S Corp - Owner Salary

[moneymaven]

I own an S corp. I have never taken money as a salary from the business. I am planning to change that in the next few months. I am going to give myself a regular paycheck.

How does this work? Is there anything in particular I should check into? Do I need to apply for a payroll withholding license for the state (Colorado) or Fed?

Any insight is helpful. I am thinking of hiring my CPA to help me set these items up and perhaps use a payroll company for the processing of taxes and quarterly filings.

[Deleted]

You will have to open a withholding account and probably an unemployment insurance account with the your state. If it is just one state, the filings are pretty straightforward and you could do them yourself, but hiring a CPA is also a good idea.

How have you gotten money out of the business in the past?

[tskeeter]

I vote talk with your CPA. I'd ask the question "Is there any way for me to regularly take money out of the business and pay less than ordinary income tax rates?" There may be other considerations impacted by this strategy, though. Things like SS benefits, retirement plan contributions, etc., so be sure to discuss the pros and cons of different approaches.

[moneymaven]

I really wasn't generating much of an income with the business, so most of the money stayed in the company for purchases like supplies, computers, etc.

Any money that I had to take out was taken as a repayment of owner capital contributions, not salary.

[Plain Old Petunia]

You need to treat your salary the same as you would anyone else's. That means withholding, quarterly reporting, etc. I do dozens of these small payrolls where I work (CPA firm). The fee is reasonable, my boss just bumps up the income tax return fee about $500 or so and doesn't charge separately for the payroll and quarterlies.

[alabamagal]

Hire petunia (or find someone like her). We use a bookkeeper associated with a CPA firm. She charges a small fee per month, and then we pay the CPA for the yearly filings

[moneymaven]

I just want to have someone in the middle to make sure filings are done on time. I have used a payroll service for several years at my current employer, and I really like them. They take the work away from me and do it for a very small fee.

[AgeOfEnlightenmentSCP]

If you're an S corp, are you filing as an individual or as a corporation?

[moneymaven]

S corps are taxed at the personal rate, but there would be a filing for DH and me as well as a corporate filing - at least I think so.

[Plain Old Petunia]

Yes, your S corp will file an 1120s, you will have a K-1 for your 1040.

[Deleted]

Jun 15, 2011 15:15:12 GMT -5 Plain Old Petunia said:

Yes, your S corp will file an 1120s, you will have a K-1 for your 1040.

Neither of which have to do with payroll taxes.

[Plain Old Petunia]

Right, I was responding to this:

<<S corps are taxed at the personal rate, but there would be a filing for DH and me as well as a corporate filing - at least I think so. >>

[ByteMe]

My wife and I are joint owners of an S-Corp for which we both work. We pay ourselves a monthly salary, from which we deduct federal income taxes, FICA, and state withholding taxes. The business also puts in its share for FICA. You may be required to pay your federal withholding quarterly or annually (probably annually, if you're not paying yourself very much). You will also be required to file your federal withholding either quarterly or annually. You'll also be required to file and pay your state withholding, as well as your state unemployment insurance and your federal unemployment insurance (for me, state is quarterly, and federal is annually for the unemployment).

My accountant told me that the federal government wants to see you pay yourself some kind of salary if you're actually working for the S-Corp. This is so it can get some kind of FICA contribution from you.

I handle all the payroll stuff, but the accountant files the yearly tax returns for the S-Corp, as well as our personal taxes. My understanding is that S-Corps are not subject to corporate income taxes, since any profit is counted toward the income of the shareholders.

I recommend letting your accountant review your incorporation documents to see what you need to do in terms of paying yourself a salary.

[mwcpa]

S corps and the active shareholder/manager compensation is a hot topic issue for the IRS and many state taxing agencies.

Under the federal income tax law an active shareholder/manager MUST take "reasonable compensation" for the services they render. If no money is paid to the shareholder (and all is retained in the company) then you should be cool for the past, but if you were paying back your investment IRS could take issue with it.... and some states departments of labor, like NY by example, treat any money paid to the active shareholder/manager as taxable compensation for unemployment taxes (the wage max in NY is on the first $8,500 paid to an employee per year).

I suggest you meet with your local tax professional asap..... there are many issues related to operating a business as an s-corporation... and there are many planning opportunities to that can be had to reduce your overall tax burden....

here is some data from the IRS website that may be of use...

www.irs.gov/businesses/small/article/0,,id=99930,00.html (general)
www.irs.gov/businesses/small/article/0,,id=99083,00.html (general)
www.irs.gov/businesses/small/article/0,,id=203100,00.html (reasonable compensation)

there is more to be found at the IRS site, it's a good resource

[sheilaincali]

My dad owns an S Corp and my mom works there- she receives a regular salary and has regular Payroll taxes deducted like everyone else. My mom owns 50% of a different S (or C- can't remember) Corp that my dad works full time for. He draws a regular weekly salary and I deduct the normal payroll taxes out of that.

Only suggestion I have is what others have said- hire a good accountant. Our accountant works for a local firm and my parents have followed her through a couple of job moves so they could retain her services. She does the taxes for all businesses my parents own, their real estate holdings, salaries, etc. It is a pretty complicated process and after 20 years in this situation my dad has no desire to tackle that beast on his own.

[moneymaven]

mwcpa - thank you! Karma to you.

[mwcpa]

money... you are welcome....

the "reasonable compensation" issue is a difficult one to grasp at times... what is reasonable....

get the opinion of your qualified tax adviser (an EA, a CPA who provides tax services, etc) as to how to develop a proper and supportable reasonable salary.... if you own a thinly capitalized professional service firm and have no employees it's gonna be hard to say that 90% of the earnings you withdrew from the company are "profits" and 10% is wages for you....

I read too many court cases where people get too aggressive trying to save a few dollars now to only end up paying it back and some later on...

[Deleted]

I have an S-Corp and my CPA just gives me a spreadsheet that calculates everything. You obviously want to take as little as you can justify through payroll (subject to income tax and fica) and more through a distribution (subject to just income taxes).

What we did is determine what a "reasonable salary" should be. It's not a science, it just needs to make sense. If you're a lawyer, it doesn't make sense to pay yourself $10k and then take a distribution of $1M. But maybe a salary of $250K and then $750K makes sense.

FOr me, I go about 50/50 payroll/distribution until I hit a certain "reasonable" threshold. Then I lean a little more heavily towards distributions.

My cpa said that the IRS knows it's vague and as long as you're reasonable about it, he's never seen an issue. They look for the people abusing it.

[mwcpa]

"But maybe a salary of $250K and then $750K makes sense"....
highly unlikely.... unless the lawyer has a bigger firm... a sole owner, sole employee would have real issues under exam (audit lottery is not legal tax planning, so I won't get caught will get you in worse trouble)... the dollars are minimal though (the Medicare portion ... 2.9% of 500K.... 14500.... very small on that level of income)

"Then I lean a little more heavily towards distributions"
do you maintain corporate minutes declaring the "dividend"... while tax rules refer to it as a distribution they are really dividends from the financial and legal point of view....

"there is less personal income tax, but i believe that a corporate income tax then kicks in"
S corporations do not pay federal income tax... but some states and local governments do not recognize the S corp status.... and then paying too little salary can cause unintended consequences (by example, NYC tax rate, they do not recognize the S corp... 8.85%.....)....

" also believe the distribution is exempt from FICA, but i would like to know the tax rate versus one or the other."

Salaries are subject to F.I.C.A. and Medicare taxes, current on 106800 for F.I.C.A and every dollar for medicare....
"Profits" from S corporations are subject to federal income tax on the shareholder's filing.... so the tax is based on your tax situation..it is generally ordinary income...

IRS position is that C (regular) corps pay too much salary and more should be dividends and that S corp pay too little salary..... and the reality is that their position is true since most do not "justify" the salary taken beyond the tax issues.... you need a solid business reason/justification for the salary portion of the moneys taken..... this is a difficult issue to address in the small single (or limited) owner/single manager company where there are blurs between business and personal lives....

[Deleted]

highly unlikely.... unless the lawyer has a bigger firm... a sole owner, sole employee would have real issues under exam (audit lottery is not legal tax planning, so I won't get caught will get you in worse trouble)... the dollars are minimal though (the Medicare portion ... 2.9% of 500K.... 14500.... very small on that level of income)

As long as you can make the argument that what you pay yourself is a "reasonable salary" for the work you do, it shouldn't matter how much the profit is. My buddy's dad is the President of an elevator company. It's a small business that makes significant profits, yet the dad only makes about $175K per year. If the dad retired, and the owner took over the operations, then why wouldn't he pay himself $175K per year. Even if the company is profiting $700K per year?.

It's not really playing the lottery. It's justifying your position.

do you maintain corporate minutes declaring the "dividend"... while tax rules refer to it as a distribution they are really dividends from the financial and legal point of view....

What's the point of keeping corprorate minutes declaring a dividend. I'm still witholding income tax on the entire amount I pay myself. As long as my salary lines up with industry standards and I have the taxes paid, what would they care?

I think what I do is pretty safe/standard. I interviewed a couple CPAs that were giving me answers similar to yours. Things like "Well, to be extra safe, let's pay yourself x amount instead of this". I'm willing to pay what I owe, but I don't want to pay more just because you don't want to do your work and help me come up with a "reasonable salary". I can get anyone to give me the safe answer, I'm paying you to legally reduce my taxes and have justification for it.

[mwcpa]

dave.... in the case of the elevator company, your positions may be "reasonable"..... that is probably a company that has a large amount of capital and an investor is "entitled" to a reasonable return on such.... if the "manager" of a similar company is paid 175K then clearly there is no issue....(I do not have enough facts though for a proper analysis)

the issue often comes up with "thinly" capitalized personal service S corporation (salary too low)....or "highly" capitalized C corporations (salary too high)....

the issue is not black and white and is based in many cases upon both objective and subjective measures....

"What's the point of keeping corporate minutes declaring a dividend." the "form" is very important, if you want something to be a dividend it is best to keep the support in place, and properly executed board minutes accomplish this.... my comment comes from having to deal with this point with the IRS.... better safe than sorry....I advise my clients to keep proper minutes, if they do or don't is up to them.

"my salary lines up with industry standards".... there is the key to "reasonable".... you keep your salary in line with industry norms.... that is how one would reasonably do such.... but many do not....

"I can get anyone to give me the safe answer".... and as a professional I have to ask, if your position of reasonable was challenged and you lost would you blame the CPA or would you take responsibility... I see this issue a lot... client comes in, wants me to justify what they did and then wants to blame me when it blows up.... damned if you do, damned if you don't.... I tend to not accept clients who are shopping for an opinion that they want to here... I give you the facts and suggestions and lay out the possible consequences (pros and cons), but you decide....