{"id":1532,"date":"2019-09-07T12:39:49","date_gmt":"2019-09-07T12:39:49","guid":{"rendered":"https:\/\/wcginc.com\/?p=1532"},"modified":"2026-01-26T16:36:59","modified_gmt":"2026-01-26T16:36:59","slug":"s-corp-transition-pains","status":"publish","type":"post","link":"https:\/\/wcginc.com\/blog\/s-corp-transition-pains\/","title":{"rendered":"S Corp Transition Pains"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68b58c7b02c39\" class=\" wd-rs-68b58c7b02c39 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<div class=\"overview\">\n<h2><span class=\"ez-toc-section\" id=\"Key_Takeaways\"><\/span>Key Takeaways<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li>Electing S corporation taxation for your LLC can reduce self-employment taxes, but the transition comes with challenges.<\/li>\n<li><b>Past tax obligations<\/b>: Many clients face large tax bills from previous poor tax planning, which must be paid first.<\/li>\n<li><b>Proper tax planning<\/b>: S Corp benefits require calculating reasonable shareholder salaries, estimated taxes, and household income to achieve tax neutrality.<\/li>\n<li><b>Cash flow impact<\/b>: Payroll and increased income tax withholdings can create a temporary cash crunch during the transition year.<\/li>\n<li><b>Shortened year considerations<\/b>: Filing a late S Corp election compresses cash needs and makes the first year feel financially tight.<\/li>\n<li><b>Long-term benefits<\/b>: After the transition year, cash flow normalizes, and tax savings from the S Corp election are realized.<\/li>\n<li><b>Patience is key<\/b>: The process may feel painful at first, but proper planning ensures smoother tax management and reduced taxes over time.<\/li>\n<\/ul>\n<\/div>\n<p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-67330173ef509\" class=\" wd-rs-67330173ef509 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Having your LLC elect S corporation taxation is fairly easy. But like\u00a0<a href=\"https:\/\/hamiltonmusical.fandom.com\/wiki\/King_George_III\" target=\"_blank\" rel=\"noopener\">King George in Hamilton<\/a>, \u201cWhat comes next?\u201d The S Corp transition frankly speaking can be painful. Let\u2019s run thought some of the transition concerns that we\u2019ve experienced having done over a thousand S corporation elections in the past decade.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-67330230a274b\" class=\" wd-rs-67330230a274b wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title img-right \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Past_Sins\"><\/span>Past Sins<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p><img decoding=\"async\" class=\"alignnone size-medium wp-image-23697\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/rave-300x183.jpg\" alt=\"\" width=\"300\" height=\"183\" srcset=\"https:\/\/wcginc.com\/wp-content\/uploads\/rave-300x183.jpg 300w, https:\/\/wcginc.com\/wp-content\/uploads\/rave.jpg 328w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>Oftentimes a client will call us in March or April freakin\u2019 out about his or her huge tax bill. They dig a little deeper into their preliminary tax return to determine that the huge tax bill was in part due to\u00a0<a href=\"https:\/\/wcginc.com\/kb\/avoiding-or-reducing-self-employment-se-taxes\/\" target=\"_blank\" rel=\"noopener\">self-employment taxes<\/a>. Like you were down the count and drowning in \u2018em. They try to find ways to reduce self-employment taxes, and they find WCG (formerly Watson CPA Group), S Corp experts. We explain that we can reduce a large chunk of self-employment taxes through an S Corp election. They say, \u201cAwesome. Wow!\u201d and we say, \u201cWait for it\u2026\u201d there\u2019s more. Alright, enough Hamilton references.<\/p>\n<p>Another part of the huge tax bill was just basic poor tax planning. So often we hear, \u201cmy friend who is in the same business I am, doesn\u2019t pay any taxes.\u201d Ok\u2026 sure\u2026 maybe your friend doesn\u2019t have any taxable income. But what is more probable is that your friend has an excellent CPA who did proper tax planning; so while there was a tax obligation associated with the tax return, the \u201cfriend\u201d made estimated tax payments along the way to land at tax neutrality during tax season.<\/p>\n<p>Don\u2019t confuse not owing taxes due to no taxable income with matching estimated tax payments correctly with tax obligations. If you have a tax obligation of $50,000 and paid in $55,000 leaving a $5,000 refund, you still owed taxes! You simply overpaid them during the year.<\/p>\n<p>So paying for past sins is boiled down to improper tax planning but it still takes cash to unbury yourself. Problem #1 with the S Corp transition is paying last year\u2019s tax obligation.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-673302208572f\" class=\" wd-rs-673302208572f wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Proper_Tax_Planning\"><\/span>Proper Tax Planning<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Going back to our client on the ledge, we demonstrate that an S corporation election is in his or her best tax interest, and we further show the benefits of our S Corp package for tax preparation, reasonable shareholder payroll and unlimited business consultation. The client says I Do, we say I Do, and off to the honeymoon we go.<\/p>\n<p>Shortly after sorting out the mess, filing a late S Corp election, preparing tax returns and paying for past sins, we start tax planning right away for the current tax year. Tax planning starts with estimated net business income after expenses and before reasonable shareholder salaries. It ends with a mock tax return including all household income sources (spouse income, rental income, pension income, etc.) and a calculated tax obligation. We then process shareholder payroll and adjust income tax withholdings using the calculated tax obligations.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[vc_row_inner el_class=&#8221;commu-video-sec&#8221; woodmart_css_id=&#8221;671799823908b&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzE3OTk4MjM5MDhiIiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column_inner][vc_video link=&#8221;https:\/\/www.youtube.com\/watch?v=ILGMFssKn-I&#8221; css=&#8221;.vc_custom_1731395933825{margin-bottom: 0px !important;}&#8221; woodmart_css_id=&#8221;6733007d780af&#8221; image_poster_switch=&#8221;no&#8221;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-673302ade6f01\" class=\" wd-rs-673302ade6f01 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h3 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Tax_Planning_Projections\"><\/span>Tax Planning Projections<span class=\"ez-toc-section-end\"><\/span><\/h3>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Business owners have enough anxiety; how do I drive revenue? How do I execute and deliver?<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][\/vc_row_inner]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-673302bc01829\" class=\" wd-rs-673302bc01829 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>We define tax neutrality as a $1,000 refund from the IRS and a $500 refund for the state.<\/p>\n<p>As such, Problem #2 with the S Corp transition is we are now increasing cash needs for payroll because income tax withholdings are increased to serve as estimated tax payments. In other words, we are leveraging payroll as a way to pre-pay your income tax as determined by proper tax planning.<\/p>\n<p>Here is Joseph Bassett, an expert in tax planning and staff accountant for WCG (formerly Watson CPA Group), explaining how he helps small business owners plan for taxes.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-6890ddb14115c\" class=\" wd-rs-6890ddb14115c wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"S_Corp_Transition_Cash_Crunch\"><\/span>S Corp Transition Cash Crunch<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>If we combine these two problems plus a shortened year, it can be super painful. This causes many people to wonder if the S Corp election is really worth it. We hear \u201cit seems like I am giving up a lot of cash with this darn S corporation thing\u201d often. Let\u2019s recap the cash crunch.<\/p>\n<p>In April, you paid a bunch of cash for last year\u2019s sins. In May, we take the remaining 8 months (tax and cash compression) and compute the cash needed for the current year\u2019s sins. So, yes, it appears a lot of cash is leaving your body because it truly is. Does it get better? Yes!<\/p>\n<p>January of the following year we are dealing with 12 months so, we don\u2019t have the cash compression. April rolls around, and you don\u2019t owe any additional taxes. And life is good. But it takes almost a year to get there, and lot of cash.<\/p>\n<p>We also hear, \u201cI don\u2019t think this\u00a0<a href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/s-corporations\" target=\"_blank\" rel=\"noopener\">S Corp election<\/a>\u00a0is really saving me taxes.\u201d Foolish. This statement is theoretically impossible. Ok, not totally impossible. You could consider a reasonable shareholder salary to be equal to your net business income; but that would be equally as foolish as the previous statement.<\/p>\n<p>So there you have it. The S Corp transition and the associated problems. Not everyone goes down this path of course, but many clients do. Hang in there! Together we will get through it.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68b58d0c5b7cf\" class=\" wd-rs-68b58d0c5b7cf wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title faqs-wrap \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title box-title-style-default wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_is_an_S_Corp_election\"><\/span>What is an S Corp election?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>It\u2019s when an LLC chooses to be taxed as an S corporation to reduce self-employment taxes.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Why_do_I_owe_so_much_during_the_transition\"><\/span>Why do I owe so much during the transition?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Past tax obligations and payroll adjustments for estimated taxes increase cash needs in the transition year.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Do_I_still_need_a_CPA_for_S_Corp_planning\"><\/span>Do I still need a CPA for S Corp planning?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Yes, professional guidance ensures proper shareholder salaries and tax neutrality.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_is_a_reasonable_shareholder_salary\"><\/span>What is a reasonable shareholder salary?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The salary that balances IRS requirements with minimizing payroll taxes.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Will_I_save_taxes_immediately\"><\/span>Will I save taxes immediately?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Some savings appear after addressing past obligations, but full benefits usually show in the next year.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Why_is_cash_flow_tight_the_first_year\"><\/span>Why is cash flow tight the first year?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Paying prior year taxes plus increased withholdings creates a temporary cash crunch.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Does_a_late_S_Corp_election_matter\"><\/span>Does a late S Corp election matter?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Yes, it shortens the transition year and affects cash flow planning.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Is_the_S_Corp_election_always_worth_it\"><\/span>Is the S Corp election always worth it?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Almost always, as long as shareholder salaries are set reasonably and tax planning is done correctly.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_long_until_things_normalize\"><\/span>How long until things normalize?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Typically by January of the following year, when a full 12-month cycle allows smoother cash flow.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Can_S_Corp_reduce_self-employment_taxes\"><\/span>Can S Corp reduce self-employment taxes?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Yes, one of the main benefits is lowering self-employment tax liability on business profits.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_row_inner el_class=&#8221;commu-video-sec&#8221; woodmart_css_id=&#8221;671799823908b&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzE3OTk4MjM5MDhiIiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column_inner][vc_video link=&#8221;https:\/\/www.youtube.com\/watch?v=ILGMFssKn-I&#8221; css=&#8221;.vc_custom_1731395933825{margin-bottom: 0px !important;}&#8221; woodmart_css_id=&#8221;6733007d780af&#8221; image_poster_switch=&#8221;no&#8221;][\/vc_column_inner][\/vc_row_inner][\/vc_column][\/vc_row]<\/p>\n","protected":false},"author":6,"featured_media":31053,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[17],"tags":[],"class_list":["post-1532","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.8 (Yoast SEO v27.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>S Corp Transition Pains - WCG CPAs &amp; 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Let\u2019s run thought some of the transition concerns.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/wcginc.com\/blog\/s-corp-transition-pains\/\" \/>\n<meta property=\"og:site_name\" content=\"WCG CPAs &amp; Advisors\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-07T12:39:49+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-01-26T16:36:59+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/wcginc.com\/wp-content\/uploads\/354598_2218243609_reps_strategies_300-1.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"300\" \/>\n\t<meta property=\"og:image:height\" content=\"200\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Jason Watson\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Jason Watson\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"S Corp Transition Pains - WCG CPAs & Advisors","description":"Like King George in Hamilton, \u201cWhat comes next?\u201d The S Corp transition frankly speaking can be painful. Let\u2019s run thought some of the transition concerns.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/wcginc.com\/blog\/s-corp-transition-pains\/","og_locale":"en_US","og_type":"article","og_title":"S Corp Transition Pains","og_description":"Like King George in Hamilton, \u201cWhat comes next?\u201d The S Corp transition frankly speaking can be painful. 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