How to Pay Myself as an S Corp
Managing finances for a small business, especially when it’s structured as an S corporation, can be a complex task. As an owner of an S corporation, you need to understand how to pay yourself properly to ensure compliance with tax laws and maintain a healthy cash flow for your business. This article will guide you through the process of paying yourself as an S corporation, ensuring you’re on the right track financially.
Understanding S Corporation Payroll
An S corporation is a pass-through entity, which means profits and losses are passed through to shareholders and reported on their personal tax returns. As an S corporation owner, you can be paid in two ways: as a salary or as a distribution. The salary you receive must be reasonable for the work you perform, while distributions are paid out of the corporation’s profits and are not deductible as business expenses.
Setting a Reasonable Salary
The first step in paying yourself as an S corporation is to determine a reasonable salary. This salary should be comparable to what other individuals in similar positions would earn. The IRS provides guidelines to help determine if a salary is reasonable, including the size of the business, the duties you perform, and the geographic area.
Reporting Salary and Taxes
Once you’ve determined a reasonable salary, you’ll need to report it on your personal tax return. As an S corporation owner, you’ll receive a W-2 from the corporation, which shows the salary you earned during the year. This amount will be subject to income tax, as well as payroll taxes, including Social Security and Medicare.
To report these taxes, you’ll need to file Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, and Form 941, the Employer’s Quarterly Tax Return. These forms will ensure you’re paying the appropriate taxes on your salary.
Paying Yourself Distributions
After paying yourself a reasonable salary, you can receive distributions from the S corporation’s profits. Distributions are not considered taxable income and are not reported on your personal tax return. However, it’s important to note that the IRS can challenge distributions that are deemed excessive or unreasonable.
To pay yourself distributions, you’ll need to ensure that the corporation has sufficient profits. You can calculate the available profits by subtracting business expenses and the salary you’ve already paid yourself from the corporation’s net income.
Record Keeping and Compliance
Proper record-keeping is crucial when paying yourself as an S corporation. Keep detailed records of your salary, distributions, and any other payments you receive from the corporation. This will help you ensure compliance with tax laws and provide documentation if the IRS requests it.
Additionally, consider consulting with a tax professional to ensure you’re meeting all legal requirements and maximizing your financial benefits as an S corporation owner.
Conclusion
Paying yourself as an S corporation requires careful planning and compliance with tax laws. By determining a reasonable salary, reporting taxes correctly, and understanding the rules surrounding distributions, you can ensure a smooth financial process for your business. Remember to maintain thorough records and seek professional advice to stay on the right track.
