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9 Replies Last post: Apr 28, 2008 1:08 PM by nytaxguy

Am I being double taxed?

Feb 15, 2008 11:08 AM

Centauri 7 posts since
Feb 15, 2008

I have funded my business, S Corp, with my personal money,
state fee $300
funding $1500
expenses $30

I plan to pay myself w2, are the funds that I've invested into the company
subject to double taxation? Since its my personal money I've already been
charged income tax on the $1830, If I pay myself (w2) with part of that $1830, then
that money seems to be double taxed? is that so? Is there a deduction for
the money invested?

I created a corportation with 1000 shares at $1, perhaps I should have only invested
exactly $1000... if thats the case can I then concider the remaining $830 as a personl loan to the company, which is to be paid back w/o intrest.

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LUCKIEST 5,749 posts since
Aug 6, 2007

1. Re: Am I being double taxed? Feb 15, 2008 11:40 AM

Welcome to this web site. Am I being double taxed?? Good question.
There is an Accountant who posted in the last 2 or 3 days who said
FREE income advice. Look for her posting.
If i come across her posting, I will get back to you.
Hopefully other accountants will answer you.
LUCKIEST

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Uncle Leon 50 posts since
Dec 28, 2007

2. Re: Am I being double taxed? Feb 15, 2008 6:02 PM

First of all let me say that I'm not an accountant...just a retired business man. Therefore, the advise I offer should be confirmed with your accountant. (*You DO have an accountant, don't you?)*

I realize this seems a bit confusing. But it's really not.

If you treat the funds that you have used to start your business as a personal loan to your business. There is no tax to your business on the borrowed money. There IS tax on earned income. Therefore, as you earn income, and use part of it to pay back your personal loan, you will pay tax on (NET, not gross) profit.

By March 15th, you must file an "S" corp income tax return. Your personal tax return is separate, but can be sent in at the same time, or a month later. There will be no Tax to your (personal) self on the money that you receive from your business as a paid back loan (since you said it was an interest free loan). If it was not interest free, your (personal) self would have to pay tax on the interest. Of course there IS tax on the salary you pay yourself, and on the business (net) profit.

Incidently; if you treat this as an investment (instead of a loan) to purchase stock; and then if your business later fails, and you (personally) loose money with this investment; you can deduct your losses against any othern personal income (on your personal income tax form.

May I add...If you don't have an accountant, I strongly (*strongly*) recommend that you interview a few and select the one most ideal for you and your business. This is REALLY a necessary business expense. Because you are on a tight budget (as everyone is at start-up), you can probably utilize Quickbooks. If you aren't sure how to set up your accounts, your accountant can advise you. as time goes on, you can adjust these accounts. That way, you can do your own book keeping and use your accountant just for occasional advise, as needed,, and for doing your quarterlies and year-end taxes.

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Centauri 7 posts since
Feb 15, 2008

3. Re: Am I being double taxed? Feb 16, 2008 4:57 PM

Everyone,

Thanks for all your help. I currently do not have an accountant. I can definitly see that I will definitly have to invest on a good accountant.

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LUCKIEST 5,749 posts since
Aug 6, 2007

4. Re: Am I being double taxed? Feb 16, 2008 5:41 PM

in response to: Centauri

How long have you been in business??
Everybody in Business should have an Accountant, A Lawyer and
maybe an insurance Agent.
LUCKIEST

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Centauri 7 posts since
Feb 15, 2008

5. Re: Am I being double taxed? Feb 16, 2008 6:19 PM

I am an IT consultant working for a small company, the CEO and myself. My company has a contract with NASA, my boss has decided to persue other intrest. We decided that I should start my own company to continue the engangement at NASA. So I decided to start up an S-corp and contract myself to NASA thru my company name. I do have plans (vision) to grow the company.

To be honest, I'm great engineer with a background product data management. I can come up with techincal solutions, train and guide other engineers to implement a solution. But I'm not a business savvy individual. So I can use a lot of help in this department.

Thanks

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dublincpa 87 posts since
Jan 29, 2008

6. Re: Am I being double taxed? Feb 17, 2008 9:14 AM

in response to: Centauri

Uncle Leon was on the right track. You are not double taxed. You shold probably file an extension for the S Corp to give you time to get things in order.

Feel free to email me at dublincpa@gmail.com for a better explanation, but here is how it works.

You put in (rounded to make my life easier) 2K. 1K was capital and should stay in the corp until liquidation. The second 1K is a loan from you to the corp. I always draw up Demand Notes on shareholder/corp loans, even when they are small. It just make life clean.

Taxable income: Say in year one you receive 10K gross receipts from customers and have 3K operating expenses and 2K of startup expenses, you will pay tax on your 1040 on 5K whether or not you ever take a dime out of the corp. That is how S corps work. Any W-2 you take reduces the S Corp flow through income, but still hits your 1040 net of the employer FICA, FUTA and SUTA. In year two you do nothing. In year three you liquidate. You will receive 7K tax free. The 2K you put in + the 5K income you were taxed on in year one.

Cash flow: In the above example, there should be 7K in the bank if you have taken nothing. 2K + 10K - 3K - 2K = 7K

Besides Pass Thru and W-2 income, the final part that comes into play for taxes is Basis. Loans from third parties, out of pockets expenses and a host of other issues can quickly complicate what appears to be simple.

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Centauri 7 posts since
Feb 15, 2008

7. Re: Am I being double taxed? Feb 17, 2008 4:40 PM

in response to: dublincpa

Thanks all,

I now see that I'm not being double taxed, thats great news. I understand how pass thru taxes work... However paying myself as w2 under the Scorp structure looks like I'm paying more in taxes for my income than I would if I structured a sole proprietorship, due to the FICA, SUTA, and FUTA taxes that I'm now required to pay. Is there something that S corp has, that offsets this additional loss

When i filed for my EIN at the irs.gov site, I recieved a documentation that indicated that I have until 4/30/08 to file my 941. I started my corp in 1/8/08, since things move a bit slow with a goverment contract I'm still waiting to phase my bosses company out and replace it with mine. I've been reading some docuementation that states that some corp taxes have to be paid every month, and some every week, depending on the income of the corp. Well Centauri has currently made $0. If my company has not recieved the contract by the end of march, then I'll file 941 with lots of $0's, is it safe to assume thats correct?

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dublincpa 87 posts since
Jan 29, 2008

8. Re: Am I being double taxed? Feb 17, 2008 6:34 PM

in response to: Centauri

If you W-2 yourself for the entire net profit of the corporation, you would pay more than a sole prop by the total of SUTA and FUTA taxes. However, you will save on SE taxes if your W-2 is less than the net profit from the corp. In addition, you will not pay SE taxes on any employer retirement contributions like a SEP or any self insured health insurance deductions. In the long run, you will pay less in taxes than a sole prop as long as the corp makes enough for you to draw a living wage and some benefits.

Even if you can't get a group plan, you can establish a benefit plan somewhere between Sections 105 and 106 to reimburse yourself for the premiums and take the SE Health Insurance deduction.

I would paste in the Treasury Reg Sec 1.106-1, but trying to paste to this site always freaks out my pop up blocker.

Basically, once the corp earns enough for you to take a salary then you will start making tax deposits at your bank with Form 8109-b or by EFTPS (recommended for convenience). By the 15th of the following month, you will need to deposit the 15.3% FICA + Fed withholding for your payroll the prior month. Once you exceed $50K in total taxes for a year, they will tell you to make deposits more often.

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nytaxguy 15 posts since
Apr 28, 2008

9. Re: Am I being double taxed? Apr 28, 2008 1:08 PM

If you keep the books correctly and file a tax return consistent with the books you will not be double taxed. Any investment in the corporation would operate like an investment in any public company. It would not be taxed but you would also not get a deduction for it. It would reside in the equity section of the balance sheet. Any S-corp income after business expenses would be taxable to you on your individual return. You are allowed to take out tax free distributions from the S-corp equal to S-corp income from which you would then theoretically pay the tax and put the rest in your pocket. Be careful that you pay yourself a reasonable salary for the services you provide the S-corp. The reason for this is that s-corp income shows up on your individual return on Sch E and therefore escapes self-employmet tax. IRS will allow that only if they feel your salary is reasonable for your services.

Best advice... get in contact with an accountant. I am a CPA in NY and would be willing to help you with any specific bookkeeping or tax issues.

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