Paying Yourself in an S Corp: Best Practices and Requirements
Starting your own business as an S Corp is a great way to operate and grow. However, when it comes to paying yourself, there are several steps and considerations to keep in mind. This article will help you understand the best practices and legal requirements for paying yourself in an S Corp environment.
Understanding S Corps and Payroll Requirements
When you setup an S Corp, it’s important to structure your financial operations correctly. One crucial step is to run payroll to pay yourself. An S Corp can take some additional steps to manage its tax liabilities, so it’s recommended to use proper payroll software or consult a CPA. This ensures that all necessary taxes are taken care of without any issues.
Proper Channels for Payment
It’s not advisable to withdraw funds directly from your company’s account to your personal account, as this would not be considered a formal pay. Instead, use a payroll software like ADP or another reputable provider. This not only simplifies the process but also ensures that all necessary withholdings and filings are completed accurately.
Compensation and Audit Considerations
When deciding on the best way to take money out of an S Corp, it’s often recommended to use distributions rather than salary, as you won’t need to withhold PR taxes. However, if work is performed for the LLC, a fair compensation must be given, which should be based on a subjective review of fair market value. It’s highly unlikely that you will be audited over this, so it’s more about avoiding being overly generous or reckless.
Legal and Tax Considerations
If you are taxed as an S Corp, you must pay yourself a salary. This is because the entity is your employer, and it is required to withhold taxes from your compensation, pay its own payroll taxes, and report and remit those amounts in compliance with federal and state laws. Checks can work well for payments, but as an employee, you are also required to withhold taxes, deposit them, file federal and state reports if necessary. This is best managed by a payroll provider to ensure compliance.
Choosing the Right Approach
When your S Corp has net income, you are required to take a salary up to the fair market value of your services. This ensures that you are complying with both federal and state tax laws. Furthermore, if you’ve formed an LLC and subsequently elected Subchapter S income tax treatment without being fully aware of the implications, it’s crucial to seek the help of a competent CPA. They can help you navigate the complex legal and financial aspects of your business structure.
Considering Professional Help
It’s wise to get an accountant to handle payroll and bookkeeping. Even if you think you have an accountant, ensure they are performing all necessary tasks. If not, it’s time to hire a professional. Not doing so can lead to significant financial and legal repercussions, making the process unnecessarily complicated and expensive.
Conclusion and Tips
To summarize, paying yourself in an S Corp involves running payroll through proper channels like payroll software or a CPA. This ensures that all required withholdings, deposits, and reports are handled correctly. Always consider the fair market value for compensation, whether it be through salary or distribution, and stay compliant with federal and state tax laws.
Remember, using the correct methods and tools can help you avoid audits and potential penalties. By seeking professional assistance, you can ensure that your business operates smoothly and legally, allowing you to focus on growing your enterprise.