If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.

Fundamentals of self-employment tax

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.

Keep your salary “reasonable”

Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C corporation

There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.

Many factors to consider

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.

© 2021

Recognizing their outstanding service, innovation, and development, Small Business Week celebrates small business owners around the country. Always falling during the first week of May, you can observe this holiday by visiting the link http://www.sba.gov and nominating your favorite small business.

There are many different ways to celebrate and help your local small businesses. Here are a few ways!

1. Purchase gift cards.

You’ll be supporting their operations when they need it most!

2. Share your favorites on social media.

Shout out some of your favorite companies, products, or promotions on social media to let your friends know.

3. Leave positive reviews.

Help them gain some social proof and improve their online rankings. And it’s free!

4. Refer people directly.

Of course, you can also help simply by talking about your favorite small businesses to others via text, phone calls, or video calls.

5. Send a kind note.

A little kindness goes a long way, especially during stressful seasons. If you can’t support small businesses financially, send them a quick note via email or social media to tell them how much you appreciate it. You could make the team’s day.

6. Ask business owners how you can help.

If you know any entrepreneurs in your area or online, reach out and ask if there’s anything specific they need. Even if there isn’t, they’ll probably appreciate the sentiment.

7. Create a community organization.

If you want to support a variety of businesses in your area and get others involved, consider creating a community fund or support group. You can either collect money or come up with creative ideas to help local businesses. Use social media or local forums to facilitate conversations with others in your area.

8. Opt for local stores over chains when possible.

Even if you don’t have extra money you spend, heading to the corner market for groceries over the big box store can make a major difference for that business owner.

Here at Wamhoff Accounting Services, we support local and small businesses all around us! We hope that you will join us in celebrating Small Business Week!

In one recent cybercrime scheme, a mortgage company employee accessed his employer’s records without authorization, then used stolen customer lists to start his own mortgage business. The perpetrator hacked the protected records by sending an email containing malware to a coworker.

This particular dishonest worker was caught. But your company may not be so lucky. One of your employees’ cybercrime schemes could end in financial losses or competitive disadvantages due to corporate espionage.

Best practices

Why would trusted employees steal from the hand that feeds them? They could be working for a competitor or seeking revenge for perceived wrongs. Sometimes coercion by a third party or the need to pay gambling or addiction-related debts comes into play.

Although there are no guarantees that you’ll be able to foil every hacking scheme, your business can minimize the risk of insider theft by implementing several best practices:

Restrict IT use. Your IT personnel should take proactive measures to restrict or monitor employee use of email accounts, websites, peer-to-peer networking, Instant Messaging protocols and File Transfer Protocol.

Remove access. When employees leave the company, immediately remove them from all access lists and ask them to return their means of access to secure accounts. Provide them with copies of any signed confidentiality agreements as a reminder of their legal responsibilities for maintaining data confidentiality.

Don’t neglect physical assets. Some data thefts occur the old-fashioned way — with employees absconding with materials after hours or while no one is looking. Typically, a crooked employee will print or photocopy documents and remove them from the workplace hidden in a briefcase or bag. Some dishonest employees remove files from cabinets, desks or other storage locations. Controls such as locks, surveillance cameras and restrictions to access can help prevent and deter theft.

Treat workers well. Create a positive work environment and treat employees fairly and with respect. This can encourage loyalty and trust, thereby minimizing potential motives for employee theft.

Wireless risk 

In addition to the previously named threats, your office’s wireless communication networks — including Wi-Fi, Bluetooth and cellular — can increase fraud risk. Fraud perpetrators can, for example, use mobile devices to gain access to sensitive information. One way to deter such activities is to restrict Wi-Fi to employees with special passwords or biometric access.

For more tips on preventing employee-originated cybercrime, or if you suspect a fraud scheme is underway, contact us for help.

© 2020

St. Louis Small Business Monthly, a regional publication serving the entrepreneurial and small business community, has recently named Wamhoff Accounting President Sandy Furuya to its 2020 list of St. Louis’ Best Accountants. The list appears in the publication’s October, 2020 issue, and is compiled based on reader nominations.

Furuya holds more than 30 years of experience in all facets of tax planning and accounting, serving individuals, non-profits, businesses and trusts. She and her team of tax professionals prepare nearly 750 returns each year and serve as consultants for clients throughout the year to help them appropriately navigate their unique financial situations.

“My passion for this industry began when I was quite young and has only grown as my career has progressed,” said Furuya. “My team and I are honored to have served generations of clients as they go through the various stages of life and business, and all of the transitions that come along with it. They rely on us to help them make informed decisions and feel prepared for tax season all year long.”

Wamhoff Accounting was established in 1975, with Furuya working alongside founder Bob Wamhoff since the early days of the firm. She assumed ownership in 2017, continuing the Wamhoff legacy of client service excellence and treating clients as part of the family. The firm has also been named to Small Business Monthly’s list of St. Louis’ Best Accounting Firms for nine years, and has received multiple Best in Customer Service awards

Services offered by the firm extend beyond taxes and accounting. Wamhoff Accounting also assists with bookkeeping, financial statements, and establishing new businesses. Free initial consultations are available upon contact, and individual tax returns can be completed within the day.

“I am honored to be included on this year’s list of St. Louis’ Best Accountants and am grateful for the support of our clients and area business owners who took the time to nominate me,” said Furuya. “As we prepare to enter a new tax season, I look forward to helping clients navigate the tax and financial implications of this past year and prepare them for the future.”

In Notice 2020-71, the IRS recently announced per diem rates that can be used to substantiate the amount of business expenses incurred for travel away from home on or after October 1, 2020. Employers using these rates to set per diem allowances can treat the amount of certain categories of travel expenses as substantiated without requiring that employees prove the actual amount spent. (Employees must still substantiate the time, place and business purposes of their travel expenses.)

The amount deemed substantiated will be the lesser of the allowance actually paid or the applicable per diem rate for the same set of expenses. This notice, which replaces Notice 2019-55, announces:

• Rates for use under the optional high-low substantiation method,
• Special rates for transportation industry employers, and
• The rate for taxpayers taking a deduction only for incidental expenses.

Updated general guidance issued in 2019 regarding the use of per diems under the Tax Cuts and Jobs Act (TCJA) remains in effect.

High-low method

For travel within the continental United States, the optional high-low method designates one per diem rate for high-cost locations and another for other locations. Employers can use the high-low method for substantiating lodging, meals and incidental expenses, or for substantiating meal and incidental expenses (M&IE) only.

Beginning October 1, 2020, the high-low per diem rate that can be used for lodging, meals and incidental expenses decreases to $292 (from $297) for travel to high-cost locations and decreases to $198 (from $200) for travel to other locations. The high-low M&IE rates are unchanged at $71 for travel to high-cost locations and $60 for travel to other locations. Five locations have been added to the list of high-cost locations, two have been removed and 10 that remain on the list are now considered high-cost for a different portion of the calendar year.

Although self-employed persons can’t use the high-low method, they can use other per diem rates to calculate the amount of their business expense deduction for business meals and incidental expenses (but not lodging), or for incidental expenses alone. (Employees can no longer deduct their unreimbursed expenses because of the suspension of miscellaneous itemized deductions by the TCJA, so these other rates are effectively unavailable to them.) The special rate for the incidental expenses deduction is unchanged at $5 per day for those who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

A simpler process

The per diem rules can greatly simplify the process of substantiating business travel expense amounts. If the amount of an allowance is deemed substantiated because it doesn’t exceed the applicable limit, any unspent amounts don’t have to be taxed or returned. If an employer pays per diem allowances that exceed what’s deemed substantiated, however, the employer must either treat the excess as taxable wages or require actual substantiation. When substantiation is required, any unsubstantiated portion of the allowance must be returned or treated as taxable wages. Please contact us to discuss the rules further.

© 2020