If you own an S Corp, you may know that there are benefits to electing an S corporation.
Did you also know that the IRS generally requires you to pay the owner(s) through payroll before drawing money from the business?
This is because of one of the benefits of S Corp, tax savings.
You get to save taxes, but IRS also makes sure that you pay at least a reasonable amount of taxes – through paying yourself payroll (which comes with payroll taxes).
I have seen people asking how much owners should be paying themselves.
Per IRS, “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. “
(Source: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#:~:text=The%20key%20to%20establishing%20reasonable,of%20non%2Dshareholder%20employees%20or)
You may have some questions…
① What is considered “reasonable?”
This is a question you want to be asking your tax professional.
A reasonable amount is different from business to business, and the tax professional can help guide you on how much you should be paying yourself as an owner, through payroll.
② How do you run payroll for yourself??
Running payroll is more complex than just drawing money out of the business.
It is not just changing the categorization of the transaction from owner’s draw/distribution to salaries.
There are more things to be considered with payroll.
For example, employee tax will need to be deducted.
Employer tax will need to be accrued and paid.
At the end of the year, W-2 will need to be issued.
Because of all the calculations, payroll tax payments, and filings, 100% of the time, I recommend investing in payroll software.
There are many payroll providers out there: QuickBooks, Gusto, ADP and so many other options.
Using payroll software comes with many benefits.
They often provide automatic payroll (so you don’t have to log in or click anything to run payroll).
Payroll tax for employee and employer portions is calculated and can be paid automatically.
W-2 can just be downloaded.
All the headaches around payroll will be gone.
Yes, there is a fee, but that investment will save you time and stress, and the fee will be deductible for taxes 🙂
