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.
What is a Reasonable Salary_

What is a Reasonable Salary?

If you have been following our series of posts about S-Corps, then you may be familiar with the phrase “reasonable salary.”

But what is a reasonable salary?

The IRS is particular about paying yourself a reasonable salary since your salary is subject to payroll taxes. There are a variety of ways to calculate your reasonable salary, and the IRS tends to work with a nine-factor test.

The factors are:

(1) Employee qualifications;

(2) The nature, extent, and scope of the employee’s work;

(3) The size and complexity of the business;

(4) Prevailing general economic conditions;

(5) The employee’s compensation as a percentage of gross and net income;

(6) The employee-shareholder’s compensation compared with distributions to shareholders;

(7) The employee-shareholder’s compensation compared with that to non-shareholder employees or paid in prior years;

(8) Prevailing rates of compensation for comparable positions in comparable concerns; and

(9) Comparison of compensation paid to a particular shareholder-employee in previous years where the corporation has a limited number of officers.

 

When we help clients with the above, we tend to ask a lot of questions and then document the process we follow. Documentation is key: if the IRS ever audits or reclassifies your distributions as salary, you need to have data to backup your numbers.

Based on the above factors, we discuss what your education and licensing level is, how your practice is set up, how your firm is doing, and the state of your financial data. Someone grossing $250,000 in their firm is going to be paid differently than someone grossing $75,000.

This, of course, goes back to the point that you need to be making enough money to make it worth electing to be an S-Corp.

Many private practice therapists who we’ve worked with have salaries ranging from $45,000 to $130,000, for example. Determining a reasonable salary depends on what is going on in your business and the factors involved in your business. A reasonable salary is not going to be the same across the board since every practice is different.

TL;DR: We recommend that you document how you determined your salary. Reach out to us if you need some help deciding what reasonable compensation looks like for you.
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.