S Corp Questions
-
- Posts: 1967
- Joined: Sat Apr 09, 2016 5:06 pm
- Location: NYC
S Corp Questions
Two S-Corp questions…
1) filed for S-Corp status on a corp entity a month and a half ago. We have not received any acknowledgment from the IRS, which I understand has to be received before the entity becomes an “official”S-Corp. We don’t want to start using the entity because it is technically a C Corp. until the S-Corp election is processed, which would make things a real headache. How long does it typically take for the IRS to send you an acknowledgment? And is there any downside to acting like the entity is an S Corp (taking salary and distros) under the assumption that the IRS will grant S Corp. election? All of the conditions are met, and if I’m understanding things correctly, it’s retroactive from the date the election is made. I’m just worried, with the IRS backlog, that it will get missed or not properly filed.
2. For those people who have an S Corp., do you always pay yourself the same salary every month, or every two months? The business cash flow would be such that it comes in big increments, but not on a consistent basis. This makes planning a consistent salary rather difficult.
1) filed for S-Corp status on a corp entity a month and a half ago. We have not received any acknowledgment from the IRS, which I understand has to be received before the entity becomes an “official”S-Corp. We don’t want to start using the entity because it is technically a C Corp. until the S-Corp election is processed, which would make things a real headache. How long does it typically take for the IRS to send you an acknowledgment? And is there any downside to acting like the entity is an S Corp (taking salary and distros) under the assumption that the IRS will grant S Corp. election? All of the conditions are met, and if I’m understanding things correctly, it’s retroactive from the date the election is made. I’m just worried, with the IRS backlog, that it will get missed or not properly filed.
2. For those people who have an S Corp., do you always pay yourself the same salary every month, or every two months? The business cash flow would be such that it comes in big increments, but not on a consistent basis. This makes planning a consistent salary rather difficult.
Re: S Corp Questions
Your user name suggests you’re in NYC. Note that NYC doesn’t allow S status for the NYC corporate tax.
Re: S Corp Questions
You dont have to wait for an IRS document to come back. If you've filed a valid election, feel free to use it as if it is an S corporation.
Especially in the COVID/post COVID delays, it may be a while before you get anything back from them.
Especially in the COVID/post COVID delays, it may be a while before you get anything back from them.
Re: S Corp Questions
You could do an annual payroll, or quarterly, or a very low base salary monthly with large bonuses (same thing taxwise), or whatever you want as long as it's reasonable compensation and FICA/withholding is paid timely. There are quarterly payroll filings for the Feds, and probably quarterly or monthly for your state too, so monthly payroll is usually a convenient compromise but it's not required.NYCaviator wrote: ↑Thu Jun 23, 2022 7:19 pm 2. For those people who have an S Corp., do you always pay yourself the same salary every month, or every two months? The business cash flow would be such that it comes in big increments, but not on a consistent basis. This makes planning a consistent salary rather difficult.
If you're going to outsource your payroll see what options the provider offers.
Re: S Corp Questions
I formed a corporation where we didn't file the S corp election in time and so it was a C corp in the first year and an S corp took effect after that. It was no problem!
I'm in a different state than you and it was a decade ago, so take it with a grain of salt. It's been closed for years now.
I just remember the way it worked out with the first year's S corp election wasn't ideal but also it was completely fine.
I'm in a different state than you and it was a decade ago, so take it with a grain of salt. It's been closed for years now.
I just remember the way it worked out with the first year's S corp election wasn't ideal but also it was completely fine.
Last edited by cchrissyy on Thu Jun 23, 2022 11:56 pm, edited 2 times in total.
60-20-20 us-intl-bond
-
- Posts: 2985
- Joined: Tue Apr 01, 2014 11:41 am
Re: S Corp Questions
We have had an S-Corp for 20 years. We always take the salary (if any) once a year in December, and pay all the taxes then.
Ralph
Ralph
Re: S Corp Questions
I've been an S Corp for decades and take a salary once a quarter. Depending on the cash flow, I decide my payroll a week or so before drawing the salary (way too much of a hassle to do this weekly or twice monthly).
Re: S Corp Questions
First, you should have an idea of how much of your profit percentage to take as salary.NYCaviator wrote: ↑Thu Jun 23, 2022 7:19 pm 2. For those people who have an S Corp., do you always pay yourself the same salary every month, or every two months? The business cash flow would be such that it comes in big increments, but not on a consistent basis. This makes planning a consistent salary rather difficult.
Then of that amount, you could take a portion as a small monthly draw. Then, monthly or quarterly or whenever, look at your numbers to calculate accounts payable, future capital needs, in other words, cash reserves needed out of the income received, and if there's a balance after that, pay out the balance either in salary, distributions or both.
In this way, you keep tempo with an inconsistent income.
"The Quality of the Answer Depends on the Quality of Your Question."
Re: S Corp Questions
I would advise a more cautious approach. The OP seems to believe the S election is automatically retroactive to the beginning of the year. It is not. To be effective as of Jan 1st, the election generally must be made no later than Mar 15th of that year. There is an exception if specific procedures are followed for a "late election."
After the S election is filed, the IRS will generally contact the taxpayer within 60 days regarding the status of the election. If not contacted in that time, the taxpayer should follow up by calling IRS at 800-829-4933.
The OP submitted the election 6 weeks ago - in early May, too late to be effective for tax year 2022. And the OP said nothing about following the required procedures for a "late election." So in this case I think there's a good chance the S election will not be effective until tax year 2023.
Re: S Corp Questions
Good catch. I was assuming it was a new entity, but OP doesnt actually say that. If it is a new entity, then it should be fine. If it is not, then yes without a Rev. Proc. statement the election is technically not effective for 2022. That said, the IRS basically accepts any S corporation election and is incredibly forgiving on slight filing issues soMarkNYC wrote: ↑Fri Jun 24, 2022 12:16 pmI would advise a more cautious approach. The OP seems to believe the S election is automatically retroactive to the beginning of the year. It is not. To be effective as of Jan 1st, the election generally must be made no later than Mar 15th of that year. There is an exception if specific procedures are followed for a "late election."
After the S election is filed, the IRS will generally contact the taxpayer within 60 days regarding the status of the election. If not contacted in that time, the taxpayer should follow up by calling IRS at 800-829-4933.
The OP submitted the election 6 weeks ago - in early May, too late to be effective for tax year 2022. And the OP said nothing about following the required procedures for a "late election." So in this case I think there's a good chance the S election will not be effective until tax year 2023.
-
- Posts: 1967
- Joined: Sat Apr 09, 2016 5:06 pm
- Location: NYC
Re: S Corp Questions
I should have mentioned it, but this a new entity so should be effective this year.soxfan10 wrote: ↑Fri Jun 24, 2022 5:25 pmGood catch. I was assuming it was a new entity, but OP doesnt actually say that. If it is a new entity, then it should be fine. If it is not, then yes without a Rev. Proc. statement the election is technically not effective for 2022. That said, the IRS basically accepts any S corporation election and is incredibly forgiving on slight filing issues soMarkNYC wrote: ↑Fri Jun 24, 2022 12:16 pmI would advise a more cautious approach. The OP seems to believe the S election is automatically retroactive to the beginning of the year. It is not. To be effective as of Jan 1st, the election generally must be made no later than Mar 15th of that year. There is an exception if specific procedures are followed for a "late election."
After the S election is filed, the IRS will generally contact the taxpayer within 60 days regarding the status of the election. If not contacted in that time, the taxpayer should follow up by calling IRS at 800-829-4933.
The OP submitted the election 6 weeks ago - in early May, too late to be effective for tax year 2022. And the OP said nothing about following the required procedures for a "late election." So in this case I think there's a good chance the S election will not be effective until tax year 2023.
Thanks for all the responses. I’m thinking payroll at least once monthly just so we have cash flow.
Re: S Corp Questions
Was it using a fiscal year so that it was timely filed for its current taxable year?
Re: S Corp Questions
If is newly formed, it only needs to be effective for the day it was formed. Id also say that even if it was formed, but it had no assets or operations that the election wouldnt need to be effective until it had assets or operations.