on that one.

Seriously, if you haven't got all this stuff up to snuff, hire an accountant (Lord Tempest may rant about that, but I think you now see the need for it). If you don't fill out the self employment tax form for your 1040 and you have an LLC partnership, the IRS will see it, you'll get audited through the roof, and end up with penalties and interest that will be staggering.

 

[Drew99GT]

Originally Posted By: pickled
Don't forget to set up your SEP-IRA man....you can bury some serious dollars in it and not take a tax hit. The [censored] thing ever for an LLC not electing S-corp taxation is paying the SE tax forever. Go talk to a pro, but realize that cutting payroll typically is not that great of an expense (key word it's an administrative expense). You don't need ADP, but a good CPA typically will hook you up. If they have set billing for the number of payroll sequences just tell them you are ok with monthly pay distributions.


You still have to pay SE tax if you're an S-Corp! If you're engaged in operations of the business, then the rules of paying yourself a salary come into play and you'll pay payroll taxes as an employee, and the S-Corp will pay the other half.

If you're just a shareholder and perform no work, then no, you don't have to pay SE tax, but that is not Pablo's situation.

 

[Drew99GT]

Originally Posted By: Pablo
we are ready to pay ourselves.



You mean you haven't taken any money out of the business? Taking a distribution from an LLC is of no consequence to taxes. You pay income taxes (or take a loss) from an LLC regardless of whether you take money out of it. Did you do a 1065 last year and then do K-1s for you and your partner? The K-1 goes on the first page of the 1040 regardless of whether you take any money out of the business. Taking money out affects your basis in the partnership. That's another thing irregardless of all the tax implications: accounting for the basis of the partnership, which you need to kind of keep track of on the side as it doesn't show up on the 1065/K-1.

Fun stuff, ain't it!

 

[pickled]

Yes but there is a ceiling on SS for a w2 wage earner within an S-corp vs. a proprietor. I'm the President/GM of my company. If I elect a W2 salary of $250k in a year my social security contribution drops off after approximately the first 100 grand. If I file as an LLC and fill out SE forms I pay the entire sum up to the $300k...that's many many thousands of dollars I could have taken home clear and free.

 

[Drew99GT]

HUH? There's a ceiling on wages subject to social security tax of $106,800, regardless of whether those wages were from being an employee, or earnings from self employment. On the SE tax form, there are provisions for calculating the SS ceiling.

 

[pickled]

Oh [censored] you're right sorry about that....I was thinking of the HI portion, but that has no limit for us poor folks now.

 

[Drew99GT]

For 2008:

More than $102,000, multiply line 4 by 2.9% (.029). Then, add $12,648 to the result.

The 2.9% is for Medicare, the $12,648 is the max you pay for SS on the SE tax form.

 

[Pablo]

Originally Posted By: Drew99GT
Originally Posted By: Pablo
we are ready to pay ourselves.



You mean you haven't taken any money out of the business? Taking a distribution from an LLC is of no consequence to taxes. You pay income taxes (or take a loss) from an LLC regardless of whether you take money out of it. Did you do a 1065 last year and then do K-1s for you and your partner? The K-1 goes on the first page of the 1040 regardless of whether you take any money out of the business. Taking money out affects your basis in the partnership. That's another thing irregardless of all the tax implications: accounting for the basis of the partnership, which you need to kind of keep track of on the side as it doesn't show up on the 1065/K-1.

Fun stuff, ain't it!


No we have not paid ourselves a nickle other than reimbursing for auto expenses and such. I just bank the cash.

 

[pickled]

LLC's that elect S corp taxation allows a little room to fudge around with partial distributions vs. all wage. The problem comes when you don't pay yourself a wage reflective of what you do. I've known some guys that tried to pull off CEO titles and paid themselves $35k from the payroll while trying to take distributions as well...didn't work out to well for them! The IRS clamped on them like stink on [censored]. In the end you gotta pay the piper, but definitely take advantage of some of the IRA perks that are only available to business owners/partners. I buried 38k in my SEP last year and that will definitely help weather the storm of market volatility as I get closer to retirement.

 

[Pablo]

Well I would think the IRS would be digging us this year....I mean if we pass all the income through and paid taxes on it.

I'll need to study the SEP IRA thing.

 

[Drew99GT]

Originally Posted By: pickled
LLC's that elect S corp taxation allows a little room to fudge around with partial distributions vs. all wage. The problem comes when you don't pay yourself a wage reflective of what you do.


That IMO is the advantage to an LLC. It's cut and dry.

Generally, if you're an S-Corp and you do all the work, all the income needs to be passed through as wages, which is essentially what happens for an LLC.

 

[Drew99GT]

Originally Posted By: Pablo
Well I mean if we pass all the income through and paid taxes on it.


What is your legal business entity?

If you're an LLC, then all your income passes through to you and your partner every year regardless of ANYTHING. Think of it like if you saved every dime from all your paychecks at a job - you still pay income tax on the money you earned. Well, it's the same for a partnership/LLC. For federal tax purposes, you're classified as a partnership. You do a 1065 (partnership return) and K-1s for each partner. The K-1 is where the income flows through to you and your partner regardless of whether you take any cash out of the business.

 

[Pablo]

Yes that is what we did last year, but we didn't actually pocket the cash!

 

[Drew99GT]

Originally Posted By: Pablo
Yes that is what we did last year, but we didn't actually pocket the cash!


OK. Well, you can take cash out anytime. It's already been taxed (both income and SE tax). The only thing it will affect is your basis, if you were to say, sell your interest in the partnership to someone else for example. Either taking cash/property out, or contributing cash/property affects your basis (ie, the "value" of your partnership interest).

 

[Drew99GT]

You owe me a Chinese Clone motor for all the help I've given you.

I'd have had you in my office for at least 3 hours at $100 an hour.

 

[Drew99GT]

An average CPA would have charged probably $200 to $300 for a partnership return and the K-1s, depending on the complexity. Probably $250-$300 for a moderately complex 1040 - Schedule A, a Schedule D etc.

H&R block would probably be cheaper, but you'd have someone who took their 10 hour tax course doing it (ie, not knowing schedule A from schedule D).

I spend have my time redoing screw ups from the chain places for people with fairly complex tax situations. When you get into passive taxation issues and the like, forget it with H&R block. They'll screw it up and I've seen people get hosed by the IRS for breaking tax shelter/passive income rules.