How to Pay Myself as an S Corp
Running a business as an S corporation offers numerous tax advantages, but one of the most common questions among business owners is how to pay themselves. Properly structuring your compensation can help minimize taxes and ensure compliance with IRS regulations. In this article, we will discuss various methods to pay yourself as an S corporation owner, keeping in mind both legal and financial considerations.
1. Salary
The most straightforward way to pay yourself as an S corporation owner is through a salary. You can set a reasonable salary for yourself based on the market rate for your position and the services you provide to the company. The salary is considered a business expense and is deductible on your corporate tax return. However, remember that you must pay yourself a reasonable salary to avoid any IRS scrutiny.
2. Distributions
In addition to a salary, S corporation owners can receive distributions from the company’s profits. Unlike a salary, distributions are not deductible on the corporate tax return but are subject to self-employment taxes. To avoid paying double taxes on the same income, you should pay yourself a reasonable salary and then receive distributions from the remaining profits.
3. Dividends
Dividends are another way to compensate yourself as an S corporation owner. However, dividends are not subject to self-employment taxes, making them a tax-efficient option. To receive dividends, you must first pay yourself a salary and then distribute the remaining profits as dividends. Keep in mind that dividends are paid out of after-tax profits, so this method may not be as beneficial as distributions.
4. Retained Earnings
Another option is to reinvest your profits back into the company by adding them to the retained earnings. This can be beneficial if you anticipate future growth or need to invest in new assets. However, it is important to remember that retained earnings are not available for personal use until they are distributed as dividends or distributed as a liquidation of the corporation.
5. Consulting Arrangement
If you are not actively involved in the day-to-day operations of the S corporation, you may consider setting up a consulting arrangement. In this case, you would be paid for your services as a consultant, which would be considered a business expense. This method can be tax-efficient, but it is important to ensure that the arrangement is legitimate and that you are receiving fair compensation for your services.
Conclusion
Paying yourself as an S corporation owner requires careful planning and consideration of various factors. By choosing the right combination of salary, distributions, dividends, retained earnings, and consulting arrangements, you can optimize your tax situation and ensure compliance with IRS regulations. Always consult with a tax professional to determine the best compensation strategy for your specific situation.
