This is super helpful! I didn't even think about the merchant services agreements. Do you have any recommendations for handling the transition period? Did you run both the old and new entities simultaneously for a while, or was it a clean cutover?

I did a phased approach where I ran both simultaneously for about 2 months. I set January 1st as my official transition date for tax purposes, but started setting up the new entity and accounts about 3 months prior. For merchant services, that was actually one of the trickier parts. Some processors treated it as a brand new business application despite having the same owner, which meant new rates and terms. I had better luck explaining it as a "restructuring" rather than a new business. Keep your processing statements handy to show history. I'd suggest creating a detailed timeline working backward from your target date. Also, create an entity-specific email address for all the new accounts rather than using a personal email - keeps everything organized during the transition.

I did this last year. Beyond Form 2553 for the S-election, you'll need: - SS-4 for your new EIN - Form 8832 if you're forming an LLC first and then electing S-corp status - Schedule D for each Schedule C business you're closing to report any asset transfers - Form 4562 for depreciable assets being transferred The trickiest part was making sure I properly documented the value of all business assets transferred to the new entity. The IRS can be picky about this if you're audited.

Thanks for the detailed response! That's really helpful. Did you handle the valuation of your business assets yourself or did you need to get professional appraisals? I'm worried about undervaluing things and causing problems down the road. Also, did you create a formal business plan for the new entity? I've heard that can help if there are ever questions about business purpose for the reorganization.

Interesting approach! What portion of your total compensation (salary plus distributions) does your $275K salary represent? I'm trying to figure out if there's a reasonable percentage that's generally considered safe.

My total compensation breaks down to about $275K salary and $180K in distributions, so my salary represents about 60% of my total compensation. My tax advisor said there's no magic percentage that's automatically "safe," but that the higher the percentage of your total compensation that comes as salary, the less likely you are to face scrutiny. He did mention that for medical specialists, keeping salary at least 50-60% of total compensation is a good starting point, but it really depends on all those factors others have mentioned - including local market rates for your specialty, your experience level, hours worked, and practice complexity. Every situation is unique, which is why documentation of how you arrived at your number is so important.

I went through one 2 years ago for my orthopedic practice. It was intense. They wanted EVERYTHING - industry salary surveys, time logs showing how many hours I worked, documentation of my education/experience, compensation data for other doctors in my practice, historical salary info, etc. The most helpful thing was having a formal reasonable compensation study we'd done when setting up the practice. The auditor still adjusted my salary up somewhat (from $280K to $320K), but accepted most of our position because we had documentation showing how we arrived at our numbers. Without that study, I suspect they would have reclassified all my distributions.

That's really helpful info, thanks for sharing. Sounds like the key is having documentation ready before any audit happens. I think I need to be more proactive about this.

This is such an important point! I didn't do this for my mother's helper and got hit with a surprise bill from my state's department of labor. They actually found out when the caregiver applied for unemployment after my mom passed away.

That's actually incorrect. According to IRS regulations, the deadline is for notifying the plan administrator, not completing the distribution. The regulation specifically states: "If the employee notifies the plan of the excess by April 15, the excess amount is not subject to double taxation." The actual distribution typically takes several weeks to process, but as long as the request is made by the deadline, the participant is considered compliant.

I work in benefits administration and handle these cases regularly. You're right that the notification deadline is April 15, not the distribution completion deadline - that was my mistake. What I should have clarified is that proper documentation of the notification is crucial. An email might work, but some plan administrators require specific forms to be submitted. The safest approach is to follow up with both administrators on Monday and ask them to confirm the appropriate procedure while referencing your weekend emails as initial notification.

The excess contribution amount gets added to your taxable income for the year you receive the distribution (so this current tax year, not last year). The earnings portion is also taxable in the current year. You'll get a 1099-R form showing the distribution. The good news is you avoid the 6% excess contribution penalty this way. The returned amount is technically taxed twice (once when contributed, once when distributed), but that's still better than the 6% penalty repeating every year until fixed.

Thank you so much for mentioning Form 8833! I just checked my 1042-S and they did apply a treaty benefit (there's something in Box 3 and 4). Will that form be available in regular tax software or do I need something special to file it?

Most major tax software packages like TurboTax, H&R Block, and TaxSlayer have Form 8833 available, but you might need to specifically search for it as it's not always included in the standard interview process. Some of the free filing options might not include this form. When you complete Form 8833, you'll need to reference the specific treaty article that applies to your situation. This information should be mentioned on your 1042-S in Box 13j typically. You'll also need to provide a brief explanation of the treaty benefit you're claiming. Don't worry too much about the technical language - just clearly state what type of income is covered (scholarship, fellowship, etc.) and which country's treaty applies to you.

Is that form 8843 required even if you're just getting a small amount on a 1042-S? I got one for a $500 prize from a contest but I'm a US citizen. Do i still need that form?