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IRS Form 1120-S | Proactive Tax Planning | CPA Wilmington NC

CPA Wilmington NC discusses Form 1120-S tax planning

Gary Bode, CPA: I believe in proactive tax planning. For a free initial phone consult on S Corporation tax planning, call us at 399-2705.

CPAs want their Form 1120-S clients to pay the least amount of tax legally possible. Proactive tax planning positions you such that potential deductions and credits aren’t missed secondary to IRS qualifications. Here’s an example of a technique that can’t be used retroactively.

“Taxes are a major expense. Proactively minimizing them is just good stewardship.”
Gary Bode, Wilmington NC CPA and tax accountant

Any CPA uses the first year of tax preparation to help reduce your taxes in the future. With new clients, CPAs also look at the prior year’s Form 1120-S to see if any deductions were overlooked.

Form 1120-S Payroll Tax Planning Example

Here’s our post on general IRS Form 1120-S compensation issues. Let’s look at Wilmington NC CPA, Inc., our demo company, set up as an S Corporation with the IRS. The primary shareholder decides how much her compensation is, within the realm of possibility of course. Her compensation comprises salary and non-payroll distribution components. Let’s say the salary component is $106,800 a year. Which is exactly the IRS wage cap on Social Security taxes for 2011. Once she takes the salary, the wages can’t be retroactively changed, so no amended return is possible. And the tax savings illustrated below are lost.

Why Would a Form 1120-S Shareholder/Employee Take any Salary?

This Form 1120-S example generally excludes non payroll distributions from Wilmington NC CPA to the shareholder/employee. Except that the shareholder/employee controls them. Such distributions aren’t subject to self employment taxes in S Corps, so why would she take any salary? Because the IRS expects some level of wages and can re-allocate distributions to wages. This could trigger payroll tax liability and penalties. So this issue always deserves consideration before filing the Form 1120-S. You can’t rely on this post to provide guidance on potential IRS action for S Corporation shareholder/employee salary to distribution ratios.

Social Security Taxes before the Applying the Technique

On the $106,800 salary, WNW pays 6.2% on it, $6,622, and she pays 4.2% , $4,486, for employer and employee Social Security taxes. $11,107 total. No way around that. And since she IS Wilmington NC CPA, she incurs the entire $11,107 Social Security tax. This isn’t like working for GE where they pick up over half the tab. Note the federal and NC total income taxes don’t change in this example, since any S corporation profit flows through to her Form 1040 return.

Social Security Taxes after Applying the Technique

Now, imagine Wilmington NC CPA pays her $86,800 in salary during 2011 by adjusting payroll in the last calendar quarter. And then paying $126,800 in 2012. So, $20,000 less this year and $20,000 more next year. I understand this takes good cash flow management.

Wilmington NC CPA pays 6.2% Social Security tax on the entire $86,800 salary in 2011. $5,382. She pays 4.2% on the $86,800. $3,646. For a total of $9,027. $2,028 less than the first scenario. Next year she and the company only pay Social Security taxes on the first $106,800 of the $126,800 anyway, because of the Social Security wage cap. Which is the $11,107 as derived above. NC and federal Income taxes are virtually the same this year and next year.

So with this technique, she saves $2,028 every other year.

This technique, like most tax planning, involves weighing the potential consequences against the benefits. Tax planning, in my experience as a CPA, uses multiple strategies simultaneously; there is seldom a single technique that yields astounding results. But they can really add up.

We’re a Wilmington NC CPA firm that operates as an S Corporation. So you know we stay on top of Form 1120-S developments. Our virtual office allows us to serve long distance clients with excellent customer service, and, makes life more convenient for our local clients. We offer a free initial phone consult at (910) 399-2705.

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