Taxpayer asks:
Hi Tax Girl,
I had income from multiple sources in 2008 – albeit, not much…it was a bad year 🙁
I briely worked as an independent contractor for a real estate company and received a 1099-MISC for $5,467 of non-employeee compensation.
It was reported under the single member LLC I formed (to my EIN). I created this LLC in June 2008 with the main purpose of pass-through taxation.
In July 2008 I opened a business checking account in the name of my LLC, deposited the $5,467, then wrote myself a check a few days later. I then deposited it into my personal checking account.
For the LLC, I elected to be taxed as an S-corp.
What tax form(s) do I use to report this income, to acheive the pass-through taxation?
Thanks in advance,
Taxgirl says:
The easy answer is that you would file a form 1120-S for the S corporation and then file a form 1040 to report the pass-through income. Depending on the type of income, you will likely file a Schedule C (or E) and report any employment income (I’m guessing you didn’t withhold at the S corporation level) paid to you on a Schedule SE.
But gosh that’s a lot of work.
I am not sure why you elected the S status but if it was only for liability protection and pass-through taxation, I probably would have advised you to keep the SMLLC. For federal tax purposes, an SMLLC is considered a disregarded entity, which means that you wouldn’t have to file a separate return. You would have simply reported the income on your regular form 1040 – with the appropriate related schedules. No extra returns are necessary.
Folks like S corporations for a lot of reasons, but they can often be a bit of overkill for smaller businesses. There are restrictions that can limit your options (health care deductions spring to mind).
I’d highly recommend that you check with your tax pro to confirm that your current set up is what will best meet your needs. You might be able to save some time and aggravation down the road with a structure that’s a bit more simple.
(And psst, tax pros, hold your fire. I know that S corporations can have favorable results in some cases. But be sure and pay attention to the dollar amounts in this post before lecturing me on saving SE tax!)
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Also, not sure about the resident of the taxpayer, but some states and municipalities (hello New York City) tax S corps at the entity level, making them inefficient in at least that respect (NYC also imposes a tax on SMLLCs, but it’s less than the tax on S corps).
Absolutely, a great point! In fact, the state and local treatment of both LLCs and S corporations will vary.
And be sure that the 2553 (S-Corp election) was filed in addition to the 8832 (check the box) form. I think both have to be filed within 75 days of formation if you want S corp and corp status retroactive to day 1.
Would your advise be any different if he was making $54,67 0? I’m sure TP has aspirations of more income in the non-“bad years”.
I’m fairly conservative on the S election front… It would have to be A LOT more IMO to make a real difference – esp if taxpayer has health insurance needs, Social Security issues or would require significant assistance with tax preparation. The incentive to be an S corporation, I’m sure, was related to SE tax. The “savings” on those can often be offset by other costs – the point relating to local and state taxes was well taken, for example.
I just ran the numbers in Philly for a taxpayer who was grossing over $100k and the savings, with health care and other issues taken into consideration – was less than $2k. That doesn’t include the fees to file the additional returns (yes, plural because of state and local). If the numbers come out relatively even, I think the less burdensome approach is best for most taxpayers.
I ran those same numbers for a taxpayer grossing over $250k and the story was very different.
The 2008 S-Corp return was due March 16, 2009. As pointed out by Vinny the S-Corp election form was due in 2008. The IRS has been allowing Form 2553 to be filed with the first S-Corp return if it wasn’t filed previously and there’s a good reason.
If no extension was filed for the corporation, she should file a return as soon as possible.