The major tax benefit for your business being taxed as an S corporation is the savings from self-employment taxes that are passed from your S corporation through to your personal tax returns. The IRS requires you as a shareholder to pay yourself a “reasonable wage” through payroll. Please see this blog on how to determine what your reasonable wage should be.
Here are the steps for how to pay yourself your reasonable wage in your S corporation.
- Each quarter end, run a balance sheet report to see how much in draws or distributions you took home from the business checking account to your personal checking account. For example, you took $100,000 in distributions for the quarter.
- Make an adjusting journal entry to move 50% or less of the quarterly draws to “Officer Compensation” expense. For example, you might move $40,000 from the draws/distributions account on your balance sheet to officer compensation expense on your profit and loss statement.
- Contact your payroll processing company and report $40,000 of gross wages for your “after the fact” payroll so they pay the social security and Medicare taxes and file the quarterly payroll report. You have already received the money in your personal account, so you will not receive a net check. You are just moving the “reasonable wage” portion to make sure it is processed in the quarterly payroll reports and your annual W-2 wages.
Please book a discovery call to find out how we can help you save on taxes and increase your net worth.
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
