We’ve helped a number of business owners and entrepreneurs set up an S corporation this year. So I thought it might be a good idea to create a little checklist for these “first year” S corporations.
None of the stuff that follows is difficult or tricky. But you do want to make sure you get the following tasks done by the deadline.
Note: If you’re a client of ours and you have a question about any of this stuff, call the office.
Confirm the S Election Acceptance
A quick first point: If you or your accountant elected Subchapter S status, and it’s been more than a couple of months since you filed the paperwork, you should now have an official-looking letter from the IRS that acknowledges your new status.
If you haven’t received such a letter, therefore, call the Internal Revenue Service and ask them to confirm your election has been successfully processed. (Here’s a webpage with contact information.)
If your election has not been successfully processed, call your accountant and ask for their help to get the election request back on track. (You really want to have this first step nailed down before the year goes too far along.)
Double-check on your Washington State Master Business License
Almost all S corporations in the state of Washington conduct an active trade or business. And if your S corporation conducts an active trade or business, you need a Washington state master business license.
Accordingly, if you’re not sure you’ve got such a license, call the Washington State Department of Revenue and confirm that you’ve got such a license. (Check out this state website page for contract telephone numbers.)
Note: If you’ve been filing and paying taxes related to a Washington state B&O tax return (also known as the gross receipts tax return) on a monthly, quarterly or annual basis, you have a master business license.
Caution: In some areas, the local municipality also requires a business license. Call city hall if you have questions about this in your locale.
Verify Shareholder-employee Payroll
S corporations save business owners lots of tax if you set them up correctly and if you don’t get greedy or act foolhardy.
But the one big rule is, you need to pay reasonable shareholder-employee compensation before the year ends. (If you carefully read the IRS acceptance letter for electing Subchapter S status, you may recall rather threatening language that emphasized this requirement.)
Accordingly, make sure that you have already or are on track to pay reasonable shareholder-employee compensation before December 31.
You should be able to pay your wages in any manner that gets you to a reasonable value by the end of the year.
For example, suppose you’re paying yourself $40,000 a year. (This is the average shareholder-employee compensation in a one-owner S corporation.)
You could pay yourself $3,333 a month. Or $10,000 a quarter. Or simply $40,000 sometime during the year.
You just need to make sure that by the time the year ends, you’ve paid yourself reasonable salary.
Note: You can probably pay your payroll in a way that doesn’t trigger a requirement to use the US Treasury’s eftps.gov system. (See here for a quick-and-dirty way to do $10,000 a quarter in payroll without using the eftps system.) But you may want to sign up for and use this system anyway. It’s pretty convenient for remitting payroll taxes to the IRS.
Prepare Quarterly Payroll Tax Returns
Even a single owner, one “shareholder-employee” S corporation needs to prepare quarterly 941 payroll tax returns. So you want to take care of these returns.
The 941 returns tell the Internal Revenue Service what wages you’ve paid for a quarter, calculate the taxes your new S corporation must deposit, and in some cases, provide a way for your S corporation to make small “de minimis” deposits, too.
As noted earlier, I provide an example, nearly complete 941 payroll tax return here if you want to just bang out a basic version of these quarterly returns yourself. (The returns are due by the end of the month that follows the quarter: The first quarter 941 return, for example, is due by April 30.)
Note: Most states have quarterly payroll tax returns too. But in Washington State, typically shareholder-employees don’t have payroll tax returns to file with state on a quarterly basis. The state’s unemployment insurance doesn’t cover shareholder-employees working as officers unless you decide to provide such coverage. Furthermore, the state’s workers compensation insurance (also known in Washington state as Department of Labor & Industries) also doesn’t cover shareholder-employee-officer types unless you proactively decide to do this.
Note: If you add additional non-shareholder employees, you will need to set up employment security and labor and industries accounts with the appropriate state agencies in order to pay these state-level payroll taxes.
Prepare to File 1099 Information Returns
If your S corporation pays any unincorporated vendors (a consultant, say, or some contract laborer) more than $600 for services, you’ll need to file 1099 informational returns with the Internal Revenue Service after the year ends. (Your S corporation return, by the way, will ask you and your accountant to confirm you’ve done the right thing.)
Accordingly, if you are working with such vendors or outside contractors, be sure you get them to fill out a W-9 well before the year ends (available here).
Tip: Sorry to be so hardcore, but a good time to get the W-9 filed out is when you next pay someone for their work. “Hey Bob, I’m just getting ready to mail out your check, but I realize we don’t have a current W-9 on file for you; can I get you to fill that out ASAP so I can pay you?”
Prepare and File Year-end Payroll and Vendor Returns
Okay, I don’t want to bum you out, but right after the calendar year ends, you’ve got several payroll and independent contractor tax returns to prepare and fill out. Many of these items are due in January. Some are due later in February. What you want to do, however, is have all of these items prepared and then sent out in January.
- 940 FUTA payroll tax return (due January 31)
- W-2/W-3 tax returns (due to employee by first work day in February)
- 1099/1096 tax returns (due to contractor by first work day in February)
Set Up Your Pension
If you enjoy a profitable first year, you may want to set up and fund a pension plan for your employees or for your single shareholder-employee.
The common popular pension option for a single shareholder-employee S corporation is a SEP-IRA. And that plan needs to be set up and the S corporation contribution made before filing your corporation tax return.
Note: Other pension plan options require an earlier set up and funding date. A Simple-IRA pension plan, for example, needs to be set up by October 1 and as a practical matter funded before the year ends. Set up deadlines for 401(k) plans vary, but these plans always need to be set up before December 31 and sometimes quite a bit earlier than that due to plan-specific requirements and any paperwork processing lead times required by the plan administrator.
Prepare either 1120S tax return or the 7004 extension by March 15
The final step? You need to prepare or have someone else prepare the 1120S corporation tax return.
Not to beat this thing to death, but note the March 15 date. That’s a month earlier than the usual April 15 due date most taxpayers are used to.
Tip: Many CPA firms (ours included) like to do S corporation tax returns early in year and then do all of the year-end tax returns for the client: W-2/W-3 and 940 if necessary, the 1099/1096 if necessary, and then the full 1120S tax return.
You can easily extend the due date for an 1120S tax return by filing a 7004 extension form. This form moves the due date out six months into the future to September 15.
Be sure to file an extension if you think you may be late. The IRS assesses a heavy penalty for late S corporation tax returns: $195 per month per shareholder. (For example, if your S corporation has husband and wife shareholders, the monthly late penalty equals $390 (two times $195). Yikes.