It’s hard to believe that we’re almost three weeks into the New Year. Things are moving quickly and tax time will be here before you know it!
Last week we talked about making sure you get your 1099 forms filed on time.This week we’re focusing on making sure your company’s annual reports and/or annual tax/fee are filed and paid. The requirements vary by the state, but most states require LLCs and corporations to file an annual report and a fee or tax with the Secretary of State. Some states (e.g., New York, New Mexico, Indiana, Alaska, Iowa, Nebraska, Washington D.C.) require filing only every two years. One state, Ohio, does not require annual reports for most companies. Another state, Pennsylvania, used to require filing every 10 years, but will now require annual reporting starting in 2025. Most other states (e.g., North Carolina, Delaware, Nevada, Tennessee, Florida, etc) require annual reports and allow filing and payment online.
In many states, the annual report and/or fee are due by April 15; however, some are due earlier while others base it around the date your company was officially formed. You should check the rules for your state to know for sure. Regardless, it makes little sense to wait for a deadline and it’s easier to pay it now and be done with it!
Another deadline that’s worth knowing is when LLCs can choose to be taxed as an S corporation. Many people choose to form an LLC for their business because they’re simple to start and can, when owned by an individual, file taxes on a Schedule C just like a sole proprietorship. The downside is that all income is subject to self employment taxes. As an LLC grows and gets employees, it may make more sense to shift to an S corporation to reduce the tax burden. For existing businesses, this change can be made before the first 2 months and 15 days of the current tax year for which you want it to take effect. This means there are still about 7 weeks to make this decision.
While lower taxation sounds attractive, it does come with some requirements which may change how you’re currently doing business and may increase your costs. The first big requirement is that everyone, even owners, are paid as employees. If the company already has employees, this means adding the owners as W-2 employees. If the company just uses contractors and owners just take money from the company as needed, it may help to work with a payroll company to make sure things are done properly and reported correctly to the IRS.
Some owners may choose to not pay themselves in an LLC, but the IRS states that S corporations must pay officers “wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While there may be a temptation for an owner of an S corporation to choose a minimum wage to avoid taxes, the IRS is well aware of this and reacts accordingly. This is why it helps to work with companies that specialize in payroll work.
The second big requirement is that the company must file tax forms separately from the owner. If the LLC has a single owner, this means filing a Form 1120-S. For those who filed on their own, this is a bit more complicated than filing a Schedule C with their taxes and usually means using a tax preparer at somewhat higher expense. If the LLC had multiple owners already or they used a tax preparer already, it mostly means changing from one form to another.
Electing to file as an S corporation does not require changing how you’re already registered with the state. This filing is instead done with the IRS by filing a Form 2553. The tricky part is you must FAX the form to the IRS. For those without FAX machines, there are options. It is important, though, to speak with a professional to make sure that this decision is right for your company. Brightleaf would be happy to help your company see if this transition makes sense.