How to Pay Myself S Corp: A Comprehensive Guide
As an S corporation owner, one of the most crucial aspects of managing your business is determining how to pay yourself. Unlike C corporations, S corporations have specific tax implications and regulations that dictate how you can compensate yourself. In this article, we will explore the various methods and considerations for paying yourself as an S corporation owner.
Understanding S Corporation Payroll
Firstly, it’s essential to understand that an S corporation is a pass-through entity, meaning that profits and losses are passed through to shareholders and reported on their individual tax returns. This structure has several advantages, including avoiding double taxation and simplifying the tax process. However, it also means that you must comply with certain rules when paying yourself.
Wages vs. Distributions
When it comes to paying yourself as an S corporation owner, you have two primary options: wages and distributions. Wages are treated as employment income and are subject to payroll taxes, while distributions are distributions of profits and are not subject to payroll taxes.
1. Paying Yourself Through Wages
To pay yourself through wages, you must first establish yourself as an employee of the S corporation. This involves completing the necessary paperwork, such as Form SS-4 to obtain an Employer Identification Number (EIN), and setting up a payroll account. Once you have done this, you can pay yourself a salary based on the services you provide to the corporation.
It’s important to note that the IRS scrutinizes S corporation salaries to ensure they are reasonable for the services provided. If the salary is deemed excessive, the IRS may reclassify the payment as a distribution, which could result in additional taxes and penalties.
2. Paying Yourself Through Distributions
Alternatively, you can choose to pay yourself through distributions. Distributions are typically made based on the corporation’s profits and are not subject to payroll taxes. However, they are subject to self-employment taxes if you own more than 2% of the S corporation.
To determine the amount of your distribution, you can use the following formula:
(Dividend paid to all shareholders / Total number of shareholders) x Your percentage of ownership
Keep in mind that you must pay yourself in the form of cash or property, and you cannot take distributions in the form of services.
Combining Wages and Distributions
In some cases, it may be beneficial to combine wages and distributions. This can help you avoid potential IRS scrutiny and ensure that you are paying yourself a reasonable salary. For example, you might start with a lower salary and then receive distributions as the corporation’s profits increase.
Record Keeping and Reporting
Regardless of whether you choose to pay yourself through wages or distributions, it’s crucial to maintain accurate records and report all income and expenses. This includes keeping track of your salary, distributions, and any related taxes paid.
Conclusion
Paying yourself as an S corporation owner requires careful planning and compliance with IRS regulations. By understanding the differences between wages and distributions, and maintaining accurate records, you can ensure that you are compensating yourself appropriately while minimizing your tax liability. Always consult with a tax professional or accountant to ensure that you are following the correct procedures and maximizing your benefits as an S corporation owner.
