Recommend Solo 401K Platform – Solo 401K

This guide compares how Sole Proprietorships (or Single-Member LLCs) and S Corporations (S-Corps) affect Solo 401(k) contribution potential, tax exposure, and administrative responsibilities.

Solo 401(k) Contribution Comparison (Based on $400,000 Profit)

Analysis: Sole Proprietor vs. S-Corp

Sole Proprietor or Single-Member LLC

Pros:

• Simple to operate, no payroll setup needed.

• Easier to max out retirement contributions under Solo 401(k) rules.

• All profits (after adjustment) are eligible for employer-side 401(k) contributions.

Cons:

• Entire net income is subject to self-employment tax.

• Limited tax planning flexibility compared to an S-Corp.

S Corporation

Pros:

• Split income between W-2 salary and distributions to reduce self-employment taxes.

• Distributions are not subject to FICA/SE tax.

• Better long-term tax planning as income scales.

Cons:

• Requires formal payroll and additional administrative work.

• 401(k) contributions based only on W-2 wages.

• A high salary may be required to reach the Solo 401(k) cap.

Which Option Is Right for You?

If you are located in the Bay Area and earning over $150,000, setting up an S-Corp in California may offer meaningful tax savings over time. However, if you prefer a leaner structure while still contributing aggressively to your retirement, a Sole Proprietorship or Single-Member LLC may serve you better.

Talk to a Bay Area Tax Advisor

At Flex Tax and Consulting Group, we specialize in Solo 401(k) planning, entity structuring, and tax reduction strategies for independent contractors, consultants, and small business owners across the San Francisco Bay Area, especially in Castro Valley and San Francisco.

We offer personalized consultations to evaluate whether an S-Corp is right for you, how to structure your compensation, and how to legally minimize your tax burden.

Schedule a consultation today:
https://flextcg.zohobookings.com/#/taxadvisory

About Flex Tax and Consulting Group

Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.

Related Post:

Navigating Retirement Savings: Roth IRA vs. 401(k)

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If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

To be better understand the S Corporation Salary’s detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Under Secs. 41(h) and 3111(f), enacted by the Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, a qualified small business can elect to apply a portion of its Sec. 41 research credit against the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes, effective for tax years beginning after Dec. 31, 2015. To be a qualified small business for a tax year, a business must have gross receipts of less than $5 million for the year and must not have had gross receipts for any tax year before the five-tax-year period ending with the year.

An eligible small business with qualifying research expenses can elect to apply up to $250,000 of its research credit against its payroll tax liability by filing Form 6765, Credit for Increasing Research Activities, with its timely filed business income tax return. Under a special rule for the tax year 2016, a small business that has already filed its 2016 return and failed to choose this option can still make the election by filing an amended return by Dec. 31, 2017.

A small business then claims the payroll tax credit by filing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to the business’s payroll tax return.

Flex Tax and Consulting Group has served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs.

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Overdue to the misdeeds of an in-house bookkeeper or a third-party payroll service responsible for ensuring that a business meets its tax obligations. More often than not, however, employers, acting without bad intentions, use the withheld money to satisfy pressing trade obligations or to meet payroll, debts the nonpayment of which is likely to lead to the shutdown of the business and loss of employee jobs. Unfortunately, this strategy can prove extremely costly to both the business and its principals, generating exposure to substantial penalties for late payment or failure to pay at all.

Making the stakes even higher, the federal government has in recent years taken steps to increase the likelihood that employment tax cases will handled criminally. All of this means that tax advisers working with business clients cannot focus solely on strategies to minimize and pay the business’s income tax obligations but also must be extremely vigilant regarding employment tax duties.

The Tax Division of the U.S. Department of Justice (DOJ) pursues both civil litigation and criminal investigations and prosecutions for failure to comply with employment tax obligations. Recently. The DOJ has increasingly emphasized criminal prosecution of those who fail to comply with their obligations to withhold, account for, and pay over federal employment taxes.

The role tax professionals play in detecting and addressing nonpayment early is becoming increasingly important.

The Treasury Inspector General for Tax Administration (TIGTA) published a report about trends and recommendations for enforcement of employment tax obligations. TIGTA found that the number of employers with 20 or more quarters of delinquent employment taxes had grown from approximately 5,000 in 1998 to nearly 17,000 in December 2015. However, the report further notes that the IRS assessed 38% fewer trust fund recovery penalties from FY 2011 to FY 2015 due to decreases in collection personnel. Fewer collection actions make it even more important for tax professionals to discover and address delinquent employment tax issues early.

A business that has fallen behind on tax payments, without any apparent consequences, may tempted to continue nonpayment. As a result, the amount of the deficiency is likely to grow, increasing the likelihood of an eventual criminal referral. In that light, the clear trend of such a significant increase in the number of cases involving severe noncompliance is alarming. A tax professional detecting the nonpayment early and assisting the client in developing a feasible plan to pay the tax owed offers an important service. Moreover, to minimize the personal financial exposure of persons potentially responsible under Sec. 6672, a practitioner should be certain to designate any voluntary payments toward the trust fund portion of the delinquency. Again, the quicker the trust fund portion paid, the less likely the need for a trust fund recovery penalty investigation and the less likely there is to be a subsequent, or concurrent, criminal investigation.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked questions and detailed.

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The Protecting Americans From Tax Hikes Act of 2015 (PATH Act), P.L. 114-113, contained several provisions favorable to taxpayers that incur qualified research and development (R&D) expenditures. Perhaps most importantly, it made permanent the previously temporary credit for increasing research activities (R&D credit) and added provisions allowing the credit to claimed against payroll taxes. Or alternative minimum tax (AMT), advantages that eligible taxpayers may still be missing.

PAYROLL TAX CREDIT

Although an unused portion of an R&D credit can carried forward, before the PATH Act. Many small startups were unable to realize any benefit, as they operated at a loss and thus had no income tax liability to offset. A lot of such startups, moreover, incurred significant R&D expenditures. To remedy this situation, the PATH Act allows qualified small businesses (QSBs) for tax years beginning after Dec. 31, 2015. Electing to claim all or a portion of the R&D tax credit against the employer portion of Social Security taxes due. The maximum amount of the credit that can elected to offset payroll taxes in a given year is $250,000, and the election can only made for five tax years.

A QSB is a taxpayer with gross receipts for the tax year of less than $5 million that did not have gross receipts for any tax year preceding the five-tax-year period ending with the credit year. For example, a taxpayer claiming the payroll tax credit for the 2018 tax year must have had less than $5 million in gross receipts in 2018 and could not have had gross receipts in 2013 or prior. The purposes of the test, gross receipts reduced by returns and allowances and must be annualized for short tax years, and predecessors  taken into account. For any person other than a corporation or partnership, only the aggregate gross receipts of the person in carrying on all of that person’s trades or businesses are considered. Organizations exempt from tax under Sec. 501 are not eligible to claim the payroll tax credit.

AMT OFFSET

Before the enactment of the PATH Act, many taxpayers also were unable to realize the benefits of the R&D tax credit in a given year due to the application of AMT liability, which the R&D tax credit could not reduce. Fortunately, the PATH Act also allows eligible small businesses (ESBs) to use the R&D credit to offset their AMT liability for tax years beginning after Dec. 31, 2015. (The legislation known as the Tax Cuts and Jobs Act, P.L. 115-97, repealed the AMT for C corporations for tax years 2018 and following and, for individuals in tax years 2018 through 2025, increased the AMT exemption amount and the exemption’s phaseout threshold.)

For this purpose, an ESB, concerning any tax year, is a non-publicly traded corporation, a partnership. Or a sole proprietorship with average annual gross receipts for the prior three years of $50 million or less. All persons treated as a single employer under Sec. 52(a) or (b) or Sec. 414(m) or (o) treated as a single taxpayer whose gross receipts must aggregated. Gross receipts reduced by returns and allowances and must annualized for short tax years. And predecessors taken into account. Additionally, if the taxpayer was not in existence for the full three-prior-year period, the average gross receipts determined based on the period in which the taxpayer did exist. In the case of partnerships and S corporations, the partner or shareholder must also meet the gross receipts test for the AMT offset to apply.

COMMON APPLICATIONS OF R&D CREDIT

To take advantage of these favorable changes, the taxpayer must first determine which its projects or activities qualify for the credit. Then substantiate a nexus between those projects and the expenses incurred. Based on the age of the business, the taxpayer must also determine a base amount under one of two available methods. Common industries that qualify for the R&D tax credit include software development, manufacturing, communications, engineering (including structural, mechanical, and electrical), and pharmaceuticals.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked questions and detailed.

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Earning More Than the Minimum Income Requirement

The IRS doesn’t tax income that is equal to or less than the amount of the standard deduction. Tax-exempt income is not include in this calculation. So if you don’t earn more in annual income than the standard deduction. And you aren’t claim as a dependent by another taxpayer, then you don’t have to file a tax return. As an example, if you’re single, younger than 65, and earn at least $12,000, the total of the tax year 2018 standard deduction for a single taxpayer. You must file a tax return. A free, simple-to-use tax calculatorcan help determine the need to file a tax return for other individual scenarios. The IRS also lists the minimum income requirement amounts to file a tax return on page 2 of Publication 501.

Dependents Earning Income

No matter whether they’re an adult or a child, those claimed as a dependent by a taxpayer on a separate tax return held to different IRS filing requirements. Because a dependent cannot claim their own exemption, when their earned income is more than the standard deduction for a single taxpayer, which in tax year 2018 is $12,000, then they required to file a tax return. But when the dependent’s income unearned, such as from interest or stock dividends, the minimum income requirement to file drops to above $1,050.

Affordable Care Act (ACA) Subsidies

For a qualifying individual to receive their tax subsidy for purchased health insurance coverage under ACA, they required to provide their income level. The government verifies this income information via the individual’s federal tax return. Even if you have never filed a tax return before, which may be the case if you didn’t make enough money, you may requir to file one to receive a tax subsidy for health insurance.

Getting Tax Refund

If you’re earning a paycheck and excessive federal taxes are being withheld, you need to file a tax return to get your refund. So let’s say you’re a single taxpayer earning $5,000 annually and $600 is being withheld for federal tax. While you are not legally require to file a tax return because you earned less than the standard deduction ($12,000), you are entitle to a refund of the entire $600. Since the IRS doesn’t issue refunds unless a tax return is filed, if you want your refund, start filing!

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File Away Your Tax Return and All Related Records

Once you’ve filed your return, it’s a good idea to create a single location to keep all the information related to the tax year for which you just submitted. If you keep physical records, this means printing off your return. Including all additional schedules, and sticking everything in a file, along with all the forms you received that reported income, expenses, or other tax-related information. These are forms like the 1099 MISC, 1099 INT, etc.

It’s also a good idea to include receipts for purchased items you’ve claimed as deductions and other records. You’ve used for filing your taxes, such as accounting reports and mileage records. Then if by chance the IRS chooses to audit your tax return, you won’t have to scramble to find all the records you need to prove why you claimed these deductions and credits.

Get Organized for Next Year

There’s no better time for organizing tax records than right now. Since you just filed your taxes, you’re aware of what was hard about the process and what parts of filing you can streamline. This may mean creating a physical file or a file on your computer where you can store receipts as they come in. Since more and more receipts arrive via email, you may want to create a separate receipts folder in your email account so they’re easy to find.

If you think you’ll be able to claim new deductions or credits next year, now is the time to start gathering the information to do so. Or if you expect to lose a credit or deduction you claimed last year, you can start considering other ways you can lower your tax burden to compensate. This may mean contributing more to your retirement plan or donating to charity. Being proactive makes it a lot easier to find everything you need when you’re ready to file your taxes next year.

Keep Receipts

You may be able to itemize your deductions, consider keeping all your receipts. When you itemize deductions, you can deduct the amount of sales tax you paid on goods throughout the year. Although the IRS provides a sales tax calculator that calculates a standard tax deduction. It based on your income and ZIP code. You may have spent more than the standard, especially if you made a large purchase. Likely buying a car or building a house, and paid sales tax on the supplies.

If you create a spreadsheet where you can enter the amount of sales tax on everything you’ve bought, it will ultimately save you a lot of time during tax season. This way, you’ll know whether you spent more than the standard tax deduction you’re eligible for.

Consider Storing Your Records Online

When you prefer to keep the amount of paperwork you acquire to a minimum, you can choose to store all your current and past tax information on your computer. Or — even better — online using a cloud service. You do store it on your computer, and be sure you make regular backups. If you subscribe to a cloud service, the information you store on your computer will automatically backup anytime you’re connect to the Internet, ensuring you never lose those records. If you have paper records, you can scan them and upload them onto your computer so you can store everything in one convenient location.

By getting organized now, you can save yourself a lot of time and more than a few headaches when the next tax season comes around. These tips on organizing tax records after you file will make the process a whole lot easier.

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Payroll taxes, including FICA tax, are what your employer deducts from your pay and sends to the IRS, state or other tax authority on your behalf. Here are the key factors, and why it’s important to monitor your withholding tax.

What is the FICA tax? 

FICA tax is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax the IRS imposes on employee earnings. For 2019, only the first $132,900 of earnings is subject to the Social Security part of the tax. A 0.9% additional Medicare tax may also apply if earnings exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Typically, employers deduct FICA tax from employee paychecks and remit the money to the IRS on behalf of the employee. FICA stands for Federal Insurance Contributions Act.

What is the withholding tax? 

When people talk about “withholding,” they’re often referring to Social Security and Medicare (which together make up FICA tax), plus a few other types of taxes that also might come out of your pay. Here’s a breakdown.

• Social Security: 6.2%.Frequently labeled as OASDI (it stands for old-age, survivors and disability insurance), this tax typically is withheld on the first $132,900 of your wages in 2019. Paying this tax is how you earn credits for Social Security benefits later.
• Medicare: 1.45%.Sometimes referred to as the “hospital insurance tax,” this pays for health insurance for people who are 65 or older, younger people with disabilities and people with certain conditions. Employers typically have to withhold an extra 0.9% on the money you earn over $200,000.
• Federal income tax.This is an income tax withheld from your pay and sent to the IRS by your employer on your behalf. The amount largely depends on what you put on your W – 4.
• State tax:This is income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live and other factors, such as your W-4 (and some states don’t have an income tax).
• Local income or wage tax:Your city or county may also have an income tax. This money might go toward such expenses as the bus system or emergency services.

What are these other payroll taxes I hear about?

• FUTA tax:This stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay for it.
• SUTA tax:The same general idea as FUTA, but the money funds a state program. Employers pay the tax.

Self-employment tax: If you work for yourself, you may also have to pay self-employment taxes, which are essentially extra Social Security and Medicare taxes. That’s because the IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings. Typically, employees and their employers split that bill. But self-employed people pay the whole thing. (For 2019, only the first $132,900 of earnings is subject to the Social Security portion.) A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Because you may not be receiving a traditional paycheck, you may need to file estimated quarterly taxes instead of withholdings.

How does my employer calculate my FICA or withholding tax?

The amount your employer withholds from your check largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things to know:

• Form W-4 asks about your marital status, dependents and other factors to help you calculate the number of withholding allowances to claim. The more allowances you claim, the less tax will be taken out of your paycheck.
• What you put on your W-4 then gets funneled through something called withholding tables, which your company’s payroll department uses to calculate exactly how much federal and state income tax to withhold.
• You can change your W-4 at any time. Just download a blank one from the IRS website, fill it out and give it to your human resources or payroll team.

Why do I have to pay FICA tax?

Employers have to withhold taxes from employee paychecks because taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible.

Some people are “exempt works”, which means they elect not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come out of their checks, though.

Typically, you become exempt from withholding only if two things are true:

• You got a refund of all your federal income tax withheld last year because you had no tax liability.
• You expect the same thing to happen this year.

Why you need to manage your withholding tax

Remember, one of the big reasons you file a tax return in April is to:

• Calculate the income tax on all of your taxable income for the year.
• See how much of that tax you’ve already paid via withholding tax.

Turns out you’ve overpaid, you’ll probably get a tax refund. If it turns out you’ve underpaid, you’ll have a tax bill to pay.

If you ended up with a huge tax bill in April and don’t want another, you can use Form W-4 to increase your withholding. That’ll help you owe less (or nothing) next April.

You got a huge tax refund. Consider using Form W-4 to reduce your withholding. You’re giving the government a free loan and — even worse — you might be needlessly living on less of your paycheck all year. It may feel great to get a tax refund from the IRS, but think of how life might’ve been last year if you’d had that extra money when you needed it for groceries, overdue bills, getting the car fixed, paying off a credit card or investing.

The post How FICA Tax and Withholding Tax Work in 2019 appeared first on Flex Tax and Consulting Group (FTCG).

If you are thinking of starting a company, then one of the best steps you can take is to understand the structure options you have before you start your own business. Today we are going to introduce the options you have and how to handle the taxes with those structures.

Small Business Taxes Depend on Business Structure

These are the basics of paying your small business taxes:

What types of taxes do you need to pay?
How much do you have to pay in taxes?
When do you have to pay small business taxes?
And how do you pay small business taxes?

When it comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.

Small Business Taxes for Sole Proprietors

A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.

Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your income tax return. Business profits will tax at your income tax rate. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.

If you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.

Estimated tax is the method that all businesses use to pay social security and medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.

To figure out what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—use Form 1040-ES, Estimated Tax for Individuals.

Small Business Taxes for Partnerships

Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.

If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.

To file taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their tax returns. Each partner’s share of the business’s income and losses are shown on Schedule K-1.

Small Business Taxes for C-Corporations

If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.

Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.

Small Business Taxes for S-Corporations

S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.

Similar to C-corps, S-corps can also divide business income between salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes quarterly.

Small Business Taxes for Limited Liability Companies

A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.

If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, you won’t be taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.

LLCs, offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.

When to Pay Small Business Taxes

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Quarterly Estimated Small Business Taxes

To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is by just looking at your taxes from the previous year as a guide.

Once you’ve put a number of these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS’s Form 1040-ES Estimated Tax Worksheet.

These are the deadlines for quarterly estimated small business taxes:

April 15 (covering the period from Jan. 1 to March 31)
June (covering the period from April 1 to May 31)
September (covering the period from June 1 to Aug. 31)
January (covering the period from Sept. 1 to Dec. 31)

Flex Tax and Consulting Group have served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or info@flextcg.com.

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Taxpayers can follow these three steps to use new Tax Withholding Estimator

All taxpayers should use the new Tax Withholding Estimator to do a Paycheck Checkup. This tool helps people make sure their employers are taking out the right amount of tax from the employee’s paychecks. The money withheld from an employee’s paychecks throughout the year should cover the amount of tax they owe.

Taxpayers who haven’t yet checked their withholding can follow these simple steps for using the estimator. Results will include a recommendation of whether the taxpayer should consider submitting a new Form W-4, Employee’s Withholding Allowance Certificate, to any of their employers.

Step 1: Gather documents. 
Before beginning, taxpayers should have a copy of their most recent pay stub and tax return. Taxpayers should go to the main Tax Withholding Estimator page on IRS.gov. Once there, they should carefully read all information and click the blue Tax Withholding Estimator button.

Step 2: Answer the questions.
Users will answer a series of questions about their specific tax situation. When they complete each section, they click the blue “Next” button that takes them to the next section.

Step 3: Review the results.
Taxpayers use the estimator’s results to determine if they need to complete a new Form W-4, which they submit to their employer, not to the IRS. The tool helps the user target a tax due amount close to zero or a refund amount.

Flex Tax and Consulting Group can help you all services here, please don’t hesitate to contact with us.

Share this tip on social media — #IRSTaxTip: Taxpayers can follow these three steps to use new Tax Withholding Estimator. http://links.govdelivery.com:80/track?type=click&enid=ZWFzPTEmbXNpZD0mYXVpZD0mbWFpbGluZ2lkPTIwMTkwODEyLjkwMjU1NjEmbWVzc2FnZWlkPU1EQi1QUkQtQlVMLTIwMTkwODEyLjkwMjU1NjEmZGF0YWJhc2VpZD0xMDAxJnNlcmlhbD0xNjc4MTA1MSZlbWFpbGlkPXN1cHBvcnRAZmxleHRjZy5jb20mdXNlcmlkPXN1cHBvcnRAZmxleHRjZy5jb20mdGFyZ2V0aWQ9JmZsPSZtdmlkPSZleHRyYT0mJiY=&&&132&&&https://go.usa.gov/xySzP

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New businesses or start-up companies may be eligible to apply the R&D tax credit against their payroll taxes for up to five years.

The R&D credit permanently extended as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. The bill included enhancements starting in 2016, including offsets to the alternative minimum tax and payroll tax for eligible businesses.

While the credit used to offset payroll taxes is based on eligible R&D expenses, it only applies to costs incurred after the bill was signed into law. The maximum benefit an eligible company can claim against payroll taxes each year under the PATH Act is $250,000.

When does the payroll-tax offset take effect?

The payroll-tax offset is currently available for qualified expenses incurred in 2017. The R&D credit must calculated and shown on a taxpayer’s 2017 federal income tax return. And with the portion of the credit applied to offset payroll taxes identified and elected when the return filed in 2018. The offset is then available on a quarterly basis beginning in the first calendar quarter after a taxpayer files their federal income tax return.

For example, taxpayers need to file their 2017 federal income tax return by June 30, 2018, to apply the payroll-tax offset to the third quarter. As a result, the earliest taxpayers are likely to see a benefit is October 2018 when they file their quarterly payroll tax return for the third quarter.

How quickly does a company need to move on this? When does it need to get started?

The current opportunity to offset payroll taxes based on 2017 expenses, which means companies can benefit from acting quickly to determine their eligibility under the new rules and start planning. This will help ensure companies understand what types of information will need to gathered at the end of the year.

This credit must specific, elected, and filed in the original 2017 tax return before it can use to offset payroll taxes. Under the current rules, taxpayers can’t take advantage of this opportunity on an amended return.

What companies qualify for the offset?

The new payroll-tax offset allows companies to receive a benefit for research activities even if they aren’t profitable. To be eligible for the credit, companies must meet these qualifications:

• Gross receipts for five years or less (interest income counts toward gross receipts)
• Less than $5 million in gross receipts in the year the credit is elected
• Qualifying research activities and expenditures
• Payroll-tax liability

How is $5 million in gross receipts defined?

A company must have less than $5 million in annual gross receipts to be eligible. For new businesses, the gross receipts must fall under the $5 million limit after being annualized for a full 12 months. The gross receipts of businesses that related or share common ownership need to calculate on a combined basis for purposes of determining eligibility under this provision.

The IRS issued interim guidance on the definition of gross receipts in March 2017. In the guidance, the IRS confirmed gross receipts include the following:

• Total sales—defined as the net of returns and allowances
• All amounts received for services
• Income from investments, including interest income

Although the gross-receipts limitation helps to define a company’s eligibility for the credit. It’s important to note the R&D credit itself isn’t based on gross receipts. The actual credit based on the company’s eligible R&D expenses.

What are eligible R&D expenditures?

Eligible R&D costs include these categories:

• Wages. W-2 taxable wages for employees offering direct support and first-level research supervision.
• Supplies. Supplies used in research, including so-called extraordinary utilities but not capital items or general administrative supplies.
• Contract research. Certain subcontractor expenses. If the subcontractor’s tasks would qualify, they  instead being performed by an employee. These can include labor, services, or research, but payment can’t be contingent on results. In addition, the taxpayer must retain substantial rights in the results, whether exclusive or shared.
• Rental or lease costs of computers. This could include payments made to cloud service providers for the cost of renting server space. As longs as payments related to hosting software under development versus payments for hosting a stable software release.

What are some potential benefits of the offset?

Brand-new businesses can potentially claim the credit for up to five years with a maximum of $1.25 million in total credits claimed on their quarterly federal payroll tax returns.

New businesses and start-up companies will see a benefit between 6% and 14% of their eligible R&D costs. For most companies that incur at least $300,000 in eligible R&D costs. The federal credit to offset payroll tax will equal to 10% of total R&D expenses.

For example, a company with $500,000 of eligible expenses. Let’s say engineering costs, that could receive a $50,000 credit. On the other hand, a company with over $2.5 million in eligible expenses in 2017 could receive a credit equal to the full $250,000 annual limitation.

If the amount of the credit exceeds a company’s Social Security tax, also known as the OASDI tax. Liability in any given quarter, the excess can carry forward to the next calendar quarter.

Social Security Tax

The payroll-tax offset can only apply to the Social Security portion of payroll taxes. Companies required to pay Social Security tax of 6.2% on up to $127,200 each employee’s salary in 2017. For example, a company that employs 50 employees with an average salary of $75,000 would pay approximately $232,500 in Social Security payroll taxes.

Accordingly, a company would need to have more than $4 million in annual payroll subject to Social Security tax. $2.5 million in eligible R&D costs to offset the maximum $250,000 in payroll taxes each year under the new law.

Most employers required to deposit their payroll taxes to the federal government on a monthly. Or semiweekly basis as well as file a quarterly payroll tax return via Form 941. However, the credit will be applied against the Social Security tax on the quarterly return. When it’s deposited monthly or semiweekly.

The IRS is still formulating a plan for how this process will formally implement.

Are there risks to claiming the R&D credit?

Once a company starts using this credit, they receive a much higher level of scrutiny from the IRS. R&D credits are often a high priority for the agency, which assembles industry-specific project teams with technical specialists that assist in reviewing R&D credit claims.

Even at the small business level, it’s common for IRS technical specialists to be involved in R&D credit examinations. In general, however, larger credits receive more scrutiny from the IRS and often require more review and documentation.

Although many companies in the technology industry likely engaged in activities that would otherwise be eligible for R&D credits, the rules surrounding the credit are complex and always changing. New legislation, regulations, court cases, and IRS guidelines have drastically shifted the landscape of R&D tax law over the past few years and will continue to do so in the future.

Considering these complexities and potential financial penalties, companies can benefit from having their activities analyzed by a CPA, attorney, or enrolled agent familiar with the tax law and accounting rules that govern the R&D credit as well as the IRS examination and appeals process.

To deter companies from claiming credits without the proper level of review and documentation, the IRS can impose penalties greater than 20% of the credit amount claimed. For example, if a taxpayer claims a $250,000 R&D credit and the credit is then audited by the IRS, it’s possible the agency could deny the entire credit and fine the company with accuracy-related penalties exceeding $50,000.

What should companies know about documentation?

It’s important companies have the right documentation in place. It’s also key to know there isn’t a one-size-fits-all approach to documentation. The level of documentation deemed to be adequate varies based on the size and scope of the credit amounts claimed.

Companies should expect a greater time commitment to get set up in the first year of claiming an R&D credit. They’ll also need to put the appropriate measures in place to completely use the credit going forward. Depending on the company, it’s possible any historic R&D spending incurred may need to evaluate.

Proving Nexus

Taxpayers often will need to provide a nexus between their R&D expenses and qualified research activities. This can be challenging—even for companies that have some level of project tracking in place. This is because time- and expense-tracking systems aren’t generally intend to track eligible R&D expense to business components or R&D activities.

The subjectivity and interpretation of the R&D rules make it difficult to develop the perfect software tool for tracking eligible expenses and documentation. Particularly when considering annual updates to tax law, regulations, and IRS guidance. For this reason, it’s important to note project-accounting and time-tracking systems aren’t a prerequisite to claim the R&D credit.

Meeting the Four-Part Test

At minimum, taxpayers’ qualitative documentation should demonstrate how their underlying activities meet the four-part test. Examples of adequate documentation can vary by industry, but it’s possible for companies to leverage documentation they generate in their day-to-day operations. Qualitative documentation may also require review and analysis of any contracts between companies and their customers, partners, or vendors.

Taxpayers who have some level of familiarity with the R&D credit should carefully evaluate their methodology and documentation standards with respect to R&D credits being used under the new rules.

Additional Guidance

Companies in the software and pharmaceutical industries especially encouraged to review the IRS audit guidelines applicable to their industries. These are available on the IRS website:

• Audit Guidelines on the Application of the Process of Experimentation for All Software
• Pharmaceutical Industry Research Credit Audit Guidelines

The payroll-tax offset is available to eligible new businesses and start-up companies for up to five years. Any unused R&D credits that aren’t elected to offset payroll taxes may carried forward for up to 20 years and used when the business becomes profitable. This length of time makes thorough documentation even more important.

We’re Here to Help

To learn more about the R&D payroll-tax offset, whether your business qualifies, or our other R&D tax services, contact your FTCG professional.

Alex Kwan has practiced public accounting since 2010. He provides R&D tax services to middle-market companies. Including S corporations and partnerships, and consults on federal and state R&D credits, R&D expense deductions, and IRS and state examinations of R&D credits. You can reach himat (415) 860-6288 or alex.kwan@flextcg.com.

The material appearing in this communication is for informational purposes only and should not construed as legal, accounting, tax, or investment advice or opinion provided by Flex Tax and Consulting Group. This information is not intend to create, and receipt does not constitute, a legal relationship. Including an accountant-client relationship. Although these materials have prepared by professionals, the user should not substitute these materials for professional services. And it should seek advice from an independent advisor before acting on any information presented. Flex Tax and Consulting Group assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

by Star Fischer, and Travis Riley

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