Please help me close my S-Corp?
December 24, 2010 6:26 PM   Subscribe

[Tax filter] You are not my accountant but the H&R Block Business center is closed for the holidays and I'm stuck on some S-Corp tax and payroll questions.

I have an S-Corp in California. I'm the President / sole shareholder / only employee. I'm a freelance writer and it was established by an accountant with whom I'm no longer working.

I have $79,000 still in the corporation and I'd like to close it down this year because it's too much stress and hassle to run when business is poor, especially with the minimum franchise tax.

I'm assuming that means pay myself payroll so the money is removed from the corporation and FICA and applicable fees are paid to the IRS and California. I've found the online site called Intuit Online Payroll to do this.

The questions is: don't S Corps also have to pay FICA tax on employee salary? So how do I figure out that magic number to pay myself that leaves enough in the corporation to pay the FICA tax? And are there any fees for closing the corporation for which I should plan?

As you can see, I'm a little lost here. My head is swimming with tax brackets and distributions and fears of making a mistake.

I just went to the H&R Block Business center to give it all to them and pay them to figure it out, but they're closed because of Christmas. I might still to do that monday, but I'm feeling the pressure of the end of the year and trying to get this closed in 2010 so I don't have to do a 2011 tax return in 2012.

I know you're not my accountant, but I'd appreciate any advice in this matter.
posted by anonymous to Work & Money (10 answers total) 1 user marked this as a favorite
I cannot answer your specific question, but I do know that according to the IRS, you can pay the shareholders (you) a dividend of as much as you want. However, you must first pay yourself a normal salary (to prevent people from using S-Corp dividends as a way of getting around taxes)
posted by zippy at 6:41 PM on December 24, 2010

It's an S corporation. That means that (for tax purposes) it is not a separate entity. The income the it made, minus the expenses that are incurred before December 31, will be reportable as income to you, regardless of whether you take it out or leave it in the corporate bank account.

So relax. And make it your resolution to hire a real accountant to do your accouting. H&R Block is a tax preparation service only.
posted by yclipse at 7:25 PM on December 24, 2010

Maybe this is a bit off topic... but run far away from H&R Block.

Find an accountant. A *real* accountant.

H&R Block made a >$10,000 mistake on my taxes, in the government's favor. Actually, make that "mistakes", going back several years. I needed to hire an accountant to go back through past tax returns and figure out the corrections.

Everyone I know, who has used H&R for even simple returns, has had negative experiences with them and their mistakes...

Sounds like you have a serious business-type question. Please, do hire an accountant. You can't afford not to.
posted by thermonuclear.jive.turkey at 7:27 PM on December 24, 2010 [1 favorite]

With the holidays, I don't think you are going to successfully wind down the corporation in 2010. There are procedures to go through with the Calif. Corp. Commission as well as the IRS. I suggest that, for the sake of not having to do a 2011 tax return, you may end up messing it up in the rush to get it done. The downside of waiting is that you will owe corporation taxes for 2011 to the state even if the corporation has to income. You need to contact the state first thing Monday to see if you have time to wind down legally before 12/31.
posted by Old Geezer at 7:30 PM on December 24, 2010

That should read "...even if the corporation has no income.
posted by Old Geezer at 7:31 PM on December 24, 2010

Agreed with others above, CA minimum corporate tax is $800, assuming you had no or minimal corporate income.

You could easily make a > $800 mistake rushing this. Do it right.

Note, one of the Turbotax editions, Deluxe or Premium, I think, does a fine job with simple S-Corp tax matters. You might spring for that just to see what you get. Make sure the box mentions S-Corps, because most of the editions have bare-bones coverage of S-Corp issues.
posted by zippy at 10:25 PM on December 24, 2010

If that was the way to go, it would seem like you do it just like any other paycheck. Pay is

- Fed Tax
- State tax
Magic number.
posted by gjc at 11:20 PM on December 24, 2010

yclipse has it right: As an S-corp, revenue from the corporation flows through to your personal taxes, as a dividend, via Form K-1. There is no magic formula for how much of that revenue is paid to you as salary (complete with FICA, Medicare, and unemployment taxes) versus dividends (which are only subject to income taxes on your personal 1040, at your tax rate).

So, the money left in the S-corp's bank account is yours. The bank account, I would assume, should be shut down approximately when the company is shut down. But wait until next week, consult with an attorney regarding the steps required to close an S-corp. If said attorney has an accountant in the same office, or can recommend a good one, so much the better.

If you somehow end up with a viable S-corp in 2011, I believe the worst you'll owe would be another year of corporate registration and associated business fees. IANAL or A, but that would be the case for my S-corp in Illinois.
posted by DrGail at 3:54 AM on December 25, 2010

I don't know ALL the answers, but what you describe of the problem makes it sound easy enough for an accountant that I bet you could retain one on Monday and have it done by Friday - at least having the steps done that must actually be DONE before Dec. 31 to declare the corporation nonexistant for 2011 purposes.

- don't do this with H&R block. Get a real tax accountant.
- if it can't be done before the 31st, you're better off to pay a few business fees than to wind up in dutch with the IRS (or overpay more than the fees would have been worth)
posted by randomkeystrike at 6:38 AM on December 25, 2010

Hey OP -

IANYCPA, but my first question would be how much of that money did you make this year? As others have mentioned, you pay individual income tax on your S-Corp earnings in the year you make the profit. So, if that money has been earned and taxed in a prior year, you're free to pull it out this year as a tax-free distribution. However, the IRS wants to see S-Corp owners take
"reasonable compensation" each year via payroll before taking distributions. So, it may be advisable to take a portion of the money out as payroll...

That being said, there's no magic formula as to what constitutes "reasonable." Did you have a great year and make all of that $79K in 2010? Well then, a salary upwards of $40K may be reasonable. Did you have a crappy year and only earn $5,000 in 2010, while the rest of that money in the S-Corp was earned in a prior year? Well, then maybe $0 salary is reasonable. The CPA you find to help you after the Christmas holiday will have a good feel for this kind of thing.

On any payroll you take you'll have to withhold the following from your check:

--6.2% social security
--1.45% medicare
--15-35% federal withholding (depending on your personal tax situation)
--Some % of CA state withholding, but I'm not sure of the specifics here since I live in a state without income tax...

In addition to these amounts, the company will need to pony up the following:

--a matching 6.2% of social security
--a matching 1.45% of medicare
--.008% federal unemployment tax (applies to the first $7,000 of wages you $56)
--Approx 1% state unemployment tax (usually applies to the first $7,000 of wages, as well, but I'm not sure of the specifics in CA, plus the rate is usually different for each company, so you'll need to check this out).

The unemployment taxes aren't due until 1/31 so you have some breathing room there. But, the social security, medicare, and federal and state withholding would probably be due by 1/15. Also, all the taxes will require the filing of payroll tax returns, but those aren't due until 1/31.

As for dissolving the company there will be a series of forms to file with the state, and likely some administrative fees to go along (probably in the $100 range). You definitely want to do this, or else you'll still be responsible for filing $0 returns each year. There are no federal fees or forms to fill out to dissolve. You'll just mark your business's federal tax return "final."

My suggestion is to call a local CPA on Monday. It's one of our crunch times since so many folks, like you, are doing year end tax planning - so you shouldn't have any problems finding someone to talk with despite the holidays.

A few extra points to keep in mind:

--If you owe additional income taxes for your personal return (say for money you earned outside of the S-corp), it may be smart to deduct extra federal withholding from the paycheck you're going to take.

--If your S-corp used to be a C-corp, there can be complications that result in more tax. Also, if you don't have "basis" in your company (for instance you're financing operations with a loan from someone else), your distributions can become taxable.

Hope this helps! Merry Christmas...
posted by MediaMer at 12:20 PM on December 25, 2010

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