Should I spend all my S-Corp LLC money before year-end for tax purposes?
I have a regular day job with salary, but I also run an S-Corp LLC for my side gigs and freelance projects that brings in about $28,000 extra annually. I keep everything properly separated with a dedicated business checking account for the LLC, and I use those funds for legitimate business expenses that I write off. What I'm confused about though - is it BAD to have leftover money in my business account at the end of the year? Since I already have income from my regular job, should I be trying to spend all my S-Corp money before December 31st for tax purposes? Would zeroing out the account somehow optimize my tax situation? I have several equipment upgrades I could purchase if needed, or I could just pay myself a distribution. I want to make the smartest financial decisions here, but I don't fully understand all the tax implications for S-Corps. Does having money left in the account at year-end somehow hurt me tax-wise?
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Vanessa Chang
This is a common misunderstanding with S-Corps. Having money left in your business account at year-end is NOT bad for tax purposes. Here's why: S-Corps are "pass-through" entities, which means the profits pass through to your personal tax return regardless of whether you physically transfer the money to your personal account. The IRS doesn't care if the money sits in your business account or your personal account - you'll be taxed on the net profit either way. What matters is your business income minus legitimate business expenses. If you spend money on unnecessary business purchases just to "zero out" the account, you're essentially converting potentially taxable income into depreciating assets you might not need.
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Madison King
•But don't you need to pay yourself a "reasonable salary" with an S-Corp? I heard that's required and you can get in trouble if you just leave all the money in the business account.
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Vanessa Chang
•Yes, you absolutely must pay yourself a reasonable salary as an S-Corp owner. This is separate from the question of having leftover profits. The IRS requires S-Corp owners who work in their business to take a reasonable salary that's in line with what someone would earn doing similar work in your industry. This salary is subject to FICA taxes (Social Security and Medicare). Any profits above your salary can be taken as distributions, which aren't subject to FICA taxes - that's the main tax advantage of an S-Corp.
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Julian Paolo
I had the exact same confusion with my marketing S-Corp last year. After trying to figure it out myself and getting nowhere, I found this tool called https://taxr.ai that really helped me understand my S-Corp tax situation. It analyzed my business structure and clearly explained what I needed to know about reasonable compensation requirements versus distributions, and how profit retention works.
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Ella Knight
•Does it actually explain S-Corp stuff specifically? I've tried other tax help sites but they usually just cover the basics and not the more complicated business structures.
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William Schwarz
•I'm kinda skeptical of these "AI tax" things. How is it different from just talking to a real accountant who specializes in small businesses? Wouldn't they give better advice?
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Julian Paolo
•It absolutely covers S-Corps in detail - that's what impressed me. It breaks down the specific rules for S-Corps including reasonable compensation requirements, distribution strategies, and profit retention options. Far more detailed than general tax sites. Real accountants are great if you have one you trust, but mine charged $250/hour and wasn't always available for quick questions. With this tool I could explore different scenarios on my own time and understand the concepts better before making decisions.
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Ella Knight
Just wanted to follow up about https://taxr.ai - I checked it out after asking about it and it was actually super helpful! I uploaded my operating agreement and some financial docs, and it gave me specific guidance about my S-Corp situation. It showed me exactly how much I should be paying myself as reasonable compensation based on my industry and revenue. Definitely worth checking out if you're confused about S-Corp rules like I was.
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Lauren Johnson
If you're having trouble getting clear answers about S-Corp rules, I'd highly recommend using Claimyr to get through to an actual IRS agent. I was in the exact same boat last year - called the IRS business line like 8 times over two weeks and could never get through. Then I tried https://claimyr.com and got connected to an IRS rep in about 15 minutes. There's a demo video here: https://youtu.be/_kiP6q8DX5c
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Jade Santiago
•How does that even work? I thought the IRS phone lines were just permanently jammed and impossible to get through. Do they have some secret number or something?
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Caleb Stone
•Sounds sketchy. Why would I need a third party service to call a government agency? And how do I know they're not recording my tax info or something?
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Lauren Johnson
•They use a system that continuously redials and navigates the IRS phone tree until it finds an opening, then it calls you and connects you directly with the IRS agent. No special numbers - it's just automated persistence. They don't stay on the line once you're connected - it's just you and the IRS agent after that. They don't have access to any of your tax information since you're talking directly with the IRS after the initial connection. I was skeptical too but it seriously saved me hours of frustration.
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Caleb Stone
I have to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to talk to someone at the IRS about my S-Corp questions. It actually worked exactly as advertised - got me through to an IRS business specialist in about 20 minutes. The agent answered all my questions about cash retention in my S-Corp and confirmed that it's not a problem to keep funds in the business account as long as I've properly reported the income and taken a reasonable salary. Saved me from making some unnecessary year-end purchases!
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Daniel Price
One important thing nobody's mentioned yet - consider setting up an accountable plan for your S-Corp! It lets you reimburse yourself tax-free for business expenses you paid from personal funds. Super helpful if you occasionally use personal money for business stuff.
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Olivia Evans
•What's the advantage of an accountable plan vs just paying business expenses directly from the business account? Seems like an extra step for no reason?
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Daniel Price
•The main advantage comes when you unexpectedly pay for something business-related with your personal funds - maybe you forgot the business card or needed to make a quick purchase. Without an accountable plan, reimbursing yourself could be considered income. With a proper accountable plan in place, these reimbursements aren't considered income to you and aren't included on your W-2. It gives you flexibility while maintaining clean separation between business and personal expenses.
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Sophia Bennett
I made the mistake of trying to zero out my S-Corp account every December for the first two years. Ended up buying a bunch of stuff I didn't really need just to avoid having profits. My accountant finally explained I was thinking about it all wrong!
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Aiden Chen
•What did your accountant recommend instead? I'm in a similar situation with about $18k sitting in my business account and wondering what to do.
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Malik Jackson
•My accountant told me to just keep the money in the business account if I don't have immediate business needs for it. The key is making sure you've already paid yourself a reasonable salary throughout the year and properly reported the business income on your personal return. She said it's actually smarter to keep cash reserves in the business for future opportunities or unexpected expenses rather than forcing purchases you don't need. The $18k you have sitting there isn't hurting you tax-wise - you're already being taxed on it as pass-through income regardless of where the cash physically sits.
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Fatima Al-Qasimi
This is exactly the kind of S-Corp confusion I had when I first started my consulting business! The key insight that helped me was understanding that S-Corp taxation is completely separate from your cash flow decisions. Your $28k in profits will be taxed on your personal return whether you spend it, distribute it to yourself, or leave it in the business account. The IRS doesn't care about your year-end account balance - they only care about your net business income for the tax year. Instead of forcing unnecessary purchases, consider these options: 1. Take a distribution to yourself (not subject to FICA taxes unlike salary) 2. Keep cash reserves for future business opportunities or emergencies 3. Only buy equipment/supplies you actually need for business growth The most important thing is making sure you're paying yourself that reasonable salary throughout the year as others mentioned. Beyond that, cash management should be based on business needs, not tax optimization attempts.
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Chris Elmeda
•This is such a helpful breakdown! I've been overthinking my S-Corp finances for months. One follow-up question - when you say "reasonable salary," how do you actually determine what's reasonable? I've been paying myself $15k annually on my $28k in profits, but I'm not sure if that's enough or too much for freelance consulting work.
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