How to Pay Yourself as an S Corp

As an S Corp owner, you're no stranger to the hustle and bustle of running a business. You work hard daily to keep things up and running, but one thing that may leave some feeling lost is figuring out how to pay yourself.

As your business grows, so must your ability to properly reward yourself for all of the time and effort put into making it successful; luckily, an S Corp can compensate owners for their labor in several ways.

In this blog post, we'll cover everything from determining what kind of salary works best for your company’s bottom line to the outstanding benefits of becoming an employee on paper. There is quite a bit of information available regarding establishing proper payroll as an S Corp – let's have a closer look!

Understand the Basics of S Corporations

An S corporation, also known as an S corp, combines the corporate benefits of liability protection and limited personal accountability with the pass-through taxation features of partnerships and sole proprietorships. This tax classification provides business owners legal and financial advantages, including reduced self-employment taxes.

To qualify for this tax classification, your company must meet all requirements outlined by IRS regulations. Generally speaking, it must be a domestic U.S. corporation organized in one of the fifty states; have only one class of stock; no more than 100 shareholders; no foreign investors or nonresident aliens as shareholders; and have shareholders who are individuals or estates.

What is a reasonable salary for an S Corp?

A reasonable salary for an S corp is the amount that exceeds the minimum wage. The IRS considers any salary below minimum wage to be a dividend, not a payment for services performed. This means your salary must be commensurate with what employees in similar roles would earn, depending on the type of work you do and industry standards.

S Corp distributions vs. salary

A company's distributions to its owners and shareholders are taxed differently than salaries. Generally speaking, distributions are not subject to payroll taxes as long as the funds do not exceed the accumulated earnings and profits of the S corp. If an owner or shareholder takes a salary in addition to these distributions, the salary and any additional distributions will be subject to payroll taxes.

By understanding the basics of S Corporations, you can ensure that you’re paying yourself what you deserve while keeping your business on track for long-term success. With this knowledge, you can establish a consistent reward strategy without worrying about running afoul of IRS regulations.

Set Up Your Payroll System

Having the right tools and policies is important when setting up a payroll system for an S corp. There are several steps you can take to get your system started:

Register with the IRS

Once you’ve established your business as an S corporation, you must register with the IRS so that your payroll taxes will be properly tracked and reported. This includes obtaining an Employer Identification Number (EIN) and filing information returns such as Form W-2 at the end of each year.

Calculate wages

Determine how much you will pay yourself based on industry standards or salary surveys for similar roles. Remember to include health insurance, retirement plans, bonuses, or other employment-related benefits in your calculations.

Set up payroll withholding

Set up payroll withholding for the wages and any applicable taxes that will be deducted from your paycheck each pay period. These deductions may include Social Security/Medicare tax, federal income tax, state income tax, and more, depending on the size of your business.

Know reporting requirements

Familiarize yourself with the reporting requirements related to payroll taxes and contributions to benefits such as health insurance and retirement plans. This includes filing information returns such as Form 941 at the end of each quarter and making timely deposits of withheld amounts to appropriate government agencies.

Reporting your S Corp salary on your taxes

When it comes to reporting your S corp salary on your taxes, there are several things you need to consider. First and foremost, the income from an S corp is considered “pass-through” income, which means that profits and losses will pass through the business to shareholders, who must then report them on their tax returns. This can be done by filing Form 1120S with the IRS.

In addition, you should also be aware of payroll taxes associated with your S corp salary. Depending on your business location, these may include Social Security/Medicare tax, federal unemployment insurance (FUTA), state or local taxes, and more. Paying all applicable payroll taxes on time and filing the necessary forms is important.

Finally, if you distribute dividends from your S corp, they are subject to different tax rates than passive income such as wages or salaries. You can report dividend payments on Form 1099-DIV, which should be reported on your tax return. Remember that distributions may also be subject to self-employment taxes depending on how much you pay yourself monthly.

Reporting S Corp shareholder distributions

In addition to salaries, S corps can also distribute profits to shareholders through distributions. Although these distributions are not subject to payroll taxes, they are still taxable income and should be reported on your tax return. When filing Form 1120S with the IRS, you must include a statement of shareholder distributions that details how much each shareholder was paid out during the year.

It’s important to note that distributions may be subject to self-employment taxes depending on how much is paid annually and whether it exceeds a certain threshold. You may have to pay additional monthly payments if your total distribution exceeds $20,000 for single filers or $25,000 for joint filers.

Withhold Tax Payments

Finally, it’s important to remember to withhold tax payments from your salary. Withholding taxes will help you avoid owing a large payment when filing your return. You may be subject to penalties and interest charges if you don't withhold the proper amount. It’s best to consult with a tax professional if you need assistance calculating the appropriate withholding amount for your S corp salary.

FAQs

Q: What should my salary be as an S Corp owner?

A: The salary you receive as an S Corp owner should be determined by the needs and resources of your business. Generally, a reasonable salary should cover the company’s expenses and leave enough money to pay taxes without financially burdening the company.

It is also important to consider that too high of a salary can raise red flags with the IRS, so it is best to consult with a tax professional for guidance on setting your salary.

Q: What other benefits can I receive as an S Corp owner?

A: Besides salary and dividends, other benefits can help offset tax liabilities while still rewarding yourself for your work. These include medical insurance deductions, retirement plan contributions, health saving accounts, and employer-paid expenses. Consult a tax professional to determine which options are best for your business.

Q: What are the tax implications of paying myself as an S Corp?

A: The tax implications for paying yourself as an S Corp depend on the type of compensation you receive. Salary payments are considered regular income and must be reported, while dividends and bonuses may have different requirements depending on your state’s laws. Any employer-paid benefits or contributions to retirement plans can also be deducted from taxes. When paying yourself, it is important to consult with a tax professional to follow all applicable rules and regulations.

Conclusion

Determining the best way to pay yourself as an S Corp owner is important to running a successful business. While several options may be available, it’s important to understand the tax implications associated with each type of compensation.

Consult with a tax professional for guidance on setting your salary and any other benefits you wish to receive from your business. Following these steps will help ensure you properly reward yourself while avoiding any unnecessary penalties or interest payments.