Accounting
What’s a reasonable wage?
The Internal Revenue Service (IRS) requires that S-Corp owners who actively participate in the business must receive "reasonable compensation" for their services to avoid potential tax issues. It's worth noting that the IRS does not provide a specific formula or percentage to calculate reasonable compensation. However, it expects S-Corp owners to receive a salary commensurate with the services they provide, similar to what an unrelated third party would receive for performing similar duties in the same industry. To ensure compliance and minimize potential tax issues, consulting with a qualified tax professional or accountant who specializes in S-Corp taxation is highly recommended. They can provide personalized guidance based on your specific circumstances and help you determine a reasonable salary that adheres to IRS guidelines. For our Employee Members, we partner with Darien Advisors, a tax advisory firm well-versed in ‘S’ Corp structures.
Why does Opolis have minimum salary requirements?
To qualify for Opolis Employee Membership, we have a minimum salary requirement depending upon the state in which you live. The minimum salary requirement consists of the exempt minimum wage plus employer taxes for your state. You should be paying yourself at least this amount in addition to the costs of benefits. Here’s why we have a minimum salary requirement:
To compliantly serve as your entity’s employer of record, we must ensure the entity’s employees are classified as full-time salaried exempt. This means they receive a fixed salary of at least the exempt minimum wage for their state.
Our group insurance plan mandates that we cover only full-time salaried employees.
Members must also include the cost of benefits in addition to their minimum salary amount as health insurance is 100% paid by their entity. This avoids any complications with Affordable Care Act compliance rules and simplifies accounting on the back end.
Again, if you or your tax accountant have questions about our requirements, please reach out to our team at: [email protected]
Does my entity need payroll tax licenses under its EIN?
No, it does not. The unique legal structure of the Employment Commons LCA allows us to serve as the Employer of Record to your entity, meaning that all payroll tax filings are filed in the appropriate jurisdictions on your behalf under Employment Commons LCA’s EIN for Federal (941/940), State (Withholding and Unemployment), and Local taxes (FMLA/SDI/City tax, to name a few, only if applicable).
Your company should not have any open payroll tax licenses or be required to file payroll reports/payroll tax filings on wages processed through Employment Commons. If you have open payroll tax licenses with the Departments of Labor or Revenue, you'll need to contact them and close any open payroll tax licenses under your EIN as your business legally does not have employees while you're employed by Employment Commons.
Does Opolis handle all accounting duties for my entity?
We do not (yet). Members typically manage their income and expenses using accounting software or engaging bookkeepers. Opolis will provide you with all the accounting data necessary to book the appropriate journal entries related to your payroll and employment. Please note that you should still be tracking all non-payroll-related expenses separately. See more on business expenses in our Taxes section below.
Taxes
What tax returns do I need to file?
Because you have created an entity for your freelancing business and elected to have it taxed as an S Corporation, you must file a separate business tax return in addition to your regular personal tax return. While this may initially feel burdensome, remember that having an S corporation means you can be compensated in two ways. You can be compensated first as an employee and secondarily by sharing the business’s profits as the business owner. This means you’re paying Social Security, Medicare, and any applicable state employment taxes only on the salary you draw, not your profits. In addition, your salary, employer’s share of payroll taxes, and any fees can be deducted as business tax expenses.
What does Opolis provide me?
At the end of January, Opolis will send you:
A password-protected digital copy of your W2 from the prior year. Physical copies will also be sent to the address we have on file.
A digital copy of the data export of your payroll invoices for the last year.
What items do I need to file my business income tax returns?
Opolis Members typically file their taxes using tax software, engaging their personal certified accountant, or using Opolis’ recommended tax advisory partner, Darien Advisors. Here are the items you’ll need to have at hand to file your business tax returns:
Opolis data export of your payroll invoices for the last year. You will receive this directly from Opolis by Jan 31. This data export contains gross payroll that you’ve processed including wages, payroll taxes, health insurance/benefits expenses, and any Opolis employment fees. Remember, as a corporation you are now both an employer and employee so while your W2 contains the expenses from the employee side of things, you still need the expenses from the employer side. This data export contains those employer expenses.
Prior year S Corp filing. Your tax accountant or software will need data from the previous year’s tax return. If your S Corp is new, ensure you have your initial EIN letter and your S Corp election documents.
Profit/Loss statement. This might be a new concept for you if this is your first time owning a business. It is essential that you keep accurate records of your incoming revenue and outgoing expenses during the year. Further, your expenses should be broken down by category. Examples of category expenses are software subscriptions, rent, training, travel, etc. You should use this data to create a profit and loss statement. Software such as QuickBooks Self-Employed can help you easily create a profit and loss statement with uploaded income and expenses. If you haven’t been bookkeeping during the course of the year, start today!
Your Personal Information. This would include your full name, personal address, social security number (SSN) in order to generate the K-1 and the S Corp return.
What items do I need to file my personal income tax return?
In order to file your personal income tax return, some of the documents you will need include:
Your previous year’s W2
K-1 from your S Corporation
Any applicable 1099s
Brokerage statements
Interest statements
Rental income statements
Property tax statements
For a full list of the documents needed to complete your personal tax return, check out this handy checklist from H&R Block.
I read that I have to complete a K-1, because I have an S Corp. What is it?
A Schedule K-1 represents your share of the profits of an S Corp. An S Corp is a pass-through entity which means profits or losses are passed through to the individual owners. This means your share of the profits of the S Corp will need to be reported on your tax return and taxes associated with those will be paid on your individual income tax return. Since all profits are passed through as owner income, no taxes are paid directly by S-corporations at the Federal level. Certain states do levy taxes if you’re incorporated there, but this is not the norm.
You must provide Schedule K-1s to any shareholders and file the S Corp return by March 15th. The S Corp return and K-1s might be complicated to fill out so we suggest consulting with your personal accountant or reaching out to Opolis partner, Darien Advisors, for further counsel.
I processed a bonus payment during the year. How do I account for that?
If you processed a bonus payment during the previous year, it will be listed on the data export of payroll invoices that Opolis provides to you on January 31st and included in taxable wages on your W2.
I bought and sold some digital currencies and some NFTs. How do I account for those?
In addition to all other documentation listed above, you can use popular cryptocurrency tax platforms such as Cointracking.info, Koinly.io, or Cointracker.io, to generate Form 8949 which captures gains and losses from those transactions. Opolis partners with Darien Advisors - expert CPAs in cryptocurrency accounting and taxes. Reach out directly to them to gain peace of mind about your digital currency tax filings.