Frequently Asked Questions

If you expect to owe more than $1,000 in tax then you are required to make quarterly estimated tax payments to the IRS and state, if applicable. Income outside of a W-2 that creates additional tax owed include interest, dividends, rentals, business, partnership & s-corporation K-1s. The due dates are generally: April 15th, June 15th, September 15th, and January 15th.

Paying employees requires a few additional steps beyond simply writing a check. In most cases, you need to register with the IRS and state agencies in charge of withholding and unemployment. Penalties and interest can be significant if you do not make these payments on time.

We recommend using a third party such as Gusto. They will handle employee onboarding, direct deposits, tax payments, periodic reporting, and issuing year-end reports.

The main benefit of an S-Corporation is the payroll tax savings. As an S-Corporation, your earnings are divided into wages and distributions. Wages are subject to payroll taxes while distributions are not. You can expect to save about $1500 per $10,000 of business income by becoming an S-Corp.

An S-Corporation is a tax status that can be elected by an LLC or Corporation. You generally need to have $50,000 or more in annual profit (i.e. income minus expenses), for the tax benefits to outweigh the additional administrative costs.

Here are some additional considerations:

Do you have other W-2 income near the social security limits ($160,00 for 2023)?

Are you located in California, NYC, or Tennessee? If so, you’ll need to consider additional costs.

Do you have a steady business or is this a one-off type of income?

Does your business hold appreciating assets like real estate?

Do you have business partners?

You’ll need to do the following things to maintain your S-Corp status:

1.Keep Up-To-Date Books: This is a requirement for any solopreneur or business owner. We recommend QuickBooks Online but Xero, Wave, and sometimes Excel will do the trick.

2. Payroll: You’ll need to register for payroll in your state, open withholding and unemployment accounts, and run a regular payroll. It Is imperative to pay yourself a reasonable salary as the owner of an S-Corporation if you materially participate. We recommend using Gusto. They will handle the tax deposits and quarterly and annual reporting.

3. Deadlines & Forms: An S-Corporation files a Form 1120-S tax return, which is different from your personal return filed using Form 1040. Your S-Corp will also be required to generate forms W-2 and K-1, which are used to complete your personal tax return. Tax deadlines are slightly different as well. Your business return is due March 15th.

4. Estimated Tax Payments: Since more of your income will be reported via your K-1 we can approach this by either 1) Increasing your wage withholdings on your W-2. or 2) Making larger quarterly tax payments.

5. S-Corporation Election: The election is generally due 75 days after your entity is formed or by March 15th. There is, however, a “late” exception that applies which generally allows you to elect back to January 1st of the current year. In some cases, we can even elect S-Corp status back to January 1st all the way up to March 15th of the next year.

If you aren’t planning on contributing more than the annual limit for an IRA, we recommend staying with the IRA. If you have more than $6k-$7k then a workplace or solo-401k plan is preferred. There are also other options, the Simple IRA and SEP IRA, but neither is as efficient as the former two options. There are additional considerations once you hire employees and legal processes to stash away larger amounts of money via profit sharing and a defined benefits plan.

This deduction allows you to deduct up to 20% of your qualified business income earned in a qualifying trade or business. Generally, if your income is less than $182,000/$364,000 for 2023 single/joint filers you can receive the full 20% deduction on your Sch C, Partnership, S-Corporation, and Trust K-1s. In most cases, rental activities qualify as well.

If you are above these income thresholds your deduction is phased out unless you’ve paid wages or have assets. Then the deduction is calculated based on those factors.

This deduction is scheduled to be phased out completely by 2026.

You can claim the home office deduction if you meet both of the following requirements:

1. You use your home office regularly and exclusively for your business. (Note that your home office doesn’t have to be an entire room and it does not have to be partitioned off.)

2. The business part of your home must be one of the following:

Your principal place of business, meaning you use it exclusively for your business activities and you have no other fixed location where you conduct substantial business activities.

A place where you meet or deal with clients, patients, or customers in the normal course of your business.

A separate structure, not attached to your home, is used in connection with your business.

You can either use the standard mileage rate or your actual expenses.

For the standard mileage rate, you multiply your business miles by the IRS rate to get the deduction.

To deduct your actual expenses you have to use the vehicle more than 50% for business use. You can then deduct your expenses to operate the vehicle such as gas, oil, tires, insurance, depreciation, and interest paid on vehicle loans.

You generally cannot switch between methods once you settle on one for your first year. Both methods require tracking and documenting your mileage. We recommend using an app such as MileIQ.

It depends. Real estate losses are generally considered “passive” for tax purposes and cannot offset W-2 or other “active” business income. However, if your modified adjusted gross income (MAGI) is less than $150,000 then you can deduct up to $25,000 or rental losses as long as you actively participate in the management of the property.

REPS is an IRS designation that is granted to qualifying real estate professionals allowing them to claim unlimited losses on rental properties. This is important because investment property owners who do not qualify for REPS cannot claim rental property losses once their income goes over $100,000.

Qualifying for real estate professional tax status requires the following:

1. Work more than 750 hours in real property trades or businesses. “Real property trades or businesses” include any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

2. More than ½ of all personal service (hours) are worked in real property trades or businesses in which you materially participate. In effect, if you are working a full-time job that is not in real estate, you would need to spend 2,081 hours in real property businesses.

3. If you are performing services as an employee, you need to be greater than a 5% owner of the business.

4. You need to materially participate in the real property trade or business. To materially participate you generally need to be involved in a regular, continuous, and substantial manner. In practice, the two most common ways to materially participate are:

Work 500 hours a year on the activity.

Work 100 hours a year in the activity and more than any other person, including non-owners i.e. property manager, cleaner, etc.

If you operate a short-term rental (such as a VRBO or Airbnb property) and meet the following qualifiers your activity is not considered passive, which means you can generate rental income while writing off property depreciation and expenses.

1. Average length of stay is 7 days or less.

2. Show that you materially participated. Material participation can most easily be achieved by:

Work 500 hours a year on the activity.

Work 100 hours a year in the activity and more than any other person, including non-owners i.e. property manager, cleaner, etc.

Generally, no. Real estate is both an appreciating asset and is generally considered a passive activity. To obtain maximum tax benefits, we recommend separating your properties into separate LLCs. Please consult an attorney when creating entities as well.