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Question about taxes and Incorporation

I own an insurance agency. I was a sole proprietor with 3 employees. On Dec 19, 2003, I incorporated my business. (I did not file any elections, such as a C Corp). In all of 2004 I continued with 3 employees. My business was profitable, and I was very busy. Maybe too busy. I really did not do anything different in my accounting from year

2004 and 2005. For example, I did not pay myself a salary. I dont know what, if anything else, I should have done during the year, as a incorporated business. Going forward I know that I need to file tax returns for the corporation. I know that I need to file a return in the State where my business is located. That is not a problem. I'll have professional help with my taxes. But now I am preparing my taxes (once I am more prepared, I will go to a CPA). I realize that this is a stupid-sounding question...but in 2004 was I required to pay myself a salary, and generate documentation to show that I paid myself? For example, should I have written myself checks to document that I was paying myself? If I should have created documentation for paying myself a salary in 2004, should I just do so now (dated March 1, 2005)? But what, if any, problems have I created for myself?

Please let me know if you have questions.

Thank you very much in advance.

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Reply to
Ralph
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You've created a bunch of problems for yourself. First, in the absence of elections the corporation is a taxable C corporation. That means that any payments from the corporation to yourself are taxable dividends, and the corporation needs to issue you a 1099-DIV. Second, the corporation is liable for income taxes; if the income is over $50,000, the tax rate gets pretty steep. You may be able to get this straightened out, but you'll need professional help to do it right. For example, there are procedures for getting a late S election, which can save double tax. The payroll issue is more complicated. Expect to pay a premium for fixing things over having done things right from the outset.

-- Tom Healy, CPA Boulder, CO Web:

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Reply to
Thomas Healy

Can't he also be an employee of his own C Corp and get W-2 wages? That is how I pay myself from my one-employee, one-stockholder C Corp. Of course, he didn't pay himself a salary and apparently didn't file 941's or anything else.

-- Vic Roberts Replace xxx with vdr in e-mail address.

Reply to
Victor Roberts

Ah yes, but you do it before the fact, right? that is, before 12/31? One step further though, why not use an S corporation and not subject all earnings to FICA tax? ChEAr$, Harlan Lunsford, EA n LA Mon 7 mar 2005

Reply to
Harlan Lunsford

Certainly.

A C Corp provides certain medical reimbursement benefits that would not be available to officers of an S Corp.

-- Vic Roberts Replace xxx with vdr in e-mail address.

Reply to
Victor Roberts

Correct of course, and probably reason that didn't occur to me, is that in my case, (I operate as a sub S), I'm not concerned about health insurance deductibility, since I'm covered by wife's plan at work. If I were to have to advise a client however, we would want to contrast the tax savings from a reduced salary not being subject to SE or FICA tax, versus any tax savings at client's marginal federal and state rate. Could go either way, depending.... ChEAr$, Harlan Lunsford, EA n LA Wed 9 Mar 2005

Reply to
Harlan Lunsford

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