Embedded Files
updated 12 DEC 2024
Keep in mind that what you are about to read is based on personal experience, information we’ve gathered from the internet, tax books, and consultations with CPAs and tax attorneys. We are not a tax practice and this is not tax advice.
When setting up Draughts & Ledgers, Ltd, we decided to go the route of incorporating a domestic profit corporation here in Massachusetts, then electing for subchapter S treatment, which all means that we setup an S-Corp. Here are some of the additional steps that we discovered in our first year:
Elect Subchapter S treatment. The whole point of forming a corporation was to create a distinct entity completely separate from you personally to protect your personal assets. Now, to simplify the accounting and tax filing, you need to inform the IRS that you wish this corporation to “pass-through” all profits to your personal tax return. This is what makes you an S-Corp. You need to fill out and send Form 2553, Election by a Small Business Corporation to the IRS.
Register with your taxing authorities. There are quite a few that need to know what your company is up to in order to collect what is due. This is a bit more complex than for an LLC because being an S-Corp means that you are employed by your corporation. Congratulations on the new job! Make sure that you pay yourself a reasonable wage, which you can look up on the Department of Labor’s website. If you're not sure where to start, AI may be able to help*. If you are a single-person S-Corp intent on the DIY model, we highly recommend buying and reading Quick and Dirty Payroll for One-person S Corps by Evergreen Small Business as it helps with the basic concepts we employ. It is SO MUCH EASIER to rely on an outside payroll service like OnPay.
Federal Withholding Remittances: The Social Security and Medicare withholdings needs to be reported and remitted at least quarterly. You do this on Form 941, Employer’s Quarterly Federal Tax Return. While employees typically should also have income tax withheld, because the profits of your S-Corp are passing through to your personal tax return, you can keep them off of this form to stay under the $2,500 limit (this allows you to remit FICA tax payments quarterly instead of monthly) and instead make quarterly payments to satisfy your Income Tax obligations with Form 1040-ES, Estimated Tax for Individuals. We have found it advantageous to register with the EFTPS Electronic Federal Tax Payment System. While the remittance can be made electronically, the paper return must still be mailed in unless you use a third-party software like TaxBandits.
State Withholding Remittances: Since you are paying yourself wages, the State (Commonwealth, in our instance) also wants to know what you’re making and withholding. In Massachusetts, this is reported twice, once when calculating Unemployment Insurance liability (below) and once through MassTaxConnect, where it is remitted. Keep in mind that the Commonwealth expects monthly filings even if two out of the three months in a quarter have no wages. So make those monthly filings with MassTaxConnect or estimated withholding, fees, and penalties will be accessed!
Massachusetts Paid Family & Medical Leave (PFML): While we're in MassTaxConnect, setup your PFML account. This is another quarterly filing where you enter your wages and your obligation (.88% of wages paid) is calculated for you. If you are an employer with fewer than 25 covered individuals, you can (and are expected to) opt-out of the .42% contribution for the medical portion, leaving only the .46% rate on the employee's wages.
State Unemployment (SUI): Being an employer means contributing to the State’s unemployment fund. This can be done quarterly. Register with the Division of Unemployment Assistance. Log in quarterly to enter your wages and have your contribution calculated. You cannot do this calculation yourself. If you’re curious, learn about employer contributions to DUA. The rates vary between 0.73% to 11.13%. As of this writing, newly subject employers in the non-construction industry pay a rate of 2.13%. These rates don’t include the 0.056% contribution rate for the Workforce Training Fund.
Federal Unemployment (FUTA): When you registered with EFTPS, you also registered for this annual filing. You’re likely using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
State Sales/Meals Tax: Did you business sell taxable items or serve taxable food? If you did, you should have collected taxes from your customers and the state would like its money in a timely manner. If this applies to you, you’ll want to register this in your MassTaxConnect account.
State Corporate Excise Tax: This is another annual filing you’ve already registered for. This is an insanely complex document that ends up at the same answer for many S-Corps. It is filed through MassTaxConnect. If you want to see the paper return, it is Form 355S – S Corporation Excise Return (2017 – Draft). The tax rate for 2017 is $2.60 per $1,000 on taxable Massachusetts tangible property and a tax of 8.00% on income attributable to Massachusetts with a minimum excise of $456. Hopefully your tax software / tax advisor is handling this for you.
State Workers’ Compensation Insurance: If you or only Officers are employees of your corporation, you can opt out of this insurance by filing Form 153 – Affidavit of Exemption for Certain Corporate Officers. If you have no other employees, you do not need to secure Workers' Compensation insurance. If you do, pay-as-you-go options through your payroll service are highly recommended and usually competitively priced.
Social Security Administration: Since you’re an employee of your corporation, you must file wage and withholding data with the SSA. There are services to do this and also 1099-NEC and 1099-MISC forms. If it’s just you and up to 49 employees, you can do this yourself for free with the Business Services Online. Be warned that this is an intimidating government website and there are a couple of tricky questions to be answered. Fortunately, all of the information can be pulled from the Form 941s you’ve been filing Quarterly. This is just a year-end summary to help your employees (you) file their personal income taxes.
Post your required Notices. As silly as it sounds, if you were to get visited by an official, they may ask to see your Notices to Employees. You should have them printed and on-hand for such a request. We keep ours on a clipboard behind the computer monitor. Both the Commonwealth and the Federal Goverment have tools to help you figure out which ones you need. You can find them here:
FirstStep Poster Advisor (Federal requirements)
Keep in mind that not all posters are required. These two resources provide all necessary posters free of charge for printing on your own paper. There are services (and more than a couple scams) that may try to scare you into buying something you could get for free with just a little effort. For our operation, there were 9 posters, one of which isn’t really required because we file the Affidavit of Exemption from Workers’ Comp.
Make your filings:
31 January – State Excise Tax for prior year (MassTaxConnect)
31 January – State UI for Q4 (MA Division of Unemployment Insurance)
31 January – State Withholding, Form M-941 for Q4 (MassTaxConnect)
31 January – MA PFML for Q4 (MassTaxConnect)
31 January – Federal UI, Form 940 for prior year (EFTPS)
31 January – Federal Withholding, Form 941 for Q4 (EFTPS)
31 January – 1099 Independent Contractors (if any) (IRS)
31 January – W2 & W3 with Social Security Administration (SSA)
15 March – State Excise Tax Return for an S Corporation, Form 355S (MassTaxConnect)
15 March – U.S. Income Tax Return for an S Corporation, Form 1120S (IRS)
30 April – State Excise Tax estimate payment for Q1 (MassTaxConnect)
30 April – State UI for Q1 (MA Division of Unemployment Insurance)
30 April – State Withholding, Form M-941 for Q1 (MassTaxConnect)
30 April – MA PFML for Q1 (MassTaxConnect)
30 April – Federal Withholding, Form 941 for Q1 (EFTPS)
31 July – State Excise Tax (MassTaxConnect)
31 July – State UI (MA Division of Unemployment Insurance)
31 July – State Withholding, Form M-941 for Q2 (MassTaxConnect)
31 July – MA PFML for Q2 (MassTaxConnect)
31 July – Federal Withholding, Form 941 for Q2 (EFTPS)
31 October – State Excise Tax (MassTaxConnect)
31 October – State UI (MA Division of Unemployment Insurance)
31 October – State Withholding, Form M-941 for Q3 (MassTaxConnect)
31 October – MA PFML for Q3 (MassTaxConnect)
31 October – Federal Withholding, Form 941 for Q3 (EFTPS)
Annually – Share your Affidavit of Exemption from Workers’ Comp (MA Department of Industrial Accidents) with your Worker's Compensation insurance holder.
Annually – Hold Shareholder’s Meeting and take Minutes
Annually – Annual Report (MA Secretary of Commonwealth)
This is, of course, A LOT. I handled my own solo payroll for 5 years, screwing up every filing at least once. The lost pandemic-era paper 941 filings were the most frustrating because the EFTPS payments were being returned almost a year later with the filing being processed and a letter demanding payment sent concurrently! If you have even ONE other employee, it is TOTALLY WORTH the ongoing fees to have an external payroll handle all this for you. You still need to do the setup to establish your identifying numbers with each agency
Is it worth it? Of course, that depends on your particular circumstance. Let’s consider ours (Draughts & Ledgers, Ltd). I’m a bookkeeper living outside of Boston. Using the Department of Labor’s Bureau of Labor Statistics chart, the median income in my profession in my area is $46,890. I prefer round numbers, so let’s make it $48K instead. So each quarter I pay myself $12K. So each quarter, the following is due:
Federal Withholding (FICA, 15.3% of $12,000 wages = $1,488 SS + $348 Medicare) = $1,836
MA PFML (.46% of $12k) = $55.20
State Unemployment (2.288% (1.35% + 0.056% WTFP + .34% EMAC + .542% COVID) on first $15K) = $343.20
Then, annually, the following fees are also paid:
Federal Unemployment ($48K – $41K * .6%) = $42
State Corporation Annual Report ($100 online + $9 expedite fee) = $109
State Corporate Excise Tax = $456
So, ($1836+$56) * 4 + 343 + $42 + $109 + $456 = $8,518. At the same time, an LLC would cost $515 in filing fees. Sounds like a terrible deal, right? Well, don't forget the extra $967 to have your tax preparer create your 1120S and K1! That's a $9,000 annual difference to go S-Corp instead of sticking with the LLC!
The advantage of the S-Corp is not in paying yourself wages, but in taking distributions. These distributions are considered unearned, passive income and are not subject to self-employment income taxes, which at 15.3% represents both Employee and Employer contributions to Social Security and Medicare wages (FICA). Since FICA taxes were paid throughout the year on the earned $48,000, there are no additional self-employment taxes assessed on the 1040. For the LLC, ALL of the business profits are subject to self-employment taxes (15.3%). Half of this is treated as a deduction to reduce your taxable income so let's focus on the 7.65% on 100% of your profits vs the $9,000 in extra business expenses that reduce your profits. Given the difference in filing fees, unemployment contributions, and everything else, how much in distributions must I have to breakeven on going the S-Corp route over the LLC route?
This calculation is tedious. Fortunately, this calculator helps to estimate your tax savings! Most CPAs will tell you that it's not worth even considering going S-Corp until you're seeing $100,000+ in profit on your Schedule C. While the breakeven may be closer to $60,000, as someone who went S-Corp out of the gate and didn't hit that $100,000 in the first couple of years while going the DIY payroll model, S-Corp is a HUGE PITA that you hopefully now better understand.
* AI is not a definitive source. Using a Large Language Model may help point you in the right direction, kinda like this article. In particular, I like how the prompt includes instruction to cite sources.
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