What is an EIN and Why do I Need One_

What is an EIN and Why Do I Need One?

An EIN is a nine-digit number assigned by the IRS and used to identify your business. It’s like a Social Security number for your business and, in many cases, can be used in place of your Social Security number on forms and other types of paperwork.

We recommend that all businesses apply for and use an EIN..

If you are a sole proprietor, you need an EIN if you have any of the following:

  • Employees
  • A retirement plan,
  • Have or are planning to buy an existing business
  • You are a partnership, LLC, or PLLC

In addition, some states require you to have an EIN to open a bank account.

To apply for an EIN, the only information you need is the type of company your business or practice is. Applying for an EIN is an online process that, in most cases, will provide you your EIN on the same day you apply for it.

When applying, PLLCs should select the “LLC” option on the application. When you are done, make sure you SAVE a copy of the generated letter. It is the ONLY time you will get a copy without requesting it from the IRS.

TL;DR: You should have an EIN.
How much should I pay myself_

How much should I pay myself?

It depends.

No, really — it does.

I ask each client a handful of questions when trying to determine how much they should compensate themselves:

  • What industry are you in?
  • How much work do you do?
  • Do you have any employees?
  • How much money are you currently making?
  • Are you a PLLC or LLC?
  • Are you an S-Corp? (The below information does not apply to S-Corps because S-Corps require a reasonable compensation.)

Generally, I’ll look into your records and cash flow to help determine your salary.  However, the following chart works well as a general outline to determine your compensation, especially for service-based businesses like a Therapy Practice, Massage Therapist, or Chiropractor.

Income Between Recommended Compensation
$0 to > $250,000 50%
$250,000 to $500,000 35%
$500,000 & Up We should talk

 

What if I can’t afford to pay myself in those ranges?

It might be time to dig into your expenses and see what you are spending money on. When looking at your expenses, ask yourself: is this required or does this bring in clients?

If the answer is no, should you really be spending money on it?

TL;DR: Figuring out what you should pay yourself is difficult. To determine your salary and compensation, speak with a professional for advice.

Should I be an S-Corp_ LLC, PLLC_

Should I be an S-Corp? LLC, PLLC?

Starting off such a comparison is like comparing apples to oranges.

A PLLC, or an LLC, is how your business is formed with the state. An S-Corporation election is made on the Federal level for taxation purposes.

So, if you are already a PLLC or LLC, continue on. If not, our PLLC vs. LLC post will help you identify what decision is best for you.

We’re always asked questions about companies that wish to become S-Corporations in an attempt to save on taxes.In response, the first thing I discuss with clients is if becoming an S-Corporation is going to save them more money than it costs to become an S-Corp.

Until now, you’re most likely a sole proprietor. You file your business on your personal tax return and you (hopefully) pay estimated taxes.

That changes when you make the election to be an S-Corporation. You need to file a separate tax return for the business and you will need to start paying yourself a salary. Both of these usually cost money to do. For S-Corporation clients, we estimate that the tax return and payroll are going to run you around $1,350 a year. This is in addition to the costs of making the election and getting payroll set up, which is estimated to be around $500.

Now that we have an estimate on the additional costs it will take to operate an S-Corp, are you going to save enough?

If your net income before you pay yourself is around $50,000 or higher, it is more than likely worth the additional hassle of making the S-Corp election. There are additional factors as well, such as do you work in a home office, how are you getting your health insurance, and so forth.

Of course, choosing to become an S-Corp is based on your unique situation and does depend on your industry.

TL;DR: Set up an appointment with us if you are thinking about making the S-Corporation election.