This is the 4th post on going into business as an independent IT consultant. So far we have covered [[some tax basics]] and [[LLC vs S Corp]] issues. Today we are going to go into more detailon the taxing procedures that apply to S Corps since it is likely that most IT freelancers will want to go this route.
S Corp Tax Procedures
S Corps do not need to file a separate tax return. The income and expenses flow through to the shareholders. However, Form 1120S is filed, which basically just lists the income and expenses of the business. The S Corp then issues a Schedule K-1 to each shareholder that lists those incomes and expenses and each shareholder then reports those numbers on their individual 1040. An accountant is usually required to prepare and file the 1120S and prepare the K-1, but K-1's are easy to transfer onto your 1040, especially if you use software.
Estimated Tax Payments
As with an LLC or C Corp, you as an individual should probably make estimated tax payments on the estimated profits of your S Corp that will flow through to your 1040. It's likely this won't be needed, however, if you simply increase the FIT and state income tax withholding from your salary to cover any shortfall. You can change your withholdings at any time. So basically, when you are nearing the end of the year get your accountant to determine what your flow-through income will be and what its tax will be. Bump up your withholding to match that amount. You don't want to underpay throughout the year and have to pay interest and penalties (although many people do this as a sort of "cheap loan" from the government). You don't need to factor tax perfectly, but if you have a huge shortfall then you should probably consider adjusting withholding.
If you go the S Corp route (highly recommended), then you will become an owner-employee of your S Corp and you will need to pay payroll taxes to the taxing authorities. You must pay FICA and FIT at least monthly via EFTPS (Electronic Federal Tax Payment System). You must also report these payments and liabilities quarterly on Form 941. Get an accountant to help you initially set this up. However, making the payments is very easy using EFTPS. Don't forget you will need to pay your state and local payroll taxes as well. I'm in PA and this is best handled, unfortunately, via an accountant who understands the nuances of PA's system.
Next post...[[Business Expenses]]