4 ms·
If you don't know the basics, how to do you know when your accountant or bookkeeper is making a mistake, or giving you bad advice? How to do you know if they a
by atria 11y ago
If you don't know the basics, how to do you know when your accountant or bookkeeper is making a mistake, or giving you bad advice? How to do you know if they are optimizing their advice to make their jobs easier, not yours?
I stared an LLC last year. It it took two months to find an anchor client, and they started paying net 60 (so no income for four months). Compared to the year previous, my income effectively dropped 25%. The accountant figured estimated payments that would require me to pay every penny I made during the first half of the year. That would mean 6 months without income. He was simply taking last year's tax obligation dividing it by the number of quarters left, not the actual tax obligation.
Did I mention he talked me into an LLC because the administration was simpler? He forgot to mention how much more in taxes I would be paying compared to an S Corp.
I'm now reading every tax book I can get my hands on, and am reading accounting textbooks. No one will watch out for your money like you should.
- mindcrime 11y agoFWIW, an LLC can elect to be taxed as an S-corp.
- atria 11y agoUnless you cannot, because you aren't in the allotted time window. Can distributions be treated as dividends?
- mindcrime 11y agoUnless you cannot, because you aren't in the allotted time window. Yes, there are rules around the whole thing. But, in principle, it is possible to have an "S LLC". But this kind of stuff is exactly where it's important to have good / knowledgeable advisors to help with this kind of stuff, because what average mortal understands the myriad of byzantine IRS regulations? Can distributions be treated as dividends? No idea. :-(
- cstejerean 11y agoHow are you paying more in taxes for an LLC compared to an S Corp?
- soaponarope 11y agoIn an LLC all income is passed through to the owner(s) personal tax returns. An S Corp will pay the officer(s) a reasonable salary and an excess capital is return to owners through a dividend which is taxed a lower rate than normal income. All gains by the LLC pass through as normal income.
- jazzyk 11y agoThis is incorrect, at least for for an S Corp. The rest of the money (after you pay salaries AND deduct valid business expenses) is distributed to shareholder(s) as shareholder distributions using Schedule K-1, not dividend (terminology is important, they are not one and the same). Shareholder distributions then add (or subtract if you lost money) to/from shareholder individual incomes. It is taxed at the same level as other income.
- zrail 11y agoOne important point that people tend to ignore/forget: every dime of income after salaries and expenses counts as a distribution for tax purposes, even if the money stays in the company bank account. Shareholder/member distributions are not taxable events.
- hsitz 11y agoNo, the non-salary income is not "qualified dividends" and does not qualify for the 15% rate. It is taxed as "ordinary income", just like the salary. The advantage of S-Corp taxes has nothing to do with lower tax rates. It has to do with fact that FICA and Medicare taxes are taken out only from the portion of income designated as "salary". So you effectively save about 15% (i.e., the rate of FICA/Medicare withholding) for income that is above your salary to point where FICA/Medicare is phased out (around $100k). Also others are correct in saying that an LLC can elect to be taxed as an S-Corp. S-Corp is a concept in the tax code, not a form of ownership itself. That is, if you create a corporation with the state, that corporation is just a "corporation", not an S-Corp or a C-Corp. Your corporation will be classified as an S-Corp or C-Corp depending on how you elect to file taxes with the IRS. It's similar with an LLC, which you create with the state, then can elect what tax treatment you will use with IRS: typically as sole proprietorship, partnership, or S-Corp.
- tryitnow 11y agoThat's the problem with hiring any professional, you've got to do the homework yourself to (1) be able to communicate effectively with the professional and (2) make sure the advice you're getting makes sense. This is true for all professions, doctor, lawyers, accountants, etc.
- chuinard 11y agoDoesn't Yelp for doctors, lawyers, accountants, etc solve this problem?
- tempestn 11y agoMy sarcasm detector may be broken, but in short, no. Even a "good" professional can give bad advice. I love my accountant, but I still catch things he's missed occasionally. (And he catches things I've missed more often.) It's a partnership. Unless you're a mega-corp with in-house professionals, you're always going to know your business better than your accountant/lawyer/etc., and you're always going to care at least somewhat more than them too.
- iolothebard 11y agoNolo books are really good in my opinion. I got a degree in Finance so I'd know what to do if I ever made money :-) Looking back it seemed overkill, but maybe it wasn't. S-Corp has it's disadvantages as well (essentially requiring a salary, etc) and can't do things a C-Corp can (plus you have to wait for it to get accepted, which depending on when you start and file, can screw a year's returns up). I've had all 3. LLC is by far the easiest and probably the right choice 95% of the time IMO.
- icedchai 11y agoI'm curious: How are the taxes between an S Corp and a single-person LLC any different? In both cases the income passes through to the owners, right?
- kjurka 11y agoS-Corps can split payouts to the owner into wages and dividends while all LLC income is equivalent to wages. Wages are subject to social security and medicare taxes that dividends are not.
- icedchai 11y agoI think you mean distributions (S Corp), not dividends (C corp), but I get your point.