Hello all,
First posting here. I'm hoping to have some help in, what appears to be, a complicated issue.
I'm a web developer working for multiple clients. In previous years I have always simply filed a Schedule C and run everything under an EIN tied to my personal SS. In late 2012, on the advice of my CPA, I formed a NY State S Corp. I formed it in NY State because I had previously lived there and believed that I was moving back there. I still had a registered address in NY but was living in Germany since 2011. There was a small misunderstanding between myself and my CPA. I believe he would have never suggested forming an S Corp had he fully understood that I was actually living overseas and not just on an extended holiday. That was my fault. The confusing came from me needing a new CPA in a flash and never fully explaining my situation because I was late on my 2010 return.
Anyhow, the S Corp simply sat there for all of 2013 as I couldn't use it since I couldn't open a business checking account from overseas. So, I continued on as a sole proprietor for all of 2013 and recently filed a Schedule C again. I moved back to the US at the very end of 2013 but this time to California. My CPA mailed me my corporate package so that I could open a business checking account. I opened at Chase because they were the only ones to let me open an out-of-state account (since I was inc. in NY). Also on my accountants advice, I started giving myself a monthly paycheck (net) of 1400 (400 per week minus an estimated 50 for payroll tax). The accountant was planning on setting up payroll services for me. Things seemed to be moving along fine. All my clients were paying me via the new EIN from the S Corp to my business banking account, I was paying myself a paycheck like told, etc. Then came time for my first quarterly taxes...
I am stuck here. I am the only employee and owner. The accountant is pursuing this as if it simply were a NY Corp paying an out-of-state employee. For me, from an employee standpoint, there's little difference in approach. Either way I need to pay personal state income tax to CA since I live here. However, where our views are diverging, is from the employer's (the S Corp's) standpoint. Yes, it's a NY entity however, I believe that I may fall under what's considered a nexus (I'm new to all of this so bear with me). My rent expense, my business expenses, all of my activity is out here in CA. Oddly though, ALL of my income is derived from NY clients (though that's looking to change soon). I have read that California imposes a 1.5% S Corp tax with a min. of $800 annual franchise tax. On top of that, in order to even give myself a correct payroll, I need to register my NY S Corp as a foreign entity allowed to do business in the state of CA. This has me worried as my first quarter payroll taxes are due before the end of this month.
All of this is so overwhelmingly confusing, especially because what I do is virtual. All of the servers on which I work are located in NY, as are my clients, however I am physically located in CA. Mind you, I am NOT looking for any kind of loophole here. I want to pay my taxes correctly and to where they need to be paid.
So, I propose a few questions based on what I wrote above:
1. In keeping the S Corp, is it better to:...?
a. Keep the NY S Corp, pay the annual $25 NYS Franchise tax, and file in CA as a foreign corp to pay all state taxes to CA.
b. Dissolve to NY S Corp and form a new CA S Corp (huge headache for numerous reasons to transition my clients yet again).
c. I read something about combining S Corps and even keeping the same EIN. So, essentially "moving" my S Corp.
2. Regarding payroll tax, what is the quickest action I can take to remedy my situation if I do indeed owe/need to collect CA tax from the S Corp?
3. In the long run, is any of this even worth it or should I simply go back to being a Sole Proprietor and paying SE tax? If I'm lucky, the business grosses ~$120,000 annually. I have business insurance incase I ever got sued anyhow, so the whole "layer of protection" with an S Corp doesn't seem to apply (or does it?). Also, the little tax savings that there may be (not sure yet as this is my first year with the S Corp) seems to be flushed out but way more fees from my accountant for filing more returns along with payroll fees as well.
Again, I don't mind paying CA tax even though it's higher. I use the roads here just like everyone else. My concern is doing this all correctly, not swindling to save a buck or two. If I legally owe NY then I want to pay NY. If I legally owe CA, then that too.
Because my CPA is NY based we have to do everything via email and phone. Sometimes things get "lost in translation" so I'd really like some advice from the community on which direction to go here so that I can call my CPA and have a better understanding of what he's saying and what I should be saying.
Thank you all in advanced. Kind regards.
