Q: Can payments made out to my actual name be deposited in the LLC bank account as a pass-through then pay myself a salary?
I'm an insurance agent hired as a 1099. I formed the LLC w/ S corp tax designation, but my agency can't pay my LLC unless it is licensed with the state. That requires I carry a 500k E&O policy, which costs approx. 1k/yr. Would I be able to deposit checks made out to my name into the LLC's business account, and then have my LLC pay me a salary. This still allows me to take advantage of the tax savings, while not having to expense 1k/yr on insurance I don't need. I would still have E&O coverage for my name, but not the LLC. I'm trying to figure out if this is a viable option. Thanks.
A:
I don't see any reason why you could not do this provided you 1) ensure your salary is reasonable based upon fair market comps 2) issue yourself a W-2 at year end 3) pay estimated payroll tax payments monthly (or bi-monthly depending on how often you are paid...ask an accountant) 4) file 940s and 941s quarterly.
In other words, it is fine to make yourself an employee of your S corp, but you must follow through on all the steps to ensure you are, in fact, an employee.
One issue you could have is if your employer issues you a 1099 at year end of these payments. The 1099 will be in your social security number (not your business EIN). If you do not personally report these payments on your 1040 Schedule C, it will not match the IRS 1099s and subject you to audit risk. Ask the insurance company if they can issue to 1099 under your EIN. You will need to fill out a W-9.
I see this all the time in my practice. So many people set up LLCs and make an S election (likely at the advice of friends or an accountant), but the reality is for more people, it is not worth the trouble. Often I see this as a ploy for accountant's to make more revenue in the future. Remember your tax savings are ONLY on payroll taxes for the difference in your reasonable salary and the money received from your employer. You will pay income tax on ALL of it. This may not be enough money to justify the additional headache involved with having a separate entity filing and/or giving yourself a salary. If you had decided to not make the S election, all the income would be passed through to you anyway. You would not have a separate entity tax return due. It is much cleaner and makes the most sense for the vast majority of people.
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