C Corporation Operation Practices and Filing Requirements
You have a c-corporation what does that mean for you?
What does your business structure mean?
Your business structure lays the foundation for your business practices. You will need to meet business standards, accounting standards, and tax regulations. I will cover the essential points for a corporation.
Handling Owners Pay
According to taxes, state and federal compliance, and legal purposes your business is a separate entity from you. You are considered the owner and the employee of your business, and when you pay yourself a salary you must process payroll calculations and report this pay and withholding on the 941 federal reports. If your state is a withholding state for payroll taxes you would pay to your state. You do not have to have a payroll system if it is just you, but you will need to calculate payroll taxes and issue yourself a W-2 at the end of the year. I have services that you can purchase to help you process this information.
Suggestions: Decide what you need to pay yourself. Is your income at that level to pay yourself now? You do not have to pay yourself if you are a new start-up but if you can start with a small number create an amount for payment. Stick to this amount and do not withdraw money without reporting it as either a reimbursement or salary. Many people look at the business as a savings bank, and this works in the beginning, but after 3-5 years, if not sooner, you need to pay yourself. Do you wonder why you need grants and loans to build your business? (Depends on your business.) Do not seek grants and loans to pay your salary. I know what small businesses are told about using someone else's funds or debt, but this burden will harm your business.
You can pay yourself 10% or 30% of net profit for now. Do not wait until you are strained for funds to take money out. If you do not want to pay yourself, you can reserve this money in a business savings account and use it for business expenses instead. If you reinvest back into the business in lieu of paying wages or dividends it is called "retained earnings." Retained earnings reduce the need for outside funds to cover business expenses.
If you do not have enough to cover the owner's pay, you need to review your pricing. Learn more about pricing and build your pricing plans here in my Ask the Accountant training module: How To Build A Fair and Profitable Pricing Plan Training Course Information. (If you do not have control of our pricing, you will need other income.)
As a corporation, the corporation will match your social security taxes. You are also required to pay for state unemployment and other deductible business expenses. Your salary and your taxes are deductible expenses for the business taxes, except for dividends.
Most business owners must invest their personal funds to start a business. I did as well in the beginning. How you track this investment is essential to your business.
If you invest money by making purchases for the business with personal funds, you have three options:
1. The first option and the cleanest is to deposit the funds into the business account and then make the purchase out of the business account.
2. The second option is to bill the business or submit an expense report for reimbursement and when the money is available for you to pay yourself back.
3. The third option is to accumulate expenses and report the amount on your personal tax return after the business issues a 1099 DIV. Do not take money without a plan. As the business owner, you are also a shareholder, or you own 100%, but you are eligible for dividends in addition to salary and bonus pay.
Most people do not know that as the owner of a corporation, you also earn dividends (this does not apply to LLCs). What are dividends? Yes, just like the public stock market you earn money off the profit of your business. If you choose to pay that money out, you will pay a tax on your personal tax return 1040. Many people avoid dividends because they do not want double taxation. However, you will benefit from dividends in the future do not be afraid of taxes.
Since we touched on dividends and double taxation, let us talk about how that will affect your taxes. You will file the 1120 or 1120-S for S-Corporation each year. A Limited Liability Corporation would file a schedule C inside of 1040 unless you apply to file as a corporation with the Internal Revenue Service (IRS). You will also file a 1040 but no schedule C for this business. Often you will still receive 1099's from clients and the merchant services but inform your tax preparer that you do not file a Schedule C but that you need the 1120 tax return. Yes, it is a separate return. Yes, there is an added cost. You would give the preparer a W-2 if you paid yourself a salary from your business. If you have unreimbursed expenses paid from your personal, also considered the owner’s contribution and any dividends you paid yourself on 1099-Div. If you reimbursed yourself out of business do not report this amount on your tax return. Any unreported expenses you paid on behalf of the company subtracted from paid dividends before reporting on the 1099-DIV. Yes, a small corporation dividend paid to the owners is considered an investment income for taxes by the Internal Revenue Service (IRS) although you are not on the public stock market. A private corporation still holds stock and can sell that stock without being on the public stock market, but this would not apply to a Limited Liability Corporation (LLC). Sales of your business stock are sales of the business ownership to private investors.
When you process payroll payments via your business, throughout the year, you will need to withhold taxes and allow the company to match taxes and you will need to make payments for state employment payments and federal employment payments. I offer services to assist you with calculating your payroll taxes outside of normal payroll processing applications. If you have employees outside of yourself, you will need to purchase and pay for payroll software. The W-2 you will receive is created from this information as if you were an employee for someone else.
Set up separate accounts for business and personal.
Business, if you can, start with three accounts. Your three accounts are the revenue account (checking), the operating expenses account (checking), and a savings account (for taxes, profit, and reserves). If you can open more accounts have a separate cost of goods or cost of services sold and payroll is great. Also, having separate accounts from taxes and profit is great but not required.
Issue a formal payment out of your business account when you want to pay your salary. You can issue a paper check, transfer money to a personal account, or I like electronic checks as well. Either way, avoid making personal purchases out of the business account as much as possible. Do the same for a reimbursement and dividend payment. Track payments in your software.
Health Insurance, Benefits, Retirement, HSA's, Flex, etc.…
Health Insurance is deductible through your business, but that is a much deeper topic and requires working with a referral I have for you if you need one.
Paid time off is also a deductible expense. PTO is savings reserved in your savings account. When you pay yourself or your employees PTO you withhold taxes because it is still a payroll payment.
Make sure you understand a consultant, contractor, or employee. Do not treat an employee as a contractor or consultant or vice versa. You can create costly fines from the IRS, Department of Labor, and state agencies. You do not pay payroll to a contractor so stay away from calling contractor payments "payroll" wording. Words put us in a certain state of mind and we do not want to confuse payroll (employee) with vendor (contractor/consultant) payments. Review my contractor blog section for more information on this topic.
Investing in other businesses
If you are starting up another business and depending upon the business type you will need to revisit the type of business because certain business types must have their own business structure. If the new business does not need a separate business structure you can fund this division with the current business as the parent company. If the new business needs a separate business structure you will need to pay yourself, and that is taxable, and then fund the business. Do not use money from the business to fund another business endeavor unless it is a branch within your business.
If you invest in an LLC, you are a partner, not a stockholder. If you currently have an LLC and you want to offer stock you will need to become an S-Corporation.
Retained earnings will be essential to growing your business. Instead of paying out dividends (profit), use the money to make additional purchases or keep in savings. You will not have to pay taxes on the funds retained in the business for business use, and you can properly grow your business without hurting on the personal side.
Avoid debt if you can. If you need debt to get started, make sure you can pay that off within a reasonable about of time. Starting slow and building a foundation is a wonderful way to start a business.
C-Corporation is required to file the following reports.
- The 941 or the 944 depending on the determination of the Internal Revenue Service (IRS).
- State Withholding Reporting. State with payroll withholding taxes is based on your federal filing requirements.
- The 944 at the end of the year is the annual federal unemployment form. Corporations pay federal unemployment taxes for employees.
- The state unemployment reports. All corporations must file and pay state unemployment taxes on the payroll.
If you do not have a payroll, you would file a $0 report, but you still must file reports. I file reports $0 reports based on your schedule starting at $64.00 for all $0 reports.
Learn more about business structures and how to make the best decision on selecting a business structure with my business formation course. The course will explain what you need to know about taxes and determining the best business structure for your business. ATA Business Formation Course More Than A Name Course Information