Jovan Johnson, MBA, CFP®, CPA/PFS

 

Running an S Corp comes with its share of complexities, from managing compliance to optimizing tax benefits. Partnering with an S Corp CPA can be a game-changer in navigating these challenges. They can ensure your S Corp stays compliant while maximizing potential tax savings. Getting things right from the start is critical, as mistakes can lead to costly legal and financial consequences. It is far better to set up your S Corp correctly from the beginning than to deal with expensive clean-ups later on.

In this article, we will explore compelling reasons why hiring an S Corp CPA is a smart investment that could save you thousands in taxes.

1.) Filing Tax Returns on Time and Accurately

If you previously classified your business as a sole proprietorship, you likely filled out Schedule C and attached it to your personal income tax return (Form 1040). However, as an S Corp owner, you must file a separate business information tax return (Form 1120S). This return comes with its own complexities and specific deadlines.

As both the employer and employee of your S Corp, you likely pay yourself through both salary and distributions. The distribution portion will be reported on Schedule E, which is attached to your personal income tax return. Your salary from the S Corp will be included in your personal income tax return as W-2 income.

Currently, S Corp returns are due by March 15th (or the following business day) or September 15th (or the following business day) if an extension is filed. Missing these deadlines can lead to significant penalties and interest, potentially costing you thousands.

A knowledgeable CPA will assist you in navigating these complexities. This expertise not only helps you avoid penalties but also allows you to take advantage of potential tax savings.

2.) Ensure You Follow Reasonable Salary Requirements

As both owner and employee of an S Corp, you will pay yourself through salary and distributions, with income taxes applying to both. However, you only pay self-employment taxes on your salary, while distributions are exempt. If you want to learn more about how to pay yourself as an S Corp owner, read one of our previous articles.

It is crucial to pay yourself a reasonable salary. Although the IRS does not explicitly define what constitutes a reasonable salary, working with a CPA to determine the appropriate amount is essential. Factors to consider include your role in the business, years of experience, location, hours worked, and the company’s profitability. If your reasonable salary is significantly less than your total business profits, electing S Corp status could offer notable tax advantages.

An S Corp CPA can help you optimize the balance between salary and distributions to minimize employment taxes while adhering to the IRS’s “reasonable compensation” rule. 

3.) Ensure Payroll Is Run Correctly and Timely

As an S Corp owner who acts as both the employer and employee, you must run payroll for yourself. The frequency of running payroll must comply with applicable state laws, ensuring that you meet the necessary requirements. Additionally, it is important to consider the various payroll taxes, which may include:

  • Self-employment taxes
  • Federal Income Taxes
  • State Income Taxes
  • Local Income Taxes
  • Federal Unemployment Insurance (FUTA)
  • State Unemployment Insurance (SUTA)
  • State Disability Insurance (applicable in some states i.e. CA)

Working with an S Corp CPA can ensure that your payroll process is set up correctly and that you don’t overpay in taxes. This process can become particularly challenging when incorporating additional elements such as health insurance or retirement plan contributions.

4.) Strategic Financial Planning

Financial planning is essential for building a sustainable and thriving S Corp that aligns with your personal life and goals. A CPA can provide long-term financial strategies, including retirement planning, succession planning, and scaling the business in a tax-efficient manner.

One of the most effective ways to save on taxes as an S Corp is by contributing to a self-employed retirement plan. There are various plans to consider based on your intended contributions, the structure of your business, and your retirement objectives. An S Corp CPA can help you evaluate these options, ensuring they align with your overall business and financial goals.

5.) Ensure You Pay Adequate Quarterly Estimated Tax Payments

A common mistake S Corp owners make is failing to make quarterly estimated tax payments to the appropriate tax agencies. If your S Corp is profitable, you are likely only paying part of your profit as a salary, with the rest taken as a distribution. However, the profit after your salary payment and other qualified business expenses is still taxable.

It is essential to work with an S Corp CPA to ensure you pay these taxes quarterly to the proper agencies. Failure to do so can result in penalties and interest, potentially costing you thousands of dollars.

6.) Ensure You Take Advantage of Qualified Business Deductions 

Taking advantage of qualified business deductions is essential for maximizing your tax savings as an S Corp owner. Working with an S Corp CPA helps you better understand eligible business deductions. An S Corp CPA will help you establish an efficient bookkeeping system to ensure you capitalize on all available tax deductions. Additionally, they can provide insights into deductions specific to your industry, assist you in navigating complex tax regulations, and identify potential deductions you may not have considered.

Tax planning is crucial for fully maximizing deductions. Collaborate with your CPA to develop a strategy that aligns your expenses with your overall financial goals. This proactive approach ensures you are maximizing deductions while remaining compliant with IRS regulations.

By implementing these strategies, S Corp owners can maximize qualified business deductions and achieve significant tax savings.

7.) Audit Support

If the IRS or state tax authorities audit your S Corp, a CPA can provide representation, manage paperwork, and offer peace of mind throughout the process. Additionally, an S Corp CPA ensures your business maintains accurate financial reporting, which is crucial in the event of an audit.

Final Thoughts

S Corps are subject to specific tax regulations, including salary requirements, shareholder distributions, and quarterly tax filings. A CPA plays a crucial role in ensuring that the S Corp remains compliant with IRS rules, thereby avoiding potential penalties. By hiring a CPA, S Corp owners can focus on growing their business while maximizing tax benefits and maintaining compliance.

Are you interested in working with an S Corp CPA? Please feel free to book a free consultation with us.

Disclosures

None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.