New Mexico Small Business

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Background

I worked from home as a programmer in New Mexico for about 10 years. That is, until the company I worked for changed hands and along with it their policy of giving their employees the freedom to not have to come into the office. Of course, allowing your employees to work from home requires an implicit trust that is usually built up over the course of years so it was not too surprising that under the new ownership things would not stay the same.

The main reason I was working from home was to be more accessible to my school age children, which was still true, so I decided to either retire and write software for fun, perhaps as shareware, or be an independent contractor. I was in the fortunate position that because of my wife's job, I didn't need to worry about healthcare. I should say very fortunate position because this gave me the freedom of time and choice when picking what I would do next.

After some time and discussion with family and colleagues I decided I would go the small business route. I considered being an independent 1099 contractor and being paid directly, having an LLC or being an S-Corp. Since at the time I was starting out I had no potential contracts, start-up cost was a consideration. I was planning on doing as much as possible on my own and I ended up doing a lot of research online which I will summarize here on this wiki. Also, much of what I will describe is New Mexico specific but hopefully can be somewhat useful for people in other states.

Types of Small Businesses

Choice

Pros

Cons

DBA -Doing Business As / Sole Proprietorship

  • Easy to start with low start-up costs
  • Inexpensive to maintain
  • No legal separation between business and personal liability
  • Owner must pay self-employment taxes

LLC - Limited Liability Corporation

  • Legally separates your business property from your personal assets
  • No formal management structure
  • Considered self-employed so responsible for contributions to Medicare and Social Security
  • Can be dissolved with the death or bankruptcy of a member and can result in remaining members' being stripped of the liability protection the LLC was formed to provide

S-Corp - Subchapter S of Chapter 1 Corporation

  • Protects the personal assets of its shareholders/owners
  • Tax-favorable characterization of income by paying its earnings to owners as either earned income in the form of salaries and wages or as distributions
  • Complicated to set-up with need to incorporate the business by filing Articles of Incorporation
  • Ongoing fees, such as annual report and/or franchise tax fees along with shareholder/board meetings, keeping minutes and resolutions

Back in 2009 I chose S-Corp mainly for the favorable income distribution and a little bit for having a corporation. I've since found out that you can get the tax advantages of a corporation with an LLC by filling out Form 2553 and filing your taxes as a corporation.

Starting the S-Corp

There are a couple of documents that need to be created and filed to become an S-Corp. You can hire a lawyer to do this (which I did for about $1000), use a website like LegalZoom.com or do it yourself. In hindsight, with the plethora of templates online I think I probably should have done it myself.

First order of business, that is after you determine the name of your S-Corp, is to get an EIN number for your S-Corp. You can get an EIN online in about five minutes at www.ein-gov.us.

Next, you need to fill out Form 2553, Election by a Small Business Corporation.

Following Form 2553 come the Articles of Incorporation which after being created need to be certified by the New Mexico Office of the Public Regulation Commission. Instructions on how to create the Articles of Incorporation can be found at http://www.sos.state.nm.us and there are plenty of examples online which can be found using the googleto see the type of verbiage expected on the form.

As mentioned earlier, one of the requirements of an S-Corp is an annual meeting with the directors and the recording of the meeting minutes, here is a Corporate Minutes Template. You should probably have your first annual meeting pretty soon after incorporating during which you can appoint corporate officers, adopt bylaws, and issue stock. And while less common, you can set the fiscal year, and adopt a corporate seal.

Federal Government Obligations

Monthly

Depending on your monthly income, you have up to 30 days after issuing a paycheck to make a federal tax deposit at EFTPS. You need to make deposits for Social Security, Medicare and Income Tax.

Quarterly

Four times a year you need to send in your Quarterly tax return Form 941. You can fill it out on your computer, it's an editable pdf, but you need to mail it in.

Annually

At the beginning of the year you need to create yearly wage statements for employees and the government for the previous year. You can generate and upload the W-2 and the W-3 at www.ssa.gov.

Also at the beginning of the new year you need to file the Federal Unemployment Tax Act (FUTA) form 940 and pay the tax owed. You can download the editable pdf and then mail it in.

And, of course, you need to file your yearly federal tax form, the 1120. I use Turbo Tax Business to do this and then file electronically.

One new form I just discovered needs to be filed if you have a Solo 401K or Self-employed 401K retirement plan and have more than 250k in it, is a 5500-EZ. You can download the editable pdf and mail it in.

State Government Obligations

Monthly

Within 25 days after issuing a paycheck you need to file the CRS-1 to record your Gross receipts, compensating tax and state withholding. The form and payment can be found online. This is where you pay your state income tax withholding in addition to the 'Compensating Tax' you owe, which is 5.125% for goods and 5% on services and is paid voluntarily on goods purchased out of state when you did not pay sales tax.

If necessary, you can also apply for a CRS number at this website.

The timing of the CRS-1 depends on your monthly income which will be described with the initial documents you receive with your CRS number. Options are Monthly, Quarterly, and Semi-annual CRS reporting, including payments.

Quarterly

Four times a year you need to file an ES903A which is used to submit Employment and Quarterly Wage Detail and can be done at UI Online. This is also where you pay your Unemployment Insurance Account which varies from year to year. In 2015, you pay your current rate, mine has varied from 0.20% to 0.33%, on the first $24,300 of income.

Be aware that the New Mexico Department of Workforce Solutions website actually has 'hours' and they are: 4:00AM – 7:00PM Sunday-Friday.

Annually

Of course, once a year you need to file a state corporate tax form, the CIT-1, and pay the franchise tax fee of $50. I use Turbo Tax Business to file the taxes, which as of 2017 can not be filed electronically but the franchise fee, interestingly enough, can be paid electronically.

Biennially

All corporations doing business in New Mexico must file a State Corporate Biennial Report with the Office of the Secretary of State every other year. A First Report must be filed within 30 days after the Articles of Incorporation are issued. The cost is $25 to file the report but the late fee is $200 if you forget to file the report, which I learned the hard way.

One reason that it is very important to stay current with the State Corporate Biennial Report is that people can search for your company and see if it is in 'Good Standing'. If you are trying to get a Code Signing Certificate and they find out that: The current status of your company with the New Mexico Secretary Of State is : Corporation is not in Good Standing you will be denied your certificate.

Business Software

When I first began my business I didn't know which forms had to be filled out and for what amount. Because of this I felt I needed an accountant to help with my expenses and the business taxes. Unfortunately, since I was just starting out, I got an accountant who was also just starting out. While certainly a nice guy, I soon discovered that most of what he offered was how to use QuickBooks Pro. While there are some tricks to using QuickBooks, most of the information can be found online. So after having him do my first tax return I decided to go it on my own. I found a copy of the previous year Turbo Tax Business and compared it to the accountant's and found that it was actually easier to do the business taxes than my personal taxes.

Now your mileage may vary, and I am in no way recommending not using an accountant, only that for a small basic company, QuickBooks Pro and Turbo Tax business really are pretty comprehensive programs.

If generating your paycheck in QuickBooks Pro for 2017, I recommend having monthly paychecks:

Federal Taxes:

    Social Security   --  6.20% employee and 6.20% company up to $127,200 income or $7,886.40/$7,886.40
    Medicare Tax      --  1.45% employee and 1.45% company
    FUTA              --  0.60% (6.0% - 5.4%) was .80% (6.2% - 5.4%) company up to $7,000 income for each employee
    Withholding       --  After pre-tax deductions and from table

State Taxes:

    NM Unemployment   --  0.33% up to $24,300 income	
    Withholding       --  After pre-tax deductions and from table

Retirement:

    Solo 401(k)       --  2017 max contribution of up to 25% of compensation for a maximum of $54,000 ($60,000 catch-up) 
                                   (with regular 401(k) maximum of $18,000($24,000 catch-up)/$36,000($36,000))