Workers in the oil and gas industry often overpay their taxes. Why? Because they don’t know some of the best ways to ensure that they are only paying what is necessary, rather than what is extra. We provide easy, all-in-one small business accounting services, and one of our areas of expertise is working with oilfield landmen.
We published some general advice for landworkers about how to reduce your tax burden. Our suggestions were:
- Deduct employer meals at 100%
- Delay your income
- Pay bills before the year’s end
- Deduct travel correctly
- Open a SEP IRA
- Deduct your home office
- Set up an LLC or an S-Corp
That last one is what we want to talk more about in this post!
Setting up an LLC and electing S-Corp status can drastically reduce the amount of self-employment tax you end up paying. You may not realize this is an option, or even that it is something that could help you out. In fact, many landmen who are just starting out don’t anticipate paying self-employment taxes.
As an employee of a company, you contribute half of your social security and Medicare taxes, and your employer contributes the other half. Once you’re self-employed, you have to cover both portions. That’s 15.3% on top of your income tax.
What is an S-Corp?
Once you are incorporated as an LLC, you can be taxed as a Sole Proprietorship or as an S-Corp.
If you are taxed as a Sole Proprietorship, your LLC will report both business income and expenses on your personal tax return, and you’ll pay income tax on company profits. This is when you will end up paying as a self-employed individual, thus paying both the employer and employee tax responsibility.
However, if you are taxed as an S-Corporation, then you are no longer self-employed. You are now an employee of the business of your LLC. The LLC reports the salary as a business expense.
Then, you as the owner will report the salary and any remaining business profit on your own personal tax return. This means that the S-Corporation’s owner (you) will only pay taxes on the owner’s salary. Remaining profits that go above the salary are not subject to employment taxes.
Requirements for S-Corp Eligibility
In order to file as an S-Corp, your corporation must:
- Have no more than 100 shareholders,
- Have shareholders who are all individuals (exceptions are made for various tax exempt organizations, estates, and trusts)
- Have no nonresident aliens as shareholders, and
- Have only one class of stock.
How to Set Up an S-Corp
Once you have confirmed your eligibility, you are ready to set up your S-Corp status.
Oklahoma residents can set up an S-Corp independently or with the help of an attorney or CPA. Because the stakes are pretty high when it comes to this significant of a potential tax impact, we recommend working with a professional who can guide you through the process.
One of the commonly identified drawbacks of an S-Corp is the amount of additional paperwork and accounting that becomes the responsibility of the individual in charge.
- Charter your business as a corporation. This needs to happen in the state where you are operating, and where you are headquartered.
- Elect S-Corporation status when filing IRS form Form 2553 Election by A Small Business Corporation. This has to be done either before the tax year begins, or within two months and 15 days of the start of the tax year.
- Maintain compliance with ongoing requirements for the duration of your S-Corp’s existence.
Why are S-Corporations Good for Landworkers?
Most landmen are independent contractors. While some independent contractors avoid reporting their income on their taxes, this high-risk decision is one that will ultimately get them into serious trouble with the federal government. The bulk of independent landworkers pay their taxes, but are paying that much higher rate than if they were employed by a company.
Often, company jobs are not available or they are not desirable for other reasons. This leads landmen to work independently.
S-Corporations are a great way for these workers to fulfill their tax obligations without paying a much higher percentage than necessary. If you are eligible, we highly recommend this route.
How can Ascension CPA help?
We have been working with oil and gas workers for a very long time, and we are excited to figure out ways to support those who do this important work, especially here in Oklahoma. The benefits of hiring us include:
- Open communication between the business owner and our CPAs
- A monthly flat-fee that is predictable and affordable, rather than being charged hourly rates
- Real time access to your CPA and your business files at any time
- Dedicated QuickBooks hosting
- Monthly financial statements to let you know exactly how your company is doing
- Tax-readiness so that you are not wondering what your taxes are going to look like at the end of the year
We would love to talk with you about how we can help you form an LLC, file as an S-Corp, and start reducing your tax burden today. Send us a message today, or give us a call at 405-759-2796 to get in touch.