Tag Archives: business advisory

Assessing the S corp

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business structure

The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible, and with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.

Tax comparison

The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns, and the shareholders pay tax at their individual income tax rates.

But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.
You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.

S eligibility requirements

If S corp status makes tax sense for your business, you need to make sure you qualify – and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:

  • Be a domestic corporation and have only one class of stock,
  • Have no more than 100 shareholders, and
  • Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as insurance companies.

Reasonable compensation

Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.

Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.

Pros and cons

S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

How to avoid getting hit with payroll tax penalties

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payroll tax penalties

For small businesses, managing payroll can be one of the most arduous tasks. Adjusting income tax withholding based on the new tables issued by the IRS earlier this year added to that burden. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government.

If you don’t, you could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company.

The 100% penalty

Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.

If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a “responsible person.”

The corporate veil won’t shield corporate owners in this instance. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.

When the IRS assesses the 100% penalty, it can file a lien or take levy or seizure action against personal assets of a responsible person.

“Responsible person,” defined

The penalty can be assessed against a shareholder, owner, director, officer or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:

  1. Be responsible for collecting, accounting for and remitting withheld federal taxes, and
  2. Willfully fail to remit those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.

Prevention is the best medicine

When it comes to the 100% penalty, prevention is the best medicine. So make sure that federal taxes are being properly withheld from employees’ paychecks and are being timely remitted to the federal government. (It’s a good idea to also check state and local requirements and potential penalties.)

If you aren’t already using a payroll service, consider hiring one. A good payroll service provider relieves you of the burden of withholding the proper amounts, taking care of the tax payments and handling recordkeeping. Contact us for more information.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Taking it to the Streets: 7 Marketing Strategies to Consider

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marketing strategiesWith such intense focus on digital marketing these days, business owners can overlook the fact that there are actual, physical places to interact with the buying public. Now that spring is here and summer is on the way, it’s a good time to rediscover the possibilities of “street marketing.” Here are seven strategies to consider:

1. Set up a booth at an outdoor festival or public event. Give out product samples or brochures to inform potential customers about your company. You might also hand out small souvenirs, such as key chains, pens or magnets with your contact info.

2. Dispatch employees into a crowd or neighborhood. Have staff members walk around outdoor events or busy areas with samples or brochures. Just be sure to train them to be friendly and nonconfrontational. If appropriate, employees might wear distinctive clothing or even costumes or sandwich boards to draw attention.

3. Leave brochures at local businesses. While employees are walking the streets, they may encounter other businesses, such as hair salons and fitness centers, that allow visitors to leave marketing brochures. Some let you leave such information for free, but others may charge a nominal fee. Instruct employees to ask first.

4. Post fliers. Institutions such as libraries, universities and apartment buildings often have bulletin boards where businesses can post information about services or events. Take advantage of such venues.

5. Host a reception or social event. Street marketing doesn’t have to happen on the street. You can become the event by sponsoring a gathering at a restaurant or similar venue. Socializing tends to put current customers and prospects in an approachable mood and gives you a chance to talk up your latest products or services.

6. Hold information sessions on topics of expertise. In a less social but more informative sense, you can position yourself as an expert on a given topic to market your business. For example, a home alarm system company could host a crime-prevention seminar. You might display product or service information at the session but not make a sales pitch.

7. Attend small business seminars or chamber of commerce meetings. If yours is a B2B company, these gatherings can be a great way to subtly publicize your services to other local businesses. Even if you sell directly to the public, you may be able to pick up some sales leads or at least get a better feel for your local economy.

There’s no denying the sea change in marketing over the past decade or two. Digital approaches are now dominant. But augmenting your online activities with some good old-fashioned legwork can help boost your success. For further information and ideas about growing your business, please contact our firm.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.