Answer by Wray Rives:
To make the election, you will need to complete a Form 2553 and mail it to the IRS. Texas does not require anything and making the election will not impact your Texas franchise tax reporting.
There are a few items you need to note.
- Because you are in Texas, a community property state, your spouse, if you are married will need to sign the 2553 to indicate his or her consent to the election.
- You have a window between Jan 1 -March 15 each year to make an S election and have it effective as of Jan 1. If you make the election after March 15, then the earliest effective date you can choose is the date you mail the form.
- If you already have a separate checking account for the LLC, you do not need to open a new bank account. It is not required, but I highly recommend you use an online bookkeeping app to track your business income and expenses.
- You can continue to take withdrawals from the business account as needed, but you will also need to pay yourself a reasonable salary, which means you need to pay federal and state payroll taxes. I highly recommend you use an online payroll app to do this. I know you don't ever plan to fire yourself, but you will have to pay Federal and Texas unemployment taxes on your wages.
- If you have an individual health insurance policy, then be sure you have the S Corp pay the premiums and include that as part of your compensation from the business. The premiums are income to you, but not subject to FICA or Medicare taxes and are a tax deduction for the S Corp.
- If you are currently a sole proprietor, you may be taking a home office deduction, you will not qualify for the home office deduction as an S Corp owner except as an itemized deduction, but you can rent a portion of your home to the S Corp and achieve some of the same tax impact.
- Finally I recommend you discuss this with your tax professional or if you don't currently use a tax professional, hire one. When you own a business, taxes is not just about filling in some blanks on a form, but having a relationship with a professional who can answer your questions when they come up, help you plan for ways to minimize taxes and there will be quite a bit more tax reporting to do as an S Corp. I doubt that accounting, bookkeeping and tax returns is the area where you add value to the business, so spend your time doing the things that help the business grow and succeed.