How to Set Up an S Corp as an Amazon Seller
I work with sellers all the time on various financial issues and I find that the concept of an S corp is one of the most confusing. I typically have to explain and reexplain the concepts of setting up and operating an S Corp. In this post I will try to make the steps very clear for those who have received conflicting information.
The first thing you need to understand is that there is no entity type that is an S corp. You are either an LLC or a corporation that elects to have the IRS tax your entity as an S corp. An LLC or corporation needs to be formed at the state level. Most sellers form an LLC and elect to have that entity taxed as an S corp.
Ok, so now that we have that cleared up, let’s cover the steps.
Steps to Set Up and Operate an S Corp
Start selling on Amazon and make a profit. This step may seem obvious, but I have encountered many sellers who have worked with a company to form their entity and immediately elect to have that entity taxed as an S corp. This is generally bad advice. S corps are treated as corporations by the IRS so they are more complex to operate than a single-member LLC. You’ll need to file a separate business tax return, track your basis, pay yourself on payroll if you intend to take money out of the business, and outsource your bookkeeping to ensure a balance sheet is available for your tax return. Most sellers are best served by operating as a single-member LLC until they’ve started earning a regular profit and can afford to pay themselves a regularly salary.
Understand what you are getting yourself into by electing to be taxed as an S Corp. It’s important to understand that when you elect to be taxed as an S corp you will be required to do certain things that you are not required to do as a single-member LLC. You’ll need to file a separate business tax return called Form 1120S. This is now in addition to your personal tax return. You’ll need to pay yourself a reasonable salary on payroll to meet the IRS reasonable compensation requirements. If you plan to take money out of the business, you must meet this requirement before taking distributions. You must also track your basis. That means you need to keep track of the money you put in, plus profits, and money you take out, minus losses to determine if distributions are taxable. This needs to be done by keeping your books in an accounting system such as QuickBooks Online. I recommend consulting with a CPA to ensure this is all clear.
File Form 2553 with the IRS. Once you’ve covered steps 1 and 2, complete Form 2553 and fax it to the IRS. This needs to be done by March 15th. If you file it after March 15th, you’ll need to include an explanation for being late.
Receive confirmation letter from the IRS. Expect to receive a letter in the mail from the IRS within 4-6 weeks. When you receive that letter, it will confirm the date which your S election has been effective.
Sign up with a payroll provider to pay your reasonable salary. I recommend that you sign up with Gusto. Gusto will handle all of your payroll processing and payroll tax filings with the IRS and state for a small monthly fee. But what is a reasonable salary? A reasonable salary is what you would pay a person to do everything you do in your business. I have software that helps my client determine this. If you underpay, you risk pretty severe penalties with the IRS.
Take Accountable Plan reimbursements. If you are incurring expenses on behalf of the business, you should get reimbursed. The common examples are using your home as an office or to store inventory or driving a personal vehicle. An Accountable Plan is an IRS approved method of providing a tax deduction for the business and providing tax free reimbursement to the owner. You should never charge personal expenses to the business. You are a corporation now and need to act like it.
Take distributions of profit. After you have taken your reasonable salary and Accountable Plan reimbursements, take distributions of your profits. Check with your accountant and make sure you have sufficient basis. Most likely you will have basis as long as you are not distributing more than what profits have been recognized. Distributions are tax free as long as you have basis.
Keep good bookkeeping. If you are a single-member LLC, there is no balance sheet on your tax return, no payroll, and no need to track basis. That is why single-member LLCs can get away with sloppy or no bookkeeping. S corps don’t have that flexibility. In order to prepare your tax return Form 1120S, you’ll need good Amazon seller bookkeeping.
File your Form 1120S. By March 15th, you’ll need to have your books in order so that you can file your Form 1120S. This is a separate business tax return. You’ll file this with the IRS and the K-1 will provide the information that needs to be reported on the personal tax return Form 1040.
File your Form 1040. By April 15th, you’ll need to have filed your Form 1120S so that you can use your K-1 to report your profit or loss from Form 1120S. This is where any tax due or to be refunded will be determined.