S-Corporation Follow-Through

Funny from Funny About Money wrote in with additional questions about the advantages and disadvantages of structuring a business as an S-corporation.   I’m sure other folks have similar questions, so I thought I’d respond in a post to help readers find the answers (rather than leaving them buried deep in the comment boneyard).

Funny wrote:

Thank you for this information!

My tax lawyer formed an S-corp for me and then apparently left town. Haven’t been able to get an answer about how I pay myself and when, how, and where I send the taxes. Or about these idle questions:

Do you have to pay yourself on a monthly or semimonthly basis? Or are you allowed to pay your “wages” quarterly or yearly?

If you pay yourself (this assumes you have no other employees) more often than once a year–say, monthly or quarterly–does the corporation have to send in the FICA and other taxes each time a paycheck is disbursed? How? Where?

And…uhm… This is going to sound stupid, but given the amazingly stupid stuff I’ve encountered in trying to figure out Medicare and Social Security, “stupid” may be the order of the day. So here goes: there’s a law that says you have to prove each employee is a US citizen. Do I the corporation’s employee have to prove to me the corporation’s director that I was born in the USA? Is there some government agency where I have to depose that my employee (me) is a citizen? What will happen if I just say, should I be challenged, that I’ve seen my birth certificate and believe it to be authentic?

Bummer about your tax lawyer.  I hope he’s not playing canasta with Bernie Madoff.

Speaking of lawyers, let me assure you / warn you that I am not one.  But I do have one, and he insists that I say the following:  the fact that I am attempting to answer your question does not mean that we have a client relationship.  The following does not constitute legal advice — it is just my best interpretation of your questions and of the state and federal regulations.

1.  When, how, and where to pay your taxes: This is the downside of being an S-Corp — lots of paperwork.  Many folks hire an accountant.  I hear Quickbooks can be a help (though I don’t use it myself).  You sound like a DIY kind of person, and that’s great.

The procedures vary depending on what state you live in (and work in, should they be different).  You didn’t mention your state in your email, so I took a quick look at your blog.  The post on xeriscaping gave me my first clue that you probably don’t live in Massachusetts (where I live).  A little more poking around, and I came to the conclusion that you probably live in Arizona.

When: Most tax payments are due quarterly.  For Federal taxes, there’s a convenient calendar in Pub 15:  Tax Guide for Employers.  For Arizona income tax withholding, the schedule is on this list of FAQ.

Here, I use the term “quarterly” loosely.  For Federal estimated tax payments, the first installment is due April 15th, the second is due two months later on June 15th, the third is due September 15th, and the fourth is due four months later on Jan 15th.  Go figure.

What and Where: You are both an employer and an individual taxpayer.  You must file the withholding for your employees (that’s you) and pay an individual’s estimated taxes (that’s for you, again).

As an employer:

• State: Requires withholding for unemployment and state income tax.  In Arizona, you can file income tax withholding through a web service.  The Arizona Department of Revenue has a great website, for additional information.  The Arizona Unemployment program is administered through the Department of Economic Security.  You register with the DES and pay Unemployment tax through them.
• Federal: Requires withholding for federal income tax, FICA (Social Security), and Medicare.  You pay the Federal Unemployment Tax (FUTA) separately.  IRS Pub 15 is a Tax Guide for Employers.

As an individual taxpayer:

• State: If your income exceeds $75,000/year, you’ll owe quarterly estimated payments.  That’s Arizona Form 140ES.
• Federal: Estimated income tax payments are filed using Form 1040-ES.

2. Do you have to pay yourself on a monthly or semimonthly basis? Or are you allowed to pay your “wages” quarterly or yearly?

As I read the government publications, I don’t see anything about a requirement for the frequency of payments.  Federal estimated income tax is due quarterly, so I think it would be a good idea to pay yourself at least quarterly to avoid penalties and/or interest.

3.  If you pay yourself (this assumes you have no other employees) more often than once a year–say, monthly or quarterly–does the corporation have to send in the FICA and other taxes each time a paycheck is disbursed? How? Where?

You are required to pay tax payments quarterly.  If you elect to pay yourself more frequently, you are only required to make the tax payments quarterly.

4.  And…uhm… This is going to sound stupid, but given the amazingly stupid stuff I’ve encountered in trying to figure out Medicare and Social Security, “stupid” may be the order of the day. So here goes: there’s a law that says you have to prove each employee is a US citizen. Do I the corporation’s employee have to prove to me the corporation’s director that I was born in the USA? Is there some government agency where I have to depose that my employee (me) is a citizen? What will happen if I just say, should I be challenged, that I’ve seen my birth certificate and believe it to be authentic?

There’s no such thing as a question too stupid, when it comes to matters of our government.  Employers are required to verify that prospective employees have the right to work in the US.  I don’t see why you should be exempted.  Fill out INS form I-9.  Photocopy and attach a copy of your birth certificate.  Form I-9 is not filed with any government organization.  The employer is required to retain it.  Should your firm ever be audited by the INS, you would present it.  The government accepts a birth certificate as legal proof of birth — you won’t need to have your Mom there to vouch for you.

Thanks for the good questions, Funny.  Let me know if you have more.

Tags: s-corp, small business, small business taxes