Miscellaneous

At the end of each year, all S corporation profits are allocated to the corporation's shareholders. Even if you and your fellow shareholders choose to leave some or all of the profits in the corporation, taking nothing as distributions or salaries, you will still be required to pay tax on those profits. In technical lingo, an S corporation is not permitted to have any retained earnings. This is different from a regular corporation, which can retain—and pay taxes on—its earnings.

However, S corporation shareholders may be able to deduct 20% of their business income with the pass-through deduction established under the Tax Cuts and Jobs Act. 

It sounds like you could do with some tax planning! Unfortunately, these are too many unknowns for a specific answer here.

First - setting up an LLC (or perhaps taking an S-Corp election?) would depend on a variety of factors. How high is your 1099 compensation? Would you prefer the "hands off" route and possibly ask for a W-2 instead of a 1099 from your second job (if possible, and if I understood that part of your question correctly), or would you like to set up an LLC and expense various things yourself, in addition to any other tax savings that come with having an LLC? Usually, the LLC route can offer more tax savings, but a more "hands on" approach from you - e.g. a possible additional S-Corp tax return + putting yourself on payroll (if the S-Corp route makes sense); accounting for your LLC (with or without an S-Corp election), etc.

If you'd like to schedule a (no-strings/complimentary) consultation with my firm (we work predominantly with medical service providers and specialize in tax planning), let me know. You can email my business partner, Paulina S., for more information or to set up a call - her email address is paulina (at) ratio.cpa - she handles all initial client inquiries and can help steer you through your options. We do our best to have the consultations be as transparent and informative as possible.

Apologies that I could not help more - but taxes are never straightforward, more information is needed, and making mistakes now can cost you in the future.

I can tell you put some thought into your questions. First, congratulations on the freelance work.

To set aside money for taxes on any profit, you are right that it is a good idea to have a separate account for the taxes. Keep in mind that you need to be very careful to keep your business separate from your personal life. Therefore, you shouldn’t be paying business expenses out of a personal account or depositing business income directly into a personal account. That’s called commingling. If you commingle accounts and you ever got audited by the IRS, you’d have a nightmare on your hands because an IRS agent could subpoena ALL your bank accounts and assert that any deposits to ALL bank accounts (even personal accounts) is income, subject to tax. Then, the burden of proof would shift to you. Why go through all that torture? So do it the right way from the beginning.

Consider your freelance work a business, even if it’s conducted as merely a sole proprietorship without a dba (assumed name). Each business should have its own bank account, separate from any personal account and separate from the bank account for any other business you own. That is, each different type of business must be treated separately. To illustrate, if you had one business where you did consulting and a second business where you did dog grooming, each of those businesses should have its own bank account. Why? Because on your tax return, you’re required to separately report each activity/business. So you’d have personal accounts, at least 1 business account for each activity/business, and then yet another account to set aside money for taxes. I don’t think it matters whether that “tax” account was a checking or a savings account.

If you take the business to the next level, I would recommend an LLC in the beginning. An LLC will give you (as an individual) some legal liability protection, by separating the business from you personally. If the business got to a certain level of profitability, making an S election would be wise. A C corporation might also be a good option; it depends on your specific situation. I don’t counsel my clients to do a C corporation or S corporation on day one because those entities require you to file separate federal business tax returns, which means having to pay someone (like me) to do the tax returns. It doesn’t make sense to incur those additional compliance costs if you’re not making a profit.

You are right that taxes vary from location to location. That is, state and local taxes differ. Federal taxes are the same, regardless of where you live in the 50 states. Being in New York, you’re definitely subject to state income tax.

Feel free to contact me, if you wish to engage me for assistance.

As a CPA, I came across this website and joined just last week, and I just came across your question.

Good question. I commend you for planning ahead so that you don’t end up owing a large balance or incurring the estimated income tax penalty (Form 2210) come tax-time next year.

Both of your suggestions are acceptable. You are right that there is still a lot of time left in the year, so increasing your federal income tax withholding is an option. Alternatively, you could start making estimated income tax payments via Form 1040-ES for 2021.