Not every one-person corporation pays or even can pay an annual salary of $40,000 to the shareholder-employee. But a salary of $40,000, it turns out, is roughly the average salary paid by a single-shareholder S corporation to its shareholder-employee.
Accordingly, this post describes a quick-and-dirty approach to simply, easily and correctly prepare payroll for a one-person corporation when the shareholder-employee makes $40,000.
Step 1: Set a Reasonable Salary
Step 1 is setting a reasonable salary. And so let me issue a caution here.
While I’ve arbitrarily set the salary to $40,000, you absolutely must verify the salary you pick for a one-person corporation is reasonable.
Tip: You may want to review the average S corporation salaries data we provide at our “S Corporations Explained” website.
By the way, you may very well conclude that a $40,000 annual salary is appropriate. And if that’s the case, you can use the numbers and examples provided here as your own.
Step 2: Calculate the Payroll Amounts and Taxes
Once you know the correct salary to pay yourself as a shareholder-employee, you calculate the payroll amounts and taxes.
For purposes of the method described here, you think in terms of quarterly payroll amounts and taxes.
Rather than a $40,000 annual salary, for example, you think in terms of a $10,000 a quarter salary.
Calculating the employer’s payroll tax burden
Your corporation pays a 7.65% Social Security and Medicare payroll tax. If your S corporation pays you payroll of $10,000 a quarter, that amount equals $765 obviously.
Calculating the employee’s payroll and income taxes
You (the employee) also need to pay a 7.65% payroll tax as an employee. If your corporation pays you payroll of $10,000, that’s another $765.
You also need to pay federal income tax. Rather arbitrarily, I’m going to set the federal income tax to $750 a quarter, so over the year, you’ll have paid $3,000. But in many situations where $40,000 is the appropriate wages amount, this amount of federal income taxes will pay the federal income taxes.
Calculating the net wages amount
With a $10,000 a quarter salary and the preceding payroll taxes, you need to pay yourself $8485 each quarter in net wages.
Note: The corporation will hopefully disburse more than $8485 a quarter to you. But the first $8485 will count as wages. The checks you write after reaching the $8485 threshold will represent shareholder distributions. For example, if you also write a $1000 or $2000 check each month payable to the shareholder and this amount is not payroll, you categorize that disbursement as a distribution.
Step 3: Preparing the Federal Quarterly Payroll Tax Return
With a $10,000 quarterly payroll, you don’t need to make next-day or next-week deposits of payroll taxes you’ve withheld from employee payroll checks.
Instead, you can deposit the taxes when you file the quarterly 941 payroll tax return, which you can download from the Internal Revenue Service’s web site (click here to grab form).
I’ve included an image below that shows you what a completed 941 looks like when you’re paying a shareholder-employee $10,000 a quarter and withholding $750 a quarter in federal income taxes. You of course enter the employer identification number, name and address information with your actual information.
You also need to check the right “Report For This Quarter” box in the upper right corner of page 1 (check January, February, March for the first quarter, for example). And you need to sign the return. Note also that your state and whether or not you send in a payment determines which address to send the form to. But all the other information shown on the 941 in boxes 1 through 15 and on the 941-V would match what I’ve plugged in here.
After you complete and sign the 941 form, you write your check for $2,280 and then mail the 941 return, including the 941-V coupon, and your check to the appropriate address.
Tip: If you want more information, you can get that information from IRS instructions. Click here to download those instructions.
Step 4: Record the Payroll Transactions into Your Accounting System
You’ll also need to record your payroll transactions into your accounting system. So let me just talk about that quickly.
Recording the employee checks
You need to pay your shareholder-employee (this is you of course) $8435 in wages during the quarter. And you can do this in any way you want. You can write a check on the first or the last day of quarter for $8,485. Or you can write several checks over the course of the quarter that total $8,485.
All of these checks should be categorized as wages expense.
As noted earlier, if you make additional disbursements to the shareholder (and hopefully you will be doing this), you categorize these amounts not as wages but as shareholder distributions.
Recording the $2,280 check to the IRS
Recording the $2,280 check to the IRS works a little differently. This check actually represents two expense categories. A $765 chunk of the check represents the employer Social Security and Medicare taxes triggered by the $10,000 in total payroll. The $1,515 remainder represents the employee’s taxes that the law says the employer needs to withhold and then remit on the employee’s behalf.
This $765-$1,515 breakdown means is that you need to split the $2,280 check which gets included with the 941 form into two categories: $765 categorized as payroll taxes, and $1,515 categorized as wages expense.
Note: After you’ve categorized the $8,485 check to the employee as wages expense and also $1,515 of the check that goes with the 941 return as wages expense, your total wages expense for the quarter equals $10,000 ($8,485 + $1,515 = $10,000).
Step 5: Preparing State Payroll Tax Returns
Some states (like Washington State where I live) don’t require additional state quarterly payroll returns for shareholder-employees in one-person corporations. And if you operate in a state like this, you may only need to prepare and file the federal 941 tax returns over the course of a year.
Tip: If you are in Washington state, though, see this post so you don’t get caught in a dumb trap set by our state legislative.
But many other states you to prepare quarterly state payroll tax returns. As a generalization, these state quarterly payroll tax returns (if required) are pretty simple to deal with.
Some of the quarterly state returns amount to simple worksheets that, for example, levy a 3% tax on wages for state unemployment insurance premiums. Or simple worksheets that, as another example, charge a $.10 per hour tax on worker hours for workers compensation insurance. Other quarterly state payroll tax returns resemble the federal 941 return.
But you shouldn’t need to worry too much about all of this. Probably, your state employment agency will send you automatically information on these state returns. In this case, you need to make a couple of phone calls so you get any quarterly forms you need.
Step 6: Dealing with Any Tax Shortfalls
If paying $3,000 in income taxes won’t be enough using the method described above is not enough, you should augment the federal income taxes paid through your payroll by making quarterly estimated tax payments using the 1040ES form. For example, suppose that you know you’ll really owe $6,000 in income taxes. If through payroll withholding you’ll only pay $3,000, you’ll want to pay another $3,000 annually, or $750 a quarter, in quarterly estimated tax payments.
You can determine precisely how much federal income tax you should pay over the year by downloading the 1040-ES estimated tax payments form from the www.irs.gov website and completing the tax liability worksheet included with that form.
Note: To make regular state estimated tax payments, use your state’s equivalent to the federal 1040-ES form. For example, if you’re in California and need to pay, say, $500 a quarter in California state income taxes, you can use California’s 540-ES quarterly tax payment form.
Step 7: Preparing the Year-end Payroll Tax Returns
Even after you prepare the employee paychecks, file the quarterly payroll tax returns, and make the payroll tax deposits, you still have a small handful of additional, year-end payroll returns that need to be completed.
For example, at the end of the year, you’ll need to prepare and file a 940 Federal Unemployment Tax return. That return will assess a $420 tax if you’re a one-employee corporation in a state that doesn’t levy state unemployment tax on shareholder-employees. And that return will probably assess a $42 tax if you’re a one-employee corporation in a state that does level state unemployment tax on shareholder-employees.
Furthermore, you will need to prepare a year-end W-2 and W-3 for your employee and submit to the Social Security Administration and, possibly, to a state agency.
And it’s possible that you may have one or two additional, state related year-end tax returns to file as well.
Here’s my suggestion as to how you handle these year-end payroll tax returns: Have the person who prepares your corporation tax return prepare these year-end payroll tax returns. In other words, have the CPA who’s already doing the 1120S or 1120 corporate return do your 940 FUTA return, your W-2 and W-3 and any other state returns. He or she can easily and economically prepare these returns with the corporation return. To outsource the year-end payroll returns, get in to see your accountant early in January. Most payroll returns need to be filed by the end of January.
Some Final Comments
You have a bit of flexibility in applying the quick-and-dirty method described here. For example, if $40,000 a year in salary is too high, you can simply halve the wage and tax numbers given in the preceding paragraphs. This would of course mean you pay $20,000 in payroll over the year.
Furthermore, if you don’t or can’t do a full year of payroll, you could do, say, three quarters of $10,000-a-quarter payroll over the year. (This might make sense if your total payroll for the year should be $30,000.)
If you need to pay a reasonable annual salary of more than $40,000, you can use the basic approach described here but pay not $10,000 a quarter but rather $16,000 a quarter. (The numbers you use to do $16,000 a quarter of payroll differ as discussed in our “Five Minute Payroll” e-book which is described below.) And a $16,0000 quarterly payroll gets your shareholder-employee compensation to $64,000 a year–which should work for many S corporations.
Here’s why all this works: The quick-and-dirty payroll method described here works because of an intentional loophole in the payroll tax laws. The loophole, in a nutshell, says you can make your payroll tax deposit with your 941 tax return as long as the amount you owe is less than $2,500. If you need, therefore, to pay yourself $20,000-a-quarter, you’ll owe more than $2,500 by the end of the quarter. This breaks the loophole-related rule that opens the door to the quick-and-dirty method.
Five Minute Payroll System: Get More Details in our $20 Monograph
The Quick and Dirty Payroll Method described on this page provides a fast and easy way to handle payroll in simple situations where your annual shareholder-employee compensation is less than or equal to $40,000.
However, people have regularly asked us to explain how to use the system with a larger salary amount and also to provide a cleaner, fuller monograph with forms that the small business corporation can simply add their name, address and EIN to. So that’s what we’ve finally done with our $20 monograph, Five Minute Payroll.
The Five Minute Payroll monograph explains how to do simple cookie-cutter payroll for most one-employee S Corporations using base salary amounts of $10,000 a quarter or $16,000 a quarter. (These amounts, especially if combined with a pension or health benefits, will work for almost everyone.) The e-book includes sample IRS forms you can copy to get your quarter end or year end payroll done in a few minutes, including 941s, W-2/W-3 and 940. Furthermore, the e-book provides some common-sensed tips you can use to set a reasonable salary for your S corporation and to minimize your state payroll taxes burden, too.
Interesting in buying and then immediately downloading this monograph? Click this button:
As with all of our monographs, our products come with a money back guarantee. If you don’t think what we deliver is worth it, just let us know and we’ll refund your purchase price. We make this promise to you confident that paying $20 once to save hundreds of dollar a year (or more!) on an outside payroll service will be a great investment. Note, too, that the biggest saving to you probably won’t be the money but the time.
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I know you have mentioned that the $750/quarter in federal income taxes is arbitrary, but would this amount be higher for those who are single and have a low # of allowances (vs married and have high # of allowances)?
hi Daniel, yeah, absolutely. so you’d need to augment that $750 with whatever additional withholding is necessary to pay enough tax.
Hi Daniel,
I would consider that $750 a quarter the “first” chunk of income tax you owe… and if you owe more than that–say because your income is higher or because you have fewer deductions than average–you would need to also make quarterly estimated tax payments.
Note: You could make a larger deposit for federal income taxes via withholding from wages… but that would mean you probably need to use the eftps.gov system to remit the tax deposit. The approach I describe here in this blog post keeps your total deposit small enough that you can simply send in with the 941 tax return.
Would the payroll computations and tax forms mentioned in this article work the same way for a one-person C-corp payroll? Are there different filing requirements or tax amount cut-offs that would affect a C-corp differently than the S-corp used in the example? Thanks!
For a C corp, you would report the shareholder-employee and non-shareholder-employee medical insurance as a fringe benefit deduction on the face of the 1120 tax return.
In other words, you don’t need to worry about fiddle-faddling with the shareholder-employee’s W-2…
What if your new SubS is only able to pay extremely small wages to sole owner during the first few years of business — wages far below industry median? (No employees)
You probably don’t need to worry about small wages if you aren’t making any money. The reason is IRS can’t make you pay wages… they can only recategorize distributions. And if you’re really not making any money, you don’t have an distributions to make either.
if you also took distributions, would those be reflected on the quarterly 941 on line 2? So if you were “paid” $10,000 – but then also took $2000 in distributions, would you put $12000 on line 2?
Distributions to a shareholder don’t appear on the 941. They get reported inside the entity’s tax return. You want to confer with your accountant if you have questions about how to do the bookkeeping.
S-Corp newbie here…
So if you’re a single owner LLC elected to be taxes as a S-corp, the wage expenses I pay myself throughout the year (let’s say 10k per quarter for a total of 40k for the year)– are they considered business or Non-business Expenses for tax purposes? It seems too good to be true they would be business expenses for tax purposes and lower my net income thus tax burden.
Awesome blog–thanks!
Hi Louise,
So you’re right that if your S corp pays Louise the employee $40K for the year, it gets to put a $40K deduction on its tax return. And as a result, the K-1 that the S corp sends its shareholders will be in total $40K smaller.
For example, if the K-1 goes to Louise the shareholder, that K-1 will be $40K less than it would have been otherwise.
But note that Louise the shareholder-employee will also get a $40K W-2 from the S corp. So once you get to her 1040 return, everthing sort of washes out.
Thanks so much Steve. You’re a great teacher and make this all very clear and easy to understand.
One more question 🙂
So let’s say you still want to use this method, but you need to pay a salary slightly higher than 10k/quarter, but know you still need to keep the deposit amount under $2,500 per the loophole rules. You also know you’ll need to pay more than $750 quarter in estimated taxes due to distributions, significantly more. Can you just not withhold any federal income tax from on the 941 to still get away with the loophole and instead just pay it all through quarterly estimated tax payments using the 1040ES?
Hope this makes sense 🙂
Yes, you can do that. E.g., you can pay the shareholder-employee $16K a quarter and withhold no income taxes. Social Security and Medicare will run $2448 a quarter in this case (15.3% of $16,000), so you can pay that amount with the 941.
What individual will need to do, as you note, is top off with 1040ES quarterly payments. E.g, this person might make $10K a quarterly 1040ES payments.
Just chiming in to say that I found this whole article and comment section hugely helpful. Can’t thank you enough Steve!
Thanks very much for this guide Steve, it is extremely helpful for me as a new S-Corp owner. I have a question that I think I know the answer to but would appreciate if you could confirm:
If my S-Corp has no earnings for a quarter, I should file form 941 but report 0 as income. If I file the next quarter, my total withholding must be less than $2500 to use this trick. If my withholding for the first three quarters of the year is less than $2500, and my withholding for the last quarter is more than $2500, I can still use this trick. Is this accurate? If so, it seems the obvious thing to do for companies with varying cash flows is to pay salary primarily in one quarter.
The trick here is that you can make your payroll tax deposit with the 941 form is the deposit amount is less than $2500. That’s it. So in your example, you can use the trick in quarter 1, 2 and 3. But in quarter 4.
BTW, what I would suggest someone attempting to avoid the hassle of eftps do is make a standard quarterly payroll amount (for example, $10,000)… and then get into habit of just doing the quarterly deposit of, for example, $1530. No matter what.
The problem with a new S corporation and with a small S corporation is getting to the end of the year and finding you have not paid enough reasonable compensation. After the year ends, there’s little you can do about this that truly works.
Thank you very much for this great article for new S-corp owners.
I’ve recently established a S-corp, and honestly, I am estimating a net loss on the first year. I am paying myself little weekly wages.
question 1: I have calculated my medicare and social security taxes. Should I pay them through eftps once every quarter according to 941?
question 2: because of my dependents/# of allowances, I dont think I’ll have to pay individual income tax (according to estimated tax worksheet). Thus, do I still need to fill 1040-es and pay quarterly deposits?
thanks in advance
You probably don’t need and don’t want to pay wages if you’re incurring a loss. That’s one thing to note. I.e., you shouldn’t have to feed money into an S corp so you can then withdraw it as wages. That roundtrip costs you 15.3% payroll tax. Ugh.
To answer your questions, though, you can pay taxes with the 941 if you’re below the $2500 threshold for the quarter… and you can skip 1040ES payments if you don’t owe tax.
Steve,
First, thank you so much for the incredibly helpful article…really great information! It looks like I’m in luck and you’re still answering questions.
So, for the last two years I have filed my quarterly returns and paid using this method for my one person S-Corp. I recently had a baby and am not doing any business at the moment and likely will be inactive for the remainder of 2015. As I interpret the IRS instructions, since I’ve started filing 941 quarterly returns, I should continue to file each quarter going forward showing 0 wages until I end up getting back to work. Is this correct?
Yes, you should continue to file 941 returns but just show zero wages.
BTW, you may also want to mark the “seasonal employer” box on page 2 of the 941 form. That’ll maybe signal to the IRS that you’re not employing people every quarter.
P.S. Congratulations on the new baby!
I have one more question for you Steve. So let’s say I write my wages check of $8,485 to myself and deposit it into my personal account. At the end of the quarter I need to pay the taxes on this amount. I am confused as to which account this amount comes from. Do I actually write a check from the business to myself for $8,485, then later write another check from the business for the $2,280 taxes due? Doesn’t the business actually pay $10,765 ($8,485 personal check + $2,280 in taxes)? Or do I in fact withhold the $1,515 from my personal salary check, and actually cash a check into my personal account of $8,485 – $1,515 = $6,970?
Thanks for your amazing website, it is seriously the ONLY detailed source of this information that I can find, you are filling a much needed gap in knowledge!
Assuming you’re talking about a corporation, you write a $8485 check to Camden the employee, calling that amount wages. This check is payable to Camden.
You also write a $2280 check to the IRS. $765 of this check represents employer payroll taxes, and the other part is really wages. (This other part is Camden the employee’s wages… but the employer withheld the money because its taxes and goes to the IRS.)
But doesn’t that total to $10,765 of corporation expenses each quarter?
Yes–and that’s exactly the right number… Camden the employee earns $10,000 a quarter (some of this going to pay taxes and some appearing in the net wages paycheck.)
And then the IRS gets a 7.65% payroll tax for the matching Social Security and Medicare which means $765 of payroll taxes.
On the corporate return, if these were the only two deductions, you would show $10,000 of wages and $765 of payroll taxes.
Yeah the lightbulb went off as soon as I clicked reply on that last comment…
Thanks for clearing that up.
🙂
My fingers are often faster than my brain.
so on the W2, I log the $10,000 in the wages box even through they only got paid cash $8485. Correct? It is gross, not net.
Yes. And note this important point: You actually did get paid full $10,000…
But the employer withheld $765 of your money to pay your Social Security and Medicare taxes… and remitted that to the IRS on your behalf.
And then employer may have also withheld some chunk of your money for your federal income taxes… and remitted that too.
I hope this doesn’t sound like a dumb question, but my husband and I are new to all of this and we are trying to do all of this on our own without having to pay anyone. So I want to make sure all of our questions are answered. Do I need to physically write out 2 checks showing that $765 is going towards payroll taxes and $1515 is wages and expenses when I file our quarterly taxes? You said in your website I need to split the check into those two categories so I am assuming I need 2 checks.
I’m not sure that I perfectly understand your question… but if you’re paying someone $10,000 a quarter, when you’re done, your books should show $10,000 of wages expense. Because that’s what you’ve paid.
And your Social Security and Medicare taxes will equal $765 because that’s the employer match… so when you’re done, your books should show $765 of payroll taxes expense.
The one thing–the only thing–that’s tricky about this is that you’ll actually make potentially two disbursements… one via the 941 form which pays both the $765 of employer payroll taxes and then also the $765 of employee Social Security and Medicare taxes–SO THIS EQUALS $1530…
And then you might also have the “net payroll check” equal to the $10,000 minus the $765 of employee Social Security and Medicare.
You probably would benefit by buying and following the Five Minute Payroll ebook system… if it doesn’t work, we’ll happily refund your money.
Steve,
Thanks for the great info! I recently set-up an s-corp in CA for my wife (she’s an actress) of which she is the only shareholder. I’m in the midst of setting up the payroll and I’m at a loss to determine reasonable salary. She may make 40k in one week, then 0.00 the next with large gaps of income in between. How would you recommend I determine what the s-corp should pay her? Can we determine salary qtr by qtr and pay taxes accordingly? Thanks for any help!
I would think quarterly payroll works fine… the main thing you guys want to do is get to the end of the year and have done something reasonable in the way of wages.
BTW it might be most practical in your case to just ignore her weekly earnings which bounce between (in a sense) feast and famine… rather you might want to do $10K or $16K a quarter just to make sure you get some wages accumulated over the first quarters of the year… and then sure that in the fourth quarter you do whatever number makes things look reasonable.
If I go from reporting 1099-Misc on Sch C to a S corporation route, can I postpone paying taxes this year to next. I work on one client , get 1099-Misc. Want to defer taxes to years when I may have little to no income. Is that possible?
Thank you for such informative blog
No, sorry.
BTW, an S corp might greatly reduce your self-employment taxes (which are probably a lot of the taxes you pay). But you can only use the S corporation once you have an entity in place that can use the S corporation bookkeeping rules. So you need either a corporation or an LLC (either entity can use the S corporation bookkeeping rules.)
Refer here for more info:More about S corps.
Good afternoon,
I have a question for you. I currently have 2 formed llc’ sin the state of Wisconsin. One is a tax preparation business and the other independent insurance agent. They each have their own EIN.
I outsource my payroll and have all employees paid through the tax business. As I run both businesses out of the same office.
I would like to switch to an s corp and start drawing wages for myself as the only owner.
because I have two EIN’s, would I have to make both businesses s corps? So I would have to draw a salary from both businesses? Thus having to outsource payroll for both companies? Also having to dile 2 scorp returns?
Last question, if I make this change now, being almost September, will I file s corp return come tax season January 2016 when filing 2015 taxes or is it too late and I would have to wait To file s corp taxes in 2017 when filing 2016 return.
Thanks in advance for any help you can give me.
I would think in your case that you want to have a single S corporation (if possible) so you can worry about the reasonable compensation issue on a single S corp return… You could pretty easily make one of the LLCs a disregarded entity of the “S corp” LLC by contributing the LLC to the S corporation. But if you’re not up on this kind of tax stuff, probably conferring with a local CPA firm would make good sense.
That makes sense to combine the businesses into one s corp.
My last question, I promise… If I make this change now (aug /Sept) can I file s corp for this tax year? Or do I have to wait until the next filing season?
Again, thanks in advance.
I’m not sure I understand your question but one can typically make *very* late S elections as long as one possesses a good excuse. Or at the very least an excuse.
The real issue sometimes is whether you can get adequate “payroll” for shareholder-employees into that first year.
Hi Steve,
Thanks to you for your very concise & helpful responses here — There’s hope!
I started and maintained an S-Corp over the past 10yrs to initially maintain a few seasonal project clients while I worked from home raising our children. During this time my spouse completely supported the family especially during the very slow months when the business overhead expenses continued.
Last year was the 1st year the S-Corp made a profit. My spouse was recently laid off.
I would like to start paying myself wages/salary though may continue to be seasonal.
Q1: Where do I start?
Q2: Will there be “red flags” from the IRS or State agencies as to why the S-Corp is now starting payroll?
Q3: How do I determine if or when to start this year since it’s already September?
Again, THANK YOU in advance!
You can (and should) just start doing payroll. You can use the approach described on this page… or you can outsource to a service.
The main thing, though, is to make sure you’re paying your shareholder employee reasonable wages…
Thanks for your very informative and easy to understand site. I am wondering if you could point me to blog or website that could give me a sample chart of accounts for a one person s-corp? My primary question is how to post (I’m using QB) the initial investment to start the s-corp and how to post the value of equipment. Thanks.
You can use the income and expense categories shown on the first page of the 1120S and then the asset, liability and equity categories shown on page 4 for the Schedule L balance sheet as your chart of accounts.
Steve,
Does a single-member one-employee LLC taxed as S.Corp that provides services need to complete the L Schedule EVEN if it does not have:
– inventory
– bad debt
– loans
– securities
– bonds
– mortgages
– real estate properties
– no office space rental
– no office space of its own (it a home-based service business)
thank you
If you’re over that $250,000 in revenues or assets, you need to Completing Schedule L and Schedule M-1.
thank you,
does this mean that (given the terminology I see in these two schedules) I necessarily need to do double-entry bookkeeping even though I have no account receivables, payables, or inventory?
I definitely prefer doing single entry cash accounting…
You don’t have to do double-entry bookkeeping to process payroll. But you will save money and have a much better handle on your business if you do use a real accounting system. Even a checkbook-on-a-computer software program like Quicken (or any equivalent) will do a pretty good job for most small service businesses.
Hi Steve-
I was just granted S-Corp election retroactive to Jan 1 (first business year); do I need to file quarterly reports for all of 2015? I’ve been making estimated payments but not sure where to go from here.
Thanks, and GO COUGS!
You should do payroll returns for first three quarters of year probably… just to be safe.
BTW, I would think those quarterly returns show wages as “zero”… so you’ll want to make your four quarter wages big enough to get shareholder-employee to a reasonable amount.
P.S. Watched the Cougs play on Saturday night.
Hi,
Thank you so much for this information. I am just curious about one thing. If you are a single person LLC that chose to be taxed as an S-Corp do you still have to cut payroll checks and follow this same exact procedure? File quarterly taxes, etc.
I think it’s a good idea to do payroll this way… You can do something more formal, of course. E.g., weekly payroll. But that’s a lot of work for a simple situation where the employee (the shareholder-employee) may be okay with something informal.
BTW, we have a pretty large S corporation practice and so do regularly engage with IRS auditors on reasonable compensation questions. The auditors really like to see shareholder-employee payroll as “regular” and “proceduralized” as one can make it. Doing an annual payroll, while arguably totally correct, seems to be a bad idea. For what that’s worth…
Hello Steve and Happy Holidays!
Per Sarah’s post above……
My understanding was that health insurance for greater than 2% shareholders had to be paid from or reimbursed to the shareholder of the s-corp then added to wages in box 1 only to get the above line deduction on page 1 of the 1040?
Doesn’t the insurance plan have to be established under the s-corp?
I am trying to understand how the shareholders in Sarah’s case can still get the adjustment deduction on form 1040 even though their salaries have been increased and fully taxable?
Thanks!
Hi Juan,
The article’s approach is right way… and the health insurance deduction gets onto the shareholder-employee’s 1040 tax return because it’s a self-employed health insurance deduction if you add the insurance to box 1 of the W-2 and then also describe it as self-employed health insurance in box 14 of the W-2. Note that you don’t under current rules include the health insurance in box 3 or box 5 of the W-2 because the health insurance isn’t subject to payroll taxes.
What about FUTA (Federal Unemployment tax) that you file the 940 IRS form for? I calculate mine at 6% for the first $7,000 of my S corporation wages paid in a year since I don’t pay into the state unemployment system.
That’s another hit at $420 a year and makes me wonder if being an S Corporation is the way to go. Wouldn’t it be better to be self employed and get the deduction for 1/2 of self employment payroll taxes paid on my 1040? It seems there is a threshold where being a S Corp makes economic sense.
Good question, Keith. I provide a pretty detailed answer here to your question: https://evergreensmallbusiness.com/blue-collar-s-corporations/
But the way an S corporation works you will get the deduction for employer component of payroll taxes. So that won’t impact your analysis. FUTA is an issue. A bigger issue for many small businesses are the compliance costs.
Hi Steve,
I’ve had a single member S-Corp in the past for a commercial fishing business where I would only receive payment a couple times a year. I had my accountant only file on a yearly basis and then I paid the tax due, often close to $20k.
However now I run a “normal” small business in its second year as an llc with income regularly coming in each month. In June 2015 I elected to be treated as an s-corp, retro to Jan. 1. However from my past experience I didn’t realize that I should be filing 941’s quarterly and running payroll. I am the only owner and operator. I have not paid any estimated taxes due for 2015. I want to now try to get things straight and start 2016 properly. Gross income is just over $60k, fair wage would be right at your $40k example. Perhaps I should report all the earnings for the 4th quarter or would it be better to file all 4 reports and spread the $40k evenly? Any advice would be appreciated! Cheers,
Ben
At a minimum, I think I’d suggest you do a $16K fourth quarter payroll (thereby implicitly recategorizing $16K of distributions as payroll) and report that amount on a 941 and on your 1120S, etc. (This results in a $2448 payroll tax payment which you can make with the 941 return.)
BTW, if you also provided Ben the employee with health insurance, that amount would be nice to add to the 941 and W2 and 1120S as wages too. Note that this might bump up the payroll (by say $4K or whatever) but then not bump up your payroll taxes. Note that this transaction would also in effect reduce distributions and then jack payroll.)
Once you had these easy payroll amounts, I’d look at the “leftover” distributions you paid to Ben the shareholder. If you didn’t pay “leftover” distributions to Ben, you don’t need to worry about paying more payroll. (Though you want to get everything clean and pristine in 2016.) If you did pay some “leftover” distributions to Ben, you might want to look at doing either a SEP-IRA contribution to get Ben the employee’s compensation up. (With a combined $20K of payroll and health insurance, you should be able to do a $5K SEP… so now Ben’s compensation package is $25K and maybe that’s reasonable?) And you could also look at doing a late third quarter payroll transaction. You’ll be making the third quarter deposit WAY late and so get penalized… but you might need to do this to get to the point of “reasonable.”
Good luck. Hope this helps.
Steve,
This post of yours and its followup questions are incredibly helpful.
I’m the single member and only employee of an LLC that was created earlier this month, and for which I have already 2553-elected it be taxed as S Corp.
I will run payroll only 4 times a year. Once at the end of each quarter.
I would like to take advantage of the tax savings available through S Corp taxation for items such as:
– max out employeR contribution to employeE 401k
– max out employeE contribution to Roth account of employeE’s 401k
– max year employeR contribution to family HSA
– family health insurance premiums deductions
Questions:
Q1. Do QUARTERLY payroll calculations need to take the health insurance premiums and HSA/401k contributions into consideration?
Q2. If so, does your 5-Minute Payroll product help with payroll calculations of health ins/HSA/401k and with calculation of employment (FICA) tax for yearly wages of about $260K (reasonable) compensation?
I’d like to contribute employer and employee 401k and HSA max prorrated contributions each quarter, so I’d like to learn IF and HOW those numbers are entered into payroll.
Since payroll will be just four times a year, I’d like to learn to do this myself.
It should not be too time consuming.
Q3. For the purpose of being able to enter the health insurance premiums in box 1 in W-2, is it relevant whether the employee/member’s credit card or the LLC’s credit card was used to pay for the premiums?
Q4. S Corp bookkeeping:
Is it correct for the S Corp to reimburse member for several items (mileage, phone, health ins…) in one lump transaction? Or does the S Corp need to reimburse each of those separately?
Thank you very much
The ebook answers most of these questions. Regarding question #5, which is not about payroll, you can bunch reimbursements.
BTW, if you’re using an S corporation, you probably really want a CPA or EA to do the return. (You basically want to use some of your payroll tax savings to pay for an accountant to make sure you do the accounting right.) Accordingly,I’d suggest you find some a local person or firm and then they’ll probably be happy to answer these sorts of questions as you move through your first year.
Good luck! 🙂
Thank you, Steve.
I am hiring a CPA for advice and tax preparation.
But, I’d like to learn how to do payroll by myself, since it should not be too time consuming doing so (once I’ve learnt) once a quarter for just one employee.
Can high earners learn to run payroll with use your “5-Minute Payroll”?
thank you
The five minute payroll approach works for situations where you’ve got one shareholder-employee and no other non-shareholder-employees… and you don’t want to pay $500 or $1000 a year to a payroll service.
Many (most?) one employee, one shareholder S corps can use this approach. And this is especially the case if you work in a state where there aren’t complicated state payroll taxes you have to deal with.
I see. Thank you for clarifying.
I asked you if the Five Minute Payrol ebook works for higher earners because https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/ says it only works if the quarter’s wages are not above $16000.
does it also work for higher-than-$16000-a-quarter wages?
Probably $16K a quarter will work for people with higher business profits if you carefully structure things. Consider this example:
Base pay is $16K a quarter or $64K a year…
If you add (say) $10K of health insurance and $6K of Health Savings Account, you effectively bump your payroll by another $16K but only the original base $64K is subject to payroll taxes.
If you do a 25% SEP-IRA match (so 25% of the $64K plus the $16K), that’s another $20K of nontaxable fringe benefits. Again these amounts aren’t subject to SS/MC payroll taxes.
So in a situation like this, if IRS or state auditor questioned you, you’d say “Well, my wages and benefits equal $100K. Maybe the wages are a little low but the benefits, which I’ve accounted for using applicable statutes and regulations, are pretty high… seems like $100K a year is enough.)
In many cases, $100K a year would be enough. Not in every case, obviously. But in many.
I don’t want to start a political discourse–that’s not point of this blog–but Warren Buffet has in recent years said things that make one think he’s being paid $100K a year in wages. (This would explain the $15,300 of payroll taxes he’s paid since payroll taxes would equal 15.3% on first $100,000). If Mr. Buffet earns $100K for running Berkshire Hathaway, probably small business owners don’t need to worry too much about getting way above that.
Again, though, these are general principles. You’d need to adjust everything for your specific situation.
Final comment: Another big issue is how the wages compare to your distributions. But that’s beyond the scope of your question.
Steve, suppose I want to pay myself $270K so I can max out both my 401(k) and my CBP. I am the single, shareholder, employee and know nothing about payroll (first year as S-corp).. Will the method in Five Minute Payroll work for me?
No, sorry, it really only works for people who pay either $10K or $16K a quarter. In your situation, you want to outsource the payroll to a real service. Like Gusto.
Hi Steve Thank you so much for your helpful post and comments – i just started my llc which is being taxed as an s-corp this year …. what if i don’t have enough funds in the bank to pay myself $10,000 for the first quarter by April 1 ? this is also right around tax time and i owe a lot so really good chance i won’t have the funds to do payroll…but i really want to stick with the quarterly system you describe and use your plan here ….and as a seller of online merch i am going to set my salary at 40k which seems to be reasonable i don’t imagine my profit will be that much even this year hope i’m wrong though …but what would you suggest i do this first quarter if i don’t have the 10k to pay myself? can i just pay the taxes on it and then pay myself whatever i can ? i could see paying myself something from now until april 1 … but i doubt it will be close to 10k
thanks!
The big thing you need to worry about is getting to a reasonable compensation level by the end of the year. You *must* do that. If you can’t do that, you shouldn’t operate as an S corporation.
But that said, you can bunch your payroll in certain quarters. Some S corp shareholders just do payroll one quarter a year and pay themselves like $40K or $80K or $120K at that time.
BTW, you will need to use a different payroll “system” that includes EFTPS.gov deposits if you want to pay more than about $16K a quarter in payroll.
Hi!
Would this work for a new 2 person s corp as well, as long as the total due remains under $2500? One owner is very active in the business right now, and the other does minimal work. That may change – can we adjust payroll amounts quarterly to reflect that, or would it be better to wait and just run payroll once a year?
Also – if only one owner is active and gets a salary, how would that work for distributions? Could the minimally active owner still get those without setting off alarms?
Last question: I make more than 117000 in wages at another company, so in my case, the s corp will not save me ss taxes, but actually add to them (the employer part of payroll taxes) – any advice in that regard? We chose this entity type anyway as a lot of clients insist on a corp vs partnership.
Thanks a lot!
You probably shouldn’t be an S corporation. Rather, you should be an LLC.
Regarding payroll, you probably just want to pay the working shareholder and in that case, the five minute payroll system should work.
Can you please explain how to configure the FUTA quarterly tax payments. I understand to take the first $7,000 of each employee and multiply it by .006. Then what do I do from there?
I’m in Florida so we don’t pay SUTA. I’m trying to file my 940 for last year and my figures are not matching up. Line 12 and 17 are not the same and it says it should be.
Thank You!
If you don’t pay SUTA, you pay a 6% FUTA tax on the up to the first $7,000 that every employee makes. E.g., if you have one employee who makes $40,000, you pay a $420 FUTA tax.
In this situation, BTW, line 8 of the 940 return shows $42 and line 9 shows $378… so total equals $420.
Hi Steve;
Thank you for all the great information!
My question is how do I go back, if possible, and to set up a federal payroll tax returns and deposits for last year, 2015? I have a single employee/shareholder S Corp. Unfortunately, I did not set up payroll or make deposits during the year.
Thank you in advance.
I would (belatedly) go back and do a payroll for the fourth quarter that gets you at least something reasonable in terms of payroll.
I wanted to thank you for this informative post, and for the one about avoiding state payroll taxes. I still had a few questions about our particular situation, and so I called your offices. The woman who answered the phone was extremely helpful, and verified that I would receive a full refund if I paid for the ebook and found it did not help answer my questions. I did purchase the ebook and it was definitely worth the $10! Before I found your website, I was utterly confused about doing my own payroll and was about to pay hundreds of dollars per year for someone to handle it for me. Now I feel completely confident in doing it myself, and it doesn’t take much time at all! THANK YOU!
Hi Steve,
Thank you for this useful information.
I created an LLC on 2015, but for a personal reason I couldn’t open the business that year.
I am the only one member/owner, I just created (Feb. 2016) an EIN for such LLC electing be treated as S Corp. Single Member.
For a couple of months I will be the only employee and then my plan is to hire 2 or 3 additional employees.
I want to start the payroll only with my self now then add the new employees.
My question, as the only owner and single shareholder for this LLC, could be myself treated as a regular employee in a payroll system or is there some difference between the owner and another employees regarding payroll?
Thank you,
For 2015, your LLC basically doesn’t exist for tax purposes. E.g., it didn’t make an election to be treated as a corporation. And it has no activity. Therefore, the “no activity” appears on your 1040…which basically means the LLC is a “tax nothing” for 2015.
For 2016 (or at least the part after your S corporation effective date) you’re a corporation and you treat employees (both shareholder-employees and nonshareholder employees) as employees. One caution: The rules for some payroll taxes are a little bit different for shareholder-employees. I would think that you want to outsource your payroll, therefore, to one of the payroll service bureaus like Gusto, ADP or Paychex…
You might also (if you’re really organized and disciplined) consider using one of the payroll options built into QuickBooks.
Steve – Thank you for this EXTREMELY helpful post.. I have learned so much going through the comments and your articles!
I really cant find an answer anywhere about this and trying to make the 2015 deadline.. I have a first time client single-member S corp that I am preparing her S corp and personal tax return. She had recurring losses in PY and never paid herself a salary. This year her profit increased 40% but she still didnt make any tax payments throughout the year. I am able to calculate her Income Tax liability and related penalties but not sure how to go about filing the 2015 employment taxes . She transferred $36K to herself during the year which seems appropriate to be categorized as “reasonable salary”. But at this stage (April 2016, 2 weeks before the deadline), do i :
1) Issue a W2 (past the due date?)
2) Deposit the Employment taxes for the year along with form 941 and wait for them to asses the penalty, if any? Seems this is a quarterly form but there hasn’t been any quarterly payments made, haven’t seen anything that refers to a different form when making $0 deposits…
I flied an extension for her S corp taxes ( it’s a disaster) but trying to submit all finals with her personal tax return..
Any input on this is greatly appreciated!
I’m not saying this works, but what I’d consider (if I was you) is possibly of doing a fourth quarter payroll for $16K that shows only SS and MC taxes due and not any income taxes due. This would produce a $2448 payroll tax liability and your client is more than two months late on this. But you’d at least get some decent amount of payroll into the books, pay the FUIA, etc.
In essence with this approach, you’d be saying that $16K of the $36K paid out to the shareholder as for payroll.
So would a W-2 still be issued late? And if so, it would just be for the 4th quarter amount?
It would be late if you’re talking about issuing it for 2017 at this date (mid February)… sorry.
Hi Steve,
Really appreciate the article on single member S-Corp payroll …. The article was posted in 2013. I was wondering whether your e-book (5 min payroll ….) consists of up-to-date information for 2016? I’ll buy one if YES.
Thanks and best regards
Chris
The book is up-to-date as of April 2016. (It was actually updated earlier this month.) Note that the 941 forms are 2016 forms… but the W-2 and 940 forms are 2015 forms. The 2016 versions of the W-2 and 940 won’t be available for months.
Hey Steve,
This page and the e-book are by far the best guides I’ve found for dealing with the tax situation on an S-corp. Page 6 references the the potential use of a SEP-IRA or solo 401k and page 7 expands on that, but there is no Appendix specifically demonstrating contributions to these accounts. Page 7 very specifically states that base compensation of $64,000 per year could also include $12,000 in health insurance (included in box 2 of form 941) and $19,000 of SEP (no reference to it being listed on the form).
My situation is a solo 401k. I expected to pay myself a total compensation package of $30,000 per year (expecting business to make $40k to $60k per year). I intended to cap out the solo 401k.
1. If I put the first 18k employee contributions in, does that reduce my W-2 Wage Income to 12k on the year? Part 2- If I make employee contributions of $4500 per quarter, does that reduce box 2 on the 941? It is my understanding that employee contributions to the 401k (or solo 401k) would not impact the taxable wage base used for line 5a-e.
2. Would my total employer contribution be (Option A) 25% of the 12k remaining (4k), (Option B) 25% of the 30k total (7.5k) or (Option C) 25% of of 24k (6k) based on creating a baseline of 24k and then contributing 25% of that to reach the 30k total that I believe would be reasonable for the size and scope of my small business? Or would it be (Option D) of some value I have not reached as a possibility? Calculating the .124 x30k/4 and .029 x 30k/4 won’t be a challenge. I deal with a substantial amount of math, but these taxes are still tough. If I was not contributing to to a retirement account, doing this with the book would’ve been a complete breeze.
3. It sounds like employer contributions to the solo 401k have no impact on the SS/medicare taxes. Is that because they are essentially coming from distributions rather than wages? If so, despite that, are we able to point to to this amount as part of the total compensation package in estimating the reasonable salary for our position?
Thank you. Hoping to have this finally figured out so I don’t have to struggle anymore. I’m well into day 2 of trying to find these complications and finally realized it just isn’t available on the internet because most people don’t figure out to form their LLC taxed as an S-corp (election already approved) and establish a solo 401k with the intent to max all contributions.
Thank you again for your help.
Hi Michael, so let me try to answer your two questions really simply. You’re making some of this maybe a little bit too complicated…
First part… WHERE does an employer’s pension fund contribution get reported? It gets reported as just another business deduction in the corporation return. I.e., if a corp pays $10K to some employee’s or shareholder-employee’s SEP or makes a $10K matching contribution to an employee’s or shareholder-employee’s 401(k), this is just another business deduction. (It happens to get reported on Line 17 of page 1 of the S corporation form.) There is nothing special about this business deduction, in order words. BTW, this regular old business expense has nothing to do with distributions or payroll taxes. In terms of the corporation tax return, it’s basically equivalent to office supplies or factory rent expense.
Second part… If an employee contributes to a 401(k) plan (or to something like a Simple-IRA), WHERE does that money get reported and deducted? Well, remember that this money is the employee’s money… so the money you pay to the employee is reported as wages on the corporation return… even if it’s used by the employee to make a pension fund contribution. On the corporation return, the employee’s wages get reported on line 7 or 8. Even the amounts used for pensions. Note, though, that the elective deferral does get disclosed and accounted for on the W-2. If an employee contributes (say) $12K to a 401(k) or Simple-IRA, that $12K reduces the amount reported in box 1 of the W-2 and that amount appears in box 12 with a code telling the IRS what type of adjustment has been made. A 401(k) deduction gets shown with a “D” code for example.
Hope that helps.
Thank you Steve, that does help a great deal. So to clarify, that means line 2 would not be reduced by my deferral to the solo 401k?
I’m so glad you responded quickly. I was starting to make this significantly too complicated.
This was very helpful. If you are a single owner S – Corp can and you have a $50,000 salary, can you not pay yourself for the first quarter and pay the salary over the last 3 quarters, if for instance you didn’t make any money until the very end of March?
Sure. And lots of people do that.
Hi Steve,
Awesome information here. I just bought your PDF and it’s great!
My 3 year old North Carolina SMLLC just elected for S-corp taxation starting 1/1/16. Please bare with me on some basic questions: Let’s assume I use your system and take a 40K salary/10k quarterly with $750 withheld for income taxes but actually make 70K total by the end of the year. Should I be making estimated quarterly payments(1040es) on the additional 30K(distributions) to cover personal income tax not withheld on the 941?
Can I literally cut a handwritten check from my company with the 941 and avoid payroll services?
Additionally, do I make my 1040es quarterly payment check from the employee,”Kenny” or from the company paycheck?
What is the main advantage to not using eftps.gov to make payments vs this system.
Thanks in advance!
> Should I be making estimated quarterly payments(1040es) on the additional 30K(distributions) to cover personal income tax not withheld on the 941?
Yes
>Can I literally cut a handwritten check from my company with the 941 and avoid payroll services?
Yes
>Additionally, do I make my 1040es quarterly payment check from the employee,”Kenny” or from the company paycheck?
from Kenny
>What is the main advantage to not using eftps.gov to make payments vs this system.
eftps is great… you can still use it to make the payments. What the system lets you do is turn payroll into a very simple, after the fact process.
Hi Steve,
Thanks for your response.
Looking at the 10K per quarter example I’m trying to figure out how $8485 is the net wage amount? Also, assuming this was $12,500 a quarter w/no income tax withheld what would be the net wage amount. Thanks for your help.
You want to remember that the employee pays $765 of social security and medicare and then also per the example $750 of federal income taxes.
Subtract these two amounts from the $10,000 and you get to your $8485.
Hi Steve, thanks so much for this article, it is very useful. I have a somewhat related, and yet unrelated question. I’m in the process of setting up a business, and my plan is to set up two LLCs. The first will be for the “operating business”, and I’ll elect S-corp taxation. The second will be a “management” entity, earning a management fee from the S-Corp, with the funds used for retirement accounts, etc. I also have a regular day job where I receive W-2 income. I have a couple questions with this set up.
1. Should I make myself an employee of both the S-Corp and C-Corp and pay myself W-2 wages from both, or just the C-Corp and take 100% distributions from the S-Corp?
2. Instead of the C-Corp LLC contracting to provide management services to the S-Corp LLC, would it be better to instead establish the C-Corp LLC as the managing member of the S-Corp LLC and apportion the distributions such that the amount that goes to the C-Corp LLC is sufficient to fund the W-2 wages, fringe benefits, and expenses and leave as little taxable business income in the C-Corp LLC as possible?
Any advice you could give me would be great. Thanks!
Hi James, I would guess (if you already have a W-2 job) that you don’t want to complicate your business and your accounting by setting up multiple corporations. Here’s a blog post we did about using S corporations for part-time businesses: https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
You can read through the details, but the quick summary is “you don’t benefit from an S corp (usually) if you’ve already got a regular W-2 job…”
BTW, a C corp can’t be a shareholder in an S corp…
Hi Steve, thanks so much for this article,
with $30,000 payroll salary / year to my self from the S corp how much distribution is normal to take / year as a only owner in the corporation?
I don’t really think the size of the distribution matters very much. What really matters is that your compensation is reasonable. That said, if you pay John the shareholder-employee $30K in wages, I would think a distribution of $5K a year wouldn’t even be close to being a problem. $10K wouldn’t, I would guess, cause any issues either. Heck, $20K could in many circumstances be totally reasonable.
Two other comments about this…
If you’re taking $100K or $200K in distribution, that seems problematic. I have to wonder why your salary isn’t more than $30K… (but that said, who knows… $30K may be the perfect salary. even if your distributions are six figures.)
Finally, there are things you can do to get your distrbutions value down. E.g., if you or your family do charitable giving, that many can come out of the S corporation and so “use up” or reduce the distribution.
Hey Steve. Hoping to make more this year I Incorporated with S selection in beginning of jan. got the s selection confirmation in march. Its May 26th And I have barely been able to pay and cover cost of goods sold and buying more inventory. I work full time at another job and this is only an ebay business that gets a 1099k from paypal. It looks like my profits will go directly to payroll at the end of the year, obviously. As things are now, It looks like I will only clear 10k in profit for the year. How is 10k a year going to look like a normal salary? I only work about 8-10 hours a week though. Is this something I can expect to hear a call from the irs? Do I just start sending 941’s from here on out or file past 941’s with zero and pay myself at the last quarter? do I file them 2500 in income a quarter? I am lost. Also, Can I just 1099 myself at the end of the year?
I would look at this blog post…
https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
I doubt you should have made the S election for 2016 given the (very understandable) modest profits earned the start-up phase of your venture.
BTW, if you take no distributions because you’re leaving the profit “in” the business, you should not have to take a salary. See this blog post for rationale:
https://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/
Hi Steve. Just a quick question, or confirmation. I too live in Washington state, and have set up a single owner S corp for my therapy practice. MY impression is that there is no need to register/pay into Washington state workers comp or unemployment insurance…but that I would owe FUTA via an annual 940. I was on another website and was told this is bad info, although I’m suspicious of that persons’ level of expertise wrt our state. In any event, it appears you affirm my position in your article, but would love it if you could confirm!?
If so, I think I’ll opt for the quick and easy payroll as you describe, and forego bothering with any software. Seems like quarterly 941’s and annual w-2/3 and 940’s would be pretty to knock out…hard to justify paying $300-400 annual to print these out of QuickBooks.
Pat, your understanding is correct. You should, if you’re the only employee and a shareholder, be able to skip employment security department stuff… also L&I. BTW, there are ways where the state essentially tricks you into paying this your first year if you’re a corporation making the S election rather than an LLC making the election.. So a call to ESD and L&I might be appropriate.
Hi Steve, if I am a Sole owner of Scorp.
If starting the method above, and file the 941 this quarter, Will I still file the Quarterly 1040-ES? If so, do I make the same payment that the account has figured for me (which is my last year liability/4)?
Thanks!
Via the 941, you’ll take care of the social security and medicare taxes you owe…
But your 1040ES payments, in essence, include social security AND medicare AND federal income tax payments. I think you’d want to still make 1040ES payments therefore. But they’d be smaller because they wouldn’t include SS or MC.
Hi Steve… Would you recommend an S Corp to pay the recommended $40,000 yearly salary ($10,000 quarterly) and upwards of $100,000(plus) yearly in distributions to the same shareholder? Or would this not be the appropriate system for an S Corporation yielding those amounts?
Thank you in advance for your advice!
That seems aggressive to me, but you’d want to look at what is a reasonable salary for the work the shareholder-employee does.
BTW, if the S corp provides the shareholder with (say) $8,000 in health insurance, that money counts as wages but isn’t subject to social security or payroll taxes. So your $40K becomes $48K.
If you could do a 25% match SEP, that would be another $12K. With a $40K base, $8K of health insurance benefits, and $12K of pension benefits, you’re still only paying payroll taxes on $40K, but your compensation is $60K. And you’ve reduced your distribution from $100K to $80K. Such an approach would probably be a lot less problematic.
But again, the question really is whether $40K is reasonable. If the business includes other people doing the same job as the shareholder and for wages of $30K to $40K, you should logically be okay at $40K.
Hi Steve, thanks so much for this article,
With $150,000 distribution / year, how much Net payroll salary / year is reasonable for S Corporation that have only one owner?
You need to look at what people doing the same job as you do get paid… so that’s one (and the most important) factor…
And then you’d want to think about how the tax return looks and how the shareholder-employees compensation works. E.g., if you pay someone $40K a year, that seems low, but if the person gets $20K of health insurance (counted as wages but not subject to income or payroll taxes) and you do a $60K a year defined benefit pension plan (which uses up a bunch of the distributive share), you’re going to look fine. In this case, you’ll have paid payroll taxes on the $40K… that $80K of fringe benefits will be income tax and payroll tax free. And you’ll only have that last $30K to report as a distribution, which will probably be fine.
Thank you Steve for this amazing post! I bought the Five Minute Payroll and have
a few questions:
1)- On the W-2 on page 26, the SS withheld and Medicare withheld are 2480 & 580.
Please explain their calculation. I thought they would have been 4960 and
1160, respectively.
2)- I have a W-2 day job and a single shareholder/employee S-Corp. I’d like to
avoid 1040es quarterly payments. On the 941, I should be able to withhold
about 25% Federal income tax on my wages and still keep the total less
than $2500. Is this strategy OK? Are their reasons why small withholding
and 1040es are better?
3)- Let’s say I use 1040es payments. I incorporated in August 2016. Can I make
just the 3rd and fourth quarter 2016 payments? Would their be a penalty since
I missed quarters one and two?
Ho Ralph, regarding your first question, only half of the SS and MC are the employee’s taxes. That half equals $2480 and $580. I think what you’ve asked about is the employer’s other half of the SS and MC. That’s another $2480 and another $580. But that money isn’t paid by the employee, right? It’s paid by the employer and appears on the employer’s tax return (probably as “payroll taxes”
Regarding your second question, that works fine. I.e., go ahead and “over-withhold”… just make sure you stay beneath that $@500 threshold if you want to pay with the 941.
Regarding your third question, don’t worry about the penalty. There probably won’t be one… if there is, it’ll be really small.
Hi Steve,
First off, I am learning so much from your site and articles! I am a new sole owner LLC, but looking to elect to be taxed as an S-corp. I missed the March deadline, so I’ll have to now file the late election and hope to be approved. But, I’m concerned about several things:
1) I have been paying myself monthly through electronic deposit (LLC business account to my personal account), but not withholding any taxes or doing through a payroll-now that I want to be classified as an S-corp, how will these distributions be converted to salary? I was planning to start a payroll, but unsure of what I should pay myself if I don’t get approval for the S-corp.
2) I have been a 1099 for a couple years prior to the LLC and chose to not pay the quarterly estimated payments (my penalties were so little compared to what they wanted me to pay ahead of time), and with all of my deductions-I’ve always owed much less so I didn’t want to pay so much early.
2a) But if I now elect to be an S-corp, I am supposed to make quarterly payroll payments and income tax payments and I’m hesitant to start this without knowing if I’ll be approved as a Late S-Corp election…
3) If I don’t pay any of the quarterly payments and just file everything timely by March 15th, what penalties will I incur? Example: LLC to-S Corp will net about 100K, with a 45K salary to myself. If I keep as an LLC, I am looking at 100K taxed very high…but do the penalties associated with late payments on S-corp out weigh these?
Thanks so much for any advice!
You need to do payroll. The good news (probably) is that for 2016, you can probably pretty easily say you’ve paid $16K in payroll for Q3 because that would require only a $2448 deposit and that would be a small enough payment that you can simply pay the money with the Q3 941. (In this case, you’d essentially be saying that the first $16000 of money you’d paid out for Q3 to Kurstin was “payroll.”)
The only tricky thing you need to worry about is that you need to by year end have paid Kurstin the employee reasonable wages. That means that over the fourth quarter, you’ll need to pay enough additional wages to Kurstin that the total for the year is reasonable. BTW, in your business, it might be that $16K for Q3 and $16K again for Q4 gets you to a reasonable wages number.
BTW to hit your $45K total for the year, this would mean that you need to pay $29K in wages to Kurstin during the fourth quarter. $16K plus $$29K equals $45K.
One other comment… I don’t think you’ll get hit with penalties using the approaches I describe here. Where you would get hit with penalties–and they wouldn’t even be that bad–would be if you said $16K of Q2’s payments to Kurstin were payroll. That might mean you should have paid $2448 by end of July… and now it’s two months later so you have two 5% per month penalties so roughly $120 times two.
But then this would mean you have $16K for Q2, could do another $16K for Q3 and then could do $16K for Q4 thereby bringing you up to $48K in wages for the year… which might be reasonable.
Hi Steve,
Thanks again for this article and your reply to my previous questions!
I plan on paying my S-Corp operating expenses (worker’s compensation insurance,
advertising, etc), then calculating my salary based on what is left over.
Does this sound reasonable?
Probably but maybe not necessarily… what sounds “reasonable” to me, if you want more confidence in your number, is looking at your job in your S corp and comparing your salary with what people earn in similar positions.
The other thing is, if you’re close to reasonable, you’re probably okay.
Hello Steve,
Thank you so much for the article. I had a question regarding calculation of federal withholding on my income. I am a sole owner S Corp and pay myself. We projected with my CPA that I will have an income of 55 K over for the months of August-December. We will deduce 5k as business expense and pay 50K out to myself. Out of this 50K, only 25K will be paid as salary, the other 25 K will be paid as distributions. Based on these numbers he calculated federal withholding of 2000 ( based on 5000 gross income per month and 5000 in distribution). I was wondering how he got to that number because my income situation has changed and I will make much less now. So I want to be able to calculate federal withholding by myself.
Thanks in advance
I would recommend you outsource your payroll to a service like Gusto… that’ll mean you have them deal with the withholding amounts in a manner that at least takes care of the tax on the wages.
For the taxes on the “other” part of the S corporation profit–what you’re calling distributions–you should be able to multiple the profit by your marginal tax rate(s). E.g., if you’ll pay a 10% tax on that other $25K, you’ll want to at some point pay another $2500 in income taxes.
Hello Steve,
I am already using Gusto but the calculations that gusto made regarding my federal withholding didn’t match the ones that my accountant gave me ( the amount from the accountant was much higher compared to the one from gusto).
Also I am not sure I understand your example with the 10% calculation above.
Thanks,
Adelina
Use your accountant’s numbers. He or she isn’t just trying to pay the taxes on your wages… but also on your shareholder profits.
Can you help me out how he got to this calculation?
That discussions and descriptions in the post do the best job we can do to describe the calculations. Sorry that they aren’t clearer. Ugh.
BTW, the math of payroll unfortunately isn’t very intuitive… and if it’s especially “un-intuitive” a small business owner may just need to bite the bullet and outsource payroll to someone like Gusto.
Hi Steve,
I purchased your 5 Minute Payroll pdf and found it very helpful!
This will be my first year in business as a SMLLC with S-corp election and I want to use your 5 Minute Payroll System immediately. I have a friend who is a CPA and says that since this is my first year of business, that the IRS requires that I do a monthly payroll and be a monthly depositor for my first year and cannot do a quarterly method to start. Is he correct? Or can I do the quarterly method you describe right away?
Second, can reasonable compensation be an hourly wage, especially if I want to work my business part time? For example, could I make my reasonable compensation $30 an hour (assuming that’s what employees make in my field, in my area etc), and if I charged $500 to a client for a job that took me 10 hours, could my W2 pay be the $30 x 10 hours ($300), and then consider the extra $200 earned to be distribution?
Hope that makes sense, and thank you!
You by default are a semi-monthly depositer rather than a semi-weekly depositor… so your CPA friend and I agree there. But if your payroll tax liability for the entire quarter is less than $2500, you don’t have to make your tax deposits semi-monthly. You can just make the deposit with your timely filed 941. The “de minimis” payroll tax liability rule, in effect, trumps the semi-monthly deposit rule.
Monthly payroll would be better, too. IRS agents and accountants too love stuff to be systematic and procedural. But that monthly-ness isn’t a requirement. The requirement is you need to get to the end of the year and have paid your shareholder-employee reasonable compensation.
Your hourly wage approach seems fine to me. But note I only have the info you’ve provided… 🙂
Hi Steve,
I have some basic questions about how to make distributions, both schedule wise and formalities. I’m stuck on a few issues.
For these questions, lets say I take a $40K salary but end up making $60K in a calendar year.
Firstly, in a single member S-corp, is a distribution made by just writing a check to yourself from the company? Is there any other necessary formalities one has to follow other than record keeping to use at the end of the year tax returns?
Secondly, to make things simpler, can I leave the additional money I made over my salary in my business bank account and then report the money as distributions at tax time(year end) or do I have to physically write checks from my business bank account to myself(the employee) throughout the year for record keeping?
Thirdly, I got a little busy and absent minded this year and only made 1 small distribution to myself(wrote a check) after my 1st quarter payroll. To make up for that, can I make 2 larger distributions before the year is finished?
Fourthly, how do I calculate how much to take in distributions each quarter so that at the end of the year I’ve taken everything I can? Is that the goal or should I leave some money’s undistributed in my business bank account?
Per above, let’s say my salary is 40K and but I make 60K total. I pay myself $8485 a quarter after PR taxes. With the additional 20K (5K a quarter) do I distribute that full amount(5K a quarter) or do I withhold self employment tax from it first and then distribute the difference?
Just trying to understand more and keep my taxes clean for the end of the year.
Thanks for your help.
David, you don’t need to worry about the distributions. You just need to pay “David the shareholder-employee” reasonable compensation. If you want to worry about something, worry about that. I.e., worry about paying an amount that is more than you need to pay or less than you need to pay.
Regarding the distributions, it doesn’t matter whether you pay it all at once… or in little chunks… just write checks whenever. Although that said, you may as well check your LLC operating agreement on the off chance it says something about how and when to do distributions.
Thanks Steve,
I’ve learned a lot from your Ebook and this post. Yes, i’ve paid myself a very reasonable salary this year following your system.
Just to be clear about distributions: Lets say i’ve made and extra $5K above my salary over this year, what happens if I don’t distribute the $5K to myself in 2016?
Will it effect what I have to report on my taxes at the end of this year? Can I distribute it later (2017) when I need it?
I would rather leave any excess profits in my business account for when I really need it. Are there any negatives here?
Great question. And a super common question for new S corporation owners.
As a general rule, you aren’t taxed on distributions. So if your S corp makes $5K and you distribute $0, you pay tax on the $5K regardless of the distribution.
BTW, if *next* year, you make $0 but distribute $5K, you pay zero tax because you made zero income. That $5K distribution, i.e., doesn’t create any tax liability.
P.S. The only time you may pay tax on a distribution is when you make a distribution in excess of your basis… in layman’s terms, that occurs when you use borrowed money to pay a distribution.
Steve,
You say above that…
…”…if your S corp makes $5K and you distribute $0, you pay tax on the $5K regardless of the distribution…”.
Does “you pay tax on the $5K” mean:
“the individual pays tax on the $5K”
or
“the S Corp pay tax on the $5K”?
As a generalization, S corporations don’t pay income taxes except in oddball situations…
In the situation you allude to, the shareholder pays the income taxes on the $5K of profit–and, yup, that’s case even though the money still sits in the S corporation’s checking account.
Hello, and thank you for writing this great article. I am hoping you can clear something up for me.
I am self-employed, but just elected to form an s-corp for 2016 tax year. When i was filing sole-proprietor taxes, I would fill on the sched SE to calculate my self employed taxes (aka what i am trying to save money on by being an s-corp). However, when you file an SE, you are allowed to deduct half of this on your form 1040 (line 27), which then lowers your AGI. This is a fairly significant savings. Is there somewhere that I can deduct the “payroll taxes” i am now paying (as both the sole shareholder and sole employee)?
I feel as though I am losing more money or breaking even at best by not being able to lower my agi, but paying payroll taxes on a slightly smaller salary.
Hope I explained myself properly, thank you so much for your help on this issue!
You get to deduct half your self-employment taxes for self-employment tax calculation purposes and for income tax calculation purposes… and that deduction appears on your 1040 return. Example: You pay $10,000 in SE taxes and you get to deduct $5000.
Your S corporation gets to deduct the Social Security and Medicare taxes it pays. E.g., if you (the shareholder employee) pay $5,000 and your S corporation pays $5,000, the S corporation gets to deduct the $5,000 it pays.
In end, it should work out basically the same way.
Hi Steve,
Thanks for the simple solution you provided to a complex problem…
Hope you can guide me on this question:
I incorporated in Jun this year and then selected S-Corp that got formally approved by IRS in Oct 2016. I am sole employee-owner and have no other job at the moment. I started part time consulting in July via the S-Corp and received first invoice payment on Sep. 6. The S-Corp has not made any payroll wages/distributions so far as
I was planning to take salary and distributions in Q4 along with paying the required payroll/income taxes. This was done to limit the filing etc. to one quarter only. I am going to do payroll wages + distribution for Oct, Nov, Dec.
Does this sound reasonable or do I have to mandatorily do payroll every month that I work for S-Corp(i.e. for months Jul, Aug, Sep). If I have to do it every month, what is best way to remediate the last few months that I have not paid myself – do a one time quarterly type payroll and pay the payroll taxes/income taxes and penalty ?
Thanks.
Chris, I think your approach works. Again, the rule is you need to have paid reasonable compensation to shareholder-employee by year-end. What you describe does that, at least as I understand your comment.
Thanks Steve – it is made very clear by you about being reasonable on compensation and that will be done.
Knowing that the yearly wages/distribution is what matters for reporting income, what about employee expenses to be reimbursed(like health insruance, phone charges etc.) ?
1. Can S-Corp reimburse for 2016 employee expenses (like health insurance, phone charges etc.) before the S-Corp was incorporated in Jun ? I had paid for health insurance out of my own pocket from Mar-Jun. Though the corp was filed in Jun, I had been working on its product and research since March. I know the start-up expenses upto 5000$ can be deducted.
2. Also can S-corp reimburse for expenses(like health insurance, phone charges etc.) for months where I was not paid any payroll ? I assume this should be allowed.
The answer to your first question is “no” if you’re talking about the S corporation tax return. Note however that those expenses may be deductible on the entity that existed before the S corp was formed.
The answer to your second question is “yes” those amounts can be deducted on the s corporation tax return… but note that the health insurance gets treated as wages on the S corp return and go onto a W-2… so what you want to be careful about is whether you end up getting the self-employed health insurance deduction on your 1040… (The rule is you’ll need W-2 box 5 wages at least equal to the health insurance deduction you want to take.)
Steve,
What is the best way to come up with a ‘reasonable’ compensation amount. My S Corp LLC will generate about $130K of net income before any monies are allocated to ‘salary’. I am the sole ’employee’ as well as the owner of the S Corp. My acct has been evasive about the amt I can use for reasonable compensation but seems to be steering me to $60K, which, after reading your info, seems to be a little high – any recommendation?
I would defer to your accountant’s notions on this since he or she knows more about your business. But I will note that if you set the salary to $60K and your profit equals $70K (after adjusting for the $60K of wages), you’re saving maybe $10K in payroll taxes… (15.3% of $70K equals roughly $10K…)
Hi Steve,
I am so happy to have found your website. It has answered many questions for me. Thank you for providing it. My question is what should I do now. My situation is this:
I have had an S Corp since 2007. It is for a small travel business and it has allowed me to travel at no cost to myself except a great deal of work organizing trips once a year. Some years I have made as much as 12 thousand dollars and some years I have actually lost money. When I make a profit, I put it back into the business and I have not paid myself anything. I have made my living at another job working for the State of Washington and also my spouse has an income. My tax accountant wants me to have a payroll for 2016 but I don’t know how to set it up and since I lost money this year, I am not sure I need to do that. Do I? It is now the end of the year and I have to figure out what to do quickly. What do you think? I have just retired and plan to spend more time on my travel business and maybe I will begin to make a regular profit starting in 2017. I don’t know yet if it will be successful. Also, if I do set up a payroll, what are the steps I need to take in Washington State?
Thank you,
Kelley
Kelley, it doesn’t sound to me like you need to worry about payroll. You’ve got a situation where the business doesn’t make much and what profit you earn gets reinvested.
Check out this article for information about when a zero level salary is okay:
https://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/
PS. At the bottom of that post is an advertisement for a DIY kit you can use for simple payroll situations like the one you describe.
Also check out NOL (Net Operating Losses). You can carry those back to previous years (two years prior) to get tax back and carry forward any carry over for 20 years depending on the loss. Check up on the IRS publications. It is complicated but I managed to recover 10K+ of taxes that my accountant didn’t catch because NOL is not covered as part of automated TurboTax software. It is paper forms. You work the calculation then do a previous year tax return amendment. This is a huge untapped resource that few know as standard accounts robotically follow tax software questions.
Hey Steve, just bought the eBook- it’s very helpful. My situation is: I haven’t filed any 941s this year yet- but I’m prepared to do so now and make the payments (using my quick & dirty 40K salary). I know there’s a 5% late penalty per quarter per month (max 25%)- should I calculate and pay that late fee now or wait for the IRS to “slap it on” later? Thanks
Your 4th quarter 941 isn’t due yet. So there’s no penalty there. E.g., you can do a $16K 4th quarter payroll and if you only pay SS and MC, your $2448 deposit can be made with the 941 in January.
If $16K isn’t reasonable compensation, you would either need to do a late 3rd quarter and possibly even a late 2nd quarter payroll to get your total for the year up to a level that’s reasonable.
You could also do a larger payroll amount for 4th quarter (e.g., $40K or $64K) and then make the required deposit electronically via the eftps.gov system. E.g., you could pay yourself $40K in fourth quarter. That would trigger a $6120 deposit if you’re only paying SS and MC. You can’t pay a $6120 deposit with the 941–it’s too big. But you can make the deposit with eftps.gov.
I am a CPA, not practicing and I never did taxes, so I understand the basic concepts here. What I am curious about is why there is no mention of FUTA or SUTA (Federal and State Unemployment Taxes). Aren’t they supposed to be withheld and paid from wages?
FUTA isn’t withheld. So you don’t worry about that with the 941s or W-2s.
SUTA can be an issue (and I think is mentioned in the blog post and I know is discussed in the five minute payroll ebook)… but note many states also let really small businesses skip SUTA. If you live in a state where you can’t do that, you need to deal with SUTA. (Probably on the employer’s side of things.)
Steve,
Single member LLC, filed 2553( late) to convert to S corp status retroactive from Jan 1 2016. Still awaiting response from IRS. Havnt filed 941s for this year. Should i run payroll and file 941s even though i have not received a ruling on status? If yes, Can i file Q1-Q3 as zero wages and Q4 = full annual wage? Appreciate your thoughts.
Yes you should run payroll and in your case, you probably do need to load all the payroll into Q4.
P.S. If you’ve done the 2553 right, it’ll go through… so your big risk now is *not* getting reasonable compensation to your shareholder-employees.
Great article and I learned all this stuff over the last year after I fired my (incompetent) accountant. I’m an LLC taxed as S corp – no employees. Last year my accountant generated a W-2 for me. How do I do this? I see the ssa allows you to do this, but when I go to create it lists “Self-employed individuals who are not paid wages by a church or religious organization should not file using Forms W-2. Self-employment income and applicable taxes must be reported on the Internal Revenue Service Form Schedule SE. Please see ‘Contact the Internal Revenue Service’ under the Help For W-2 Filing tab for any questions about self-employment income and tax reporting.”
You need to either buy software that’ll generate the W-2 and W-3 forms… or you need to buy preprinted forms. Sorry.
Tip: It’s probably easiest to just outsource this to a bookkeeper or accountant.
Hello Steve,
I have a question about payroll and 1120S:
Assuming that last payroll was issued by the end of the year BUT WAS NOT fully processed from business bank account, do I use numbers from W2 values (as if all payrolls were already processed) OR do I use actual numbers that were deducted by the end of the year from business account while calculating:
salaries of all employees; salary of officer; retirement contribution to 401K (which is a match contribution) and ER health insurance contribution.
Thank you so much in advance
If I understand your question–which seems to boil down to maybe payroll deposits not being made by the end of the year and maybe a payroll check not being cashed by end of year–I think you use the W-2 values.
I just opened an S corp Can I pay into unemployment compensation just in case my business fails? I read that if i pay payroll taxes I can make UI payments to the state is this correct?
You need to talk with the unemployment agency in your state to learn their rules and policies. In Washington state, BTW, you probably can’t get unemployment benefits by working for your own corporation. Neither can your children…
Hello Steve,
This is the first and only good information I’ve found on this subject so far. Does this method work for a 2 person LLC being taxed as an S-corp? My husband and his partner both work full time jobs in management fields and formed the LLC to lay flooring. Flooring laborers get paid $9-$10 per hour around here and, as owners, they can make much more than that. Thus, the s-corp seemed the way to go. They are just getting started and I’m trying to get a handle on the accounting. I can use something like QuickBooks, but since they are just starting this business and since it’s a part time endeavor, an accountant would be a really tough expense.
If you have other employees, probably you just want outsource all of the payroll to QuickBooks or ADP or Paychex.
Hi Steve, I just bought your 5-minute payroll – great resource! I was wondering if the same method can be applied to a husband-wife owned llc filing as s-corp? In other words could the 10k or 16k wage be split between 2 people and still be ok? Any downfalls of doing this instead of just paying one person? Also would the health insurance deduction process (added to wages on w2) work in the same manner or would having 2 family on payroll mess it up? Thanks for your response in advance!
You should be able to use five minute payroll system for a husband and wife if they split the $16K, yes…
Hi Steve,
Thanks for sharing these resources. I have a same situation as asked above (s-corp with 2 employees — myself and my wife). My question is that for quarterly payroll do I just sum up our salaries, taxes, SS and medicare taxes etc and file 1 form with “number of employees” as 2? or do I file 2 separate forms one each for my wife and myself?
You use a single 941 no matter how much employees. (BTW if you have multiple employees, you ought to look at outsourcing payroll to somebody like ADP, Paychex or Gusto… working with more than one employee complicates the bookkeeping.)
Hi Steve-
I am sure this was asked at some point- but will this system work for a one person C corp. My husband was a independent contractor and sole proprietor and the company he gets almost all his work from required all the contractors to incorporate, so he is now a one man C corp-
Thanks for your help
It would… but if you’re operating as a C corporation, you probably don’t want to arbitrarily set your salary to some reasonable compensation amount (which is what the “quick and dirty payroll” system does). Rather you probably want to set your payroll based on the profits of the business.
By the way, I am surprised it makes sense for your husband to operate as a C corp. Almost always people in your husband’s situation choose either an S corporation or just set up an LLC and then operate for tax purposes as a sole proprietorship.
I did a little article about C corporation taxation at my S corporations site that you might find useful:
http://www.scorporationsexplained.com/does-a-c-corp-save-business-owner-taxes.htm
Hello my name is Dan… I live in Illinois… I’m a llc and been thinking of taking a s corp election because of tax benefits… say I’m on a 45,000 salary of taxable income annually but my company made let’s say 75,000 this year. If I put the extra 30,000 into Long term capital gain (which I don’t get yet) for 1 year and 1 day I can remove it with zero taxation (meaning it goes to my llc or to me the owner) because I’m still under 50,000 and in 15.3% tax bracket. 15.3 tax bracket 0% LTCG method.
If your S corp makes $30K after paying its shareholder, Dan, his wage, that $30K goes onto the K-1 the corp sends Dan and he includes income on his return.
The whole capital gain thing has no impact…
BTW, if you don’t distribute the $30K but instead leave the money inside the corporation, use the $30K to invest in something, and then later realize a capital gain or loss, those gains or losses get reported on the K-1 in the years they occur and the shareholder reports them on his or her tax return.
But this doesn’t change fact the the $30K of “operating profit” was taxed on that first K-1.
So, here is my situation…We have an S-Corp and my wife is the one employee. We pay her a “reasonable wage” each month. But, we also pay the personal Quarterly ES payments to IRS using the “safe harbor” rule (100% of prior years tax due, 1040 line 63 total tax) paying 25% each quarter. But (assuming you are the one employee of your company), I heard you don’t have to pay the Quarterly ES if you just withhold more from your paycheck. Is that true? Can I just follow the “safe harbor” rule except pay if though the paycheck withholding, rather than the Quarterly ES payment? You might ask, why does it matter where I pay it since it’s all the same to the IRS in the end? Well, I use Quickbooks online payroll to pay my wife. So, it would be much easier to take care of all the taxes in one spot, rather than adding in the separate IRS website payment each quarter. Note: I pay my wife monthly. Thanks for the help!
You only need to pay quarterly 1040ES payments if you still owe taxes after your payroll withholding.
E.g., we have clients who withhold everything from their payroll checks. And that pays their income taxes. And so they don’t have to do any additional estimated tax payments.
Steve,
I bought your Five Minute Payroll book. It has great advice. Specifically, I wanted to use the ability to use a SEPIRA to bump up my salary since I don’t think $64,000 will be a reasonable salary in my case. The problem is I am confused as to how this would affect my W-2 and there is no example W-2 with a SEPIRA in the appendices. You say all that needs to be done is check Box 13 for Retirement.
BUT, does the SEPIRA effect what goes in Boxes 1,3,5,16? For example if I pay myself $85,333 for the year and 25% of that ($21,333) is contributed to a SEPIRA it leaves with just $64,000 of taxable income.
Do I then put $64,000 in boxes 1&3&5&16?
Thanks in advance.
I already realized that I was mistaken. The correct example is $64,000 in wages and $16,000 for SEPIRA contribution. But my question still remains. From what I read, you are not supposed to really report SEPIRA contributions in anyway except checking the Retirement box on the W2. So then how does it really increase the salary that I can show to the IRS?
Your SEP helps in two ways… sort of… But to provide context, say, you make exactly $164K and then take $64K of this as W-2 wages. And then say you take the remaining $100K out as profit distribution. In this case, IRS looks at the $64K… looks at that $100K… and it may conclude that’s unreasonable.
Suppose, though, that you use $16K of the $100K for a SEP-IRA contribution. This SEP helps in two ways.
WAY #1 SEP-IRA helps… you’re supposed to pay your shareholder-employee reasonable compensation which as a practical matter means not unreasonably low compensation. So if you pay your person $64K in traditional wages and than also give him or her a $16K SEP-IRA, probably you’re more reasonable. I.e., maybe your wages are a little low… but your nontaxable fringe benefits are really high…
WAY #2 SEP-IRA helps… if you don’t pay reasonable wages, IRS can reclassify profits you distribute as wages. But if you’ve used up $16K of your $100K leftover profit for wages, there’s not $100K sitting there for a distribution. There’s only $84K.
The SEP contribution gets reported on your 1120S tax return. It doesn’t really impact your W-2 except as you note it means you need to check the box indicating you have a retirement plan.
Hi Steve,
Thank you for this info! I had a baby last year and am paying myself 20k as an employee this year on my s-corp. I’m not sure if I claim 4 allowances for myself husband and 2 kids or claim Exempt since every year we get a refund. Both show 0 to withhold for federal income tax anyway…?
This may be a stupid question but it’s showing that I only pay 765 for my 941 returns. This sounds like the matching amount my corporation pays for payroll taxes. What about the amount I deducted from my quarterly paycheck as an employee? How is that factored in? My year tax return will reflect this because they will deduct the same and adjust it? I’m so sorry I need this clearly explained to me! I just want to make sure I don’t have to do anything additional other than pay state taxes and SUTA.
Also we are trying for another baby and if I decide to pay myself less can I just not pay myself one or more quarters?
If you’re paying yourself $5K a quarter, the right payroll deposit for that–assuming you’re only doing SS and MC–would be $765.
Remember or note the tax is 7.65% for employee and then 7.65% again for employer… If you had $10,000 of wages–just to make this simple–you pay $765 as employee and $765 as employer.
If you have more questions, probably the DIY approach to payroll won’t work. You’ll want to either outsource your payroll to a service like ADP or Paychek or Gusto. Or you’ll want to have a bookkeeper do the work for you.
Hi, is your 5mins payroll updated for 2017? I just started as SMLLC taxed as S-Corp. have first qtr earning but not ready with payroll processing so cannot submit 941 for Q1. I am planning to submit 1040es for Q1 and then start filing 941 from Q2. Is this reasonable approach? Also what is the deadline to file Q1 941?
Your blog is very helpful. Thank you so much!!!
I haven’t used the 2017 forms–we’ve been busy with tax season–but the basic form examples and example numbers still work.
When withholding payroll tax is it required to withhold federal or only the SS and Medicare ?
You need to withhold the employee’s SS and MC… you’re supposed to withhold an appropriate amount for income taxes (federal and state) but that approrpriate amount might be zero.
FYI, if you’re doing withholding for yourself and you go too big or go too small, you’re probably not going to have a disgruntled employee (you) complain or cause trouble.
If you’re doing payroll for someone else, you want to get it right and based on the W-4 the employee fills out. (In this case, you want to outsource your payroll to a real payroll service provider.)
HI Steve, first of all i just want to say you are amazing! I recently formed a one person S-Corp. i have a 2 questions.
1.If i use a payroll company like quick books, they state on their site that they file quarterly taxes for you. Now i know this is probably a question for them, but, If they file quarterly taxes for me then what exactly are responsibilities when it comes to taxes? do they file every form for you automatically? are you familiar with this practice?
2. I want just want to make sure i’m understanding this correctly. If i make 30k in the first quarter, My company would get the 30k amount, that amount is then taxed with Medicare and SS, I didn’t do the math but lets say after those taxes i have 25k left and i choose to take 20k and leave 5k in the corp account. the 20k is then taxed with all taxes applicable to me ( federal, state, ss, mc, etc ) – and again, ( i didn’t do the math ) but lets assume i keep about 15k of that money. Is that my take home pay? the “15k” ?
I’ll throw in a 3rd quick question. As for ” reasonable compensation ” is there a percentage ratio that you personally recommend?
thanks in advance!
Pedro, if you use a payroll service, they’ll basically take care of everything for you. That’s why you use them.
Regarding the mechanics of how the S corporation’s tax works, you’re a little off in your descriptions. Check out this other website we have that’s all about S corporations:
http://www.scorporationsexplained.com/index.htm
Regarding what’s an appropriate salary, I’d say this blog post from last week is a good place to start: https://evergreensmallbusiness.com/s-corporation-reasonable-compensation/
Note: There are several addition articles that talk about S corporation salaries at the bottom of the post just mentioned, too.
I file my 941 & pay payroll taxes monthly, last month I couldn’t afford to pay myself do I file the 941 with 0.00 income ?
Your 941 reports on the wages you paid. If you paid zero wages for the quarter, your 941 for the quarter should show zero wages.
BTW, remember or note that you need by the end of the year to have paid the shareholder-employee reasonable compensation. That’s a hard requirement of you operating as an S corporation.
Hi Steve,
Thanks for running such an informative forum.
My question is regarding handling of payroll tax on deferred compensation for an S corporation:
I’ll pay $40K salary and intend to max contribute 18K to solo 401k plan. Since FICA will need to be withheld on 18K, would the actual deposit in my solo 401k account be:
1. 15,246 (i.e. 18000 – 2754 (15.3% for FICA on 18K))
2. or would I deposit full 18000 in solo 401k account and subtract FICA elsewhere (such as deducting it from the regular salary)?
Neal, you would not subtract the FICA tax from the $18K… but from the $22K that’s left over after you subtract the $18K from the $40K…
Thank you for quick reply Steve. You’re awesome.
So, I would deposit 18K in solo 401K and pay 15,880 salary (22,000 – 3,366 (FICA on 22K) – 2754 (FICA on 18K)). Of course, I would also subtract the Fed/State Taxes before depositing the salary but in this example we are only focusing on the FICA tax.
Thanks again.
I spent a lot of time to locate something similar to this
Hi Steve, I have bought your 5-min payroll ebook. Two questions for you:
1. Is SEP-IRA reported on form 941?
2. Can I split distributions and take part of the distribution in the future? E.g., My one-person S Corp earned $200K this year, I paid myself $80K compensation. Instead of taking all $120k as distribution this year, can I just take $70K distribution this year and leave $50k in the corporate account to be taken as distribution next year?
Answers:
Question #1: No, the SEP-IRA deduction is a business expense and goes on the business tax return. E.g., on the 1120S return for an S corporation.
Question #2: You can split the distributions the way you describe.
Hi Steve,
So, I’m currently operating an S corp, previously sole proprietor paying self employment tax. The “pay yourself a salary” incorporation thing is supposed to be tax saving but I’m not seeing it.
Let’s say I’m claiming $48,000 salary/$32,000 dividend, total $80k, which is the net from the corp.
Per the online paycheck company I use, I’m running $2000 paychecks twice a month. The annual amounts are as follows:
Fed tax $3150 (131 per paycheck x 24)
Ss/Mc $3670 (124+29 per paycheck x 24)
State $370 (15 per paycheck x 24)
Estimated tax due on dividends $4000
Total employee: $11,190
Corporate FICA $5640 ($235 per paycheck x 24)
Corp state tax $1700
Total corporation: $7340
It ends up being like $18,000 a year on $80,000 income. Self employment tax is only $12,000 on that amount.
What am I doing wrong?
You’re probably doing it right. I.e., in your case, you used to pay the 15.3% self-employment tax on 92.35% of the $80,000… so that’s roughly $11,300.
You should now be paying a combined employer and employee Social Security and Medicare tax rate of 15.3% on $48,000… so that’s roughly $7,300.
Your S corp saves you about $4,000 a year.
I didn’t check all your payroll calculations above. But you can ignore the income taxes… they don’t change if you become an S corporation. By the way, do double-check the payroll SS and MC taxes. It’s possible the payroll service goofed.
Hi Steve,
This is my first year as an LLC/S-corp business owner. Since I’m the only employee, does it matter WHEN I pay myself throughout the year? For instance, rather than running payroll during the year, could I wait and pay myself a larger sum once or twice per year? Or would that be some sort of red flag for the IRS? Thanks!
You can get to that reasonable compensation pretty much any way you want…
I will note that I’ve had IRS agents argue a regular payroll schedule is more robust…
Hi Steve,
I already paid myself the $10,000 for this quarter. I have an extra $10,000 I’d like to transfer to my personal savings account due to the 1% rate I get, but I don’t want to classify this as a distribution because that would trigger a $1500 taxable event assuming my tax rate is $15%. Instead, can I pay myself another $10,000 now but have it count as next quarters salary? Or do I have to wait until next quarter to pay myself?
I just want to keep my money in my high interest personal savings account, because my business checking account has a 0% rate.
First, distributions aren’t taxable… so make sure you’ve got a good hold on how the accounting works. (Technically, the distributive share is taxable… and that’s true whether the profits are distributed or left in business.)
Second, as long as your S corp meets the reasonable compensation requirement by end of year, you can distribute funds rather than pay wages to shareholder-employee… it’s those wages that trigger a 15.3% SS/MC tax and maybe what you’re referring to.
Final point: The 1% interest may be small potatoes compared to the other tax savings opportunities and risks in your situation. (Without more details, tricky to say.)
Thank you Steve.
I was thinking you could retain earnings without being taxed until distributed like a C corp. That part makes sense to me know.
In terms of wages and this quick and dirty payroll trick, would it work to pay myself (transfer to my personal bank) 40k the 1st quarter, and 0 for the rest of quarters. Then each quarter file a 941 saying I paid myself 10k each quarter, to stay under the $2500 loophole? Or would that be pushing it?
That approach would wrong. You’d owe $6120 for Q1, only have paid $1530 with the Q1 941 and so have a late payroll tax deposit.
Hi Steve-
Thank you for the great information you have provided here. I had a few questions that I’d like to get your take on.
Situation: I have had an s-corp for multiple years. I performed duties associated with the business on what would be considered a part-time/seasonal basis, but have never made a distribution or been paid a salary. Up until now, I have always just kept all money in the business. (its not a lot…from year to year there is no more then $10,000 a year net due to operating expenses/repairs).
Questions-
-Can I make retroactive Salary Payments?
-If I start with Salary Payments, Can they be low (on the order of $100-$200/month), varied ($5000 one month, and $0 the next)? Do I have to take out a large salary?
-If I take a larger salary this year, can I lower the salary amount the next year?
-If I take a larger salary this year, can I take the salary in one lump sum for the year, or does it have to be monthly?
Thanks
I think your questions are pretty tricky to answer without knowing more details, but it seems like the safest “general” answer is to start paying yourself a reasonable salary.
I would also think keeping it really simply would make sense. E.g., if your reasonable compensation is $10K a year, pay yourself $2500 a quarter using the quick and dirty method. If a reasonable compensation number is $40K a year, pay yourself $10K a year using the quick and dirty method.
BTW, I think the quick and dirty method and a good faith attempt will suffice as long as you get a good reasonable compensation number you’re working from. I would not, however, combine the quick and dirty method with a lowball or unreasaonably low value.
Thanks for your prompt reply! I appreciate your advise on this situation!
Excellent inputs Steve. I was wondering where to account for that $1,515. Got the answer that it is already included in the $10,000 paid as wages. Thank you.
Half of the $1530 is employer payroll taxes… and the other have is part of the employee’s $10,000 of wages.
Hi Steve, I used your guide successfully last year and it helped a lot. Thanks! This year I decided to pay all my estimated taxes through withholding on my 941 to simplify paperwork. During the 3rd quarter this year my business ended up making more money than I anticipated and the fixed amount I used for withholding (line 3) won’t be enough cover the additional tax liability I will have at the end of the year. Can I simply add more withholding to line 3 on my 941 for Q3 and Q4 or should to pay estimated taxes? If I have to pay estimated taxes for Q3 and Q4 will I be penalized for not paying any in Q1 and Q2? Thanks.
I’d just pay via an estimated tax payment. That’d be easiest…
It’s actually a little more convenient (for me) to just change the withholding amount on my Quarterly 941. That said is changing the withholding amount on my 941 for Q3 and Q4 gonna throw up red flags?
Also, if I suddenly start paying individual estimated taxes per you suggestion ( I already missed Q1, Q2 and just missed Q3 deadline) do I have to file form 1120 to avoid penalties?
Thanks for your help. This thread and your ebook have been a lifesaver!
You can change the quarterly withholding without throwing up a flag… but keep in mind you are limited in what you can pay with the 941 to $2500 total.
If you didn’t make any income tax payments for quarters 1 through 3, you might want to withhold a LOT of tax from the fourth quarter (that would prevent you getting assessed underpayment penalties)… but you can’t make the deposit with the 941 form. Rather, you need to sign up for and then use eftps.gov system. (This is the U.S. Treasury’s system, you can easily sign up now and use in a few days…)
Thanks for doing this Steve!
Just to make sure I understand, if I have a small business and elect S corp, and I pay yourself a salary of $40,000 like the example outlined in the article, can I pay any amount I want for the income tax portion as long as the total payment sent in with Form 941 is less than 2500? Using the $750 per quarter example, a total of $3000 is sent in for income tax. If my business is successful and has a significant profit that goes to my K-1, I have a good idea that more than likely more federal tax will be owed. Do I or can I on December 31 mail in Form 1040ES with a payment of say $2500 to cover teh shortfall and any potential tax penalty by not withholding enough throughout the year? If I do this, do I write this check out of the business account or does it come out of my personal account?
If you think you’ll owe more in income taxes than gets withheld, you want to make quarterly 1040ES payments.
E.g., if you withhold $3000 through the payroll but you actually owe $43,000, there’s a $40,000 “shortfall.”
That $40,000 should get split into quarters… and then one-fourth, or $10,000, paid quarterly with the 1040ES coupon.
BTW if you don’t pay the $40,000 over the year but instead pay it all at the end, IRS hits you with the underpayment penalty.
Hi Steve –
Great info. Recently decided to have my sole member LLC taxed as an S- Corp.
If I hurry I will have 2 quarters of wages at $16k each.
1) Do I need to deduct my solo employee 401k contribution and show on the 941 form and then the w-2… or can I just do that separately as an employee and not worry about reporting through the business …. (understand that any employer contribution will need to be detailed but that will be after 4q) and
2) Legally, I am still an LLC……
but will I now have to pay state (GA) and Federal unemployment insurance?
Thanks,
Jerry
Your W-2s and 941s should tell the same story with regard to the employee elective deferral for a 401(k).
I.e., if in each of the two $16K payroll quarters you withheld $9K for 401(k) elective deferral, the wages subject to income taxes equal $7K and the wages subject to SS and MC show as $16K.
P.S. The employee’s match won’t appear anyplace on the 941 or W-2… that’s just “another” deduction on the 1120S corporate tax return.
perfect. thanks,
JS
Hi Steve,
Can I say SEP-IRA is better than solo employee 401k because solo employee 401k is subject to Social Security and Medicare but SEP-IRA is not?
Thanks,
Robin
Hi Steve,
If i want to maximize my 401K contributions for the 415 and 402b plans (my individual and my employer contributions), which i believe are $54,000 a year, what is the minimum I can payroll myself to do this? My financial advisor told me that I would have to set my payroll at $144,000 a year, but man I’m getting rocked with a bunch of taxes. I want to try to max out as much into my 401K as possible, but also want to record as cheap of a W2 as possible to not pay so much in payroll taxes.
You can’t avoid the tradeoff you’re getting beat up by… sorry.
I will say this: Usually it doesn’t make sense to bump up the wages and payroll taxes in order to bump up the pension contribution.
Which means the answer is pay as little salary as you can while still complying with the requirement for reasonable compensation. That’ll save you payroll taxes which is the main thing… and then you’ll just need to accept a lower pension contribution.
Hi Steve,
Is my understanding correct that SEP-IRA is better than solo employee 401k because solo employee 401k is subject to Social Security and Medicare but SEP-IRA is not?”
Thanks,
Robin
The employer match in a 401(k) and the employer contribution from a SEP get treated the same way for an S corporation shareholder-employee. So both save income taxes and in effect payroll taxes.
The elective deferral for a 401(k) comes out of employee wages… which means that money *is* subject to payroll taxes.
Hi Steve,
Firstly, as you’ve heard many times before, thank you so very much for this awesome blog. Your answers are clear and very helpful.
If I’ve paid myself an intermittent salary throughout the year and did not file a 941 (but did file the state reports), can I deduct my salary as a business expense on the company’s 1120S and then distribute a K-1 to myself. Do I have to issue a W2 to myself? Last year, I just issued a K-1 to myself and I didn’t include the salaries as a business expense on my return (I didn’t have a W2). Which is better? Issue the K-1 and do not include the wages as a business expense OR is this even correct? Or, can I include the wages paid to myself (no taxes witheld) as a business expense, issue myself a K-1 and then do my 941s? Can I avoid a W2 by issuing a k-1 if I’ve paid myself a salary. BTW, I’m going back and completing the 941s for the year.
Sorry for the confusion … it’s because I’m confused!
Thanks!
You want to do a W-2. And note that starting next year, you’ll need that W-2 to get the new Sec. 199A deduction…
This is my second year as a Sub S. We did not pay payroll yet and declared $0 income per quarter because we were waiting for a client to pay his bill at the end of the year. We are a husband and wife LLC federally treated as a Sub S. We are retiring (both over 55 years of age) and have closed the Sub S (sent notice to gov’t) and state LLC (before 12/31/17)
I though our salaries would be higher but it wasn’t. So for arguments sake, my gross receipts were $36K and my daughter (17 years of age) was a seasonal worker with $3.8K. I also had ACA health premiums for our family of three of $12K.
So my W2 would be $6K (wages to cover health premiums) and the $10.1K could be in a SEP IRA? Or is it better in a 401K? [We have both]
My husband would have $6K (wages to cover health premiums) and the $10.1K in a SEP IRA?
My daughter would just file a w2 of $3,800 with seasonal worker checked and 0 taxes.
I would pay ss/medicare only on $15.8K [declared in box 1 as wages] Line 8
Line 17 would show $20.2K [Box 14 on w2 shows $10.1K each]
So prior to Line 18 I would have a $0 loss as well as Line 19 other deductions (let’s say $17K to run business) for a cumulative loss on line 21 of the 1120S of $17K?
As I mentioned I thought a reasonable compensation for us would be an income of $18000 each, so I’m short in actual gross receipts. Could I pay myself a higher salary and show less gross receipts or is it just better to zero out everything before business deductions of $17K?
I appreciate your consideration.
There are a lot of moving parts in your situation. I’d say consult a local accountant and let her or him work out a solution.
P.S. You probably want to do this payroll stuff ASAP since you don’t want to inadvertently make a late payroll tax deposit and get hit with a penalty.
Steve,
Did I make it more complicated than I should have by asking how to handle both health care and retirement and referencing the 1120S lines? Or is it because the gross receipts and numbers are so low for a Sub S? I’d actually thought this was a fairly typical scenario for a husband wife Sub S service business in terms of how to handle two major benefits of a Sub S – the ability to max retirement and deduct for healthcare.
Since my income came at the end of December with a check, I still need to receive my official 1095-A to complete a W2 (or I can just multiply my Obamacare premium by 12 months) to precisely figure out my final W2 but I’d like to know if my example reasoning is correct.
Hopefully I will be able to complete the W2 by Jan. 31st and Form 944 with accompanying payroll taxes. My local accountant unfortunately complicate my situation by moving me from LLC to Sub S status a year ago, and since I’ve closed it, I’m on my own now to complete this final business return.
Thanks.
Lou, I think you want to buy about an hour of an accountant’s time (maybe a little more) to get specific answers to your questions and then, ideally, get a little coaching on the optimal way to handle the shareholder-employee going forward.
It’s pretty easy to do the forms for a one-employee S corporation if one is okay sticking with a really simple payroll arrangement… But you’ve moved beyond a simple arrangement. The good part of that, you’ve created an opportunity for some new tax benefits… but the bad part, you either need to outsource the payroll to someone (cost $500 and up)… or you need to invest a lot in learning how to handle the trickier stuff.
Again, I suggest you consult a local accountant.
Hello Steve, Thank you for the great blog. I have a single owner LLC with S-corp taxation, with one employee, my husband. The Husband gets a reasonable wage and I pay all the LLC’s FICA etc. My question is about claiming pass-through/residual funds in the S-corp account. There is a two-month lag between the month he works and the month he is paid. On 12/31/2016, there is ~17K in the LLC account, nearly all of which was then used for the Jan 2017, the 1st payroll (we use a monthly payroll) but that money has now been taxed because it was in the account at the end of the year a similar situation exists for 2017. How exactly is the pass-through suppose to work if it is needed for operating expenses? and how to I take a 17K distribution when there is not 17K in the account?
Additionally, I live in WA state and my husband is an officer of the company not subject to state unemployment insurance, do I still need to pay FUTA?
Your husband’s wages will be fully subject to FUTA (so $420 as calculated on the 940) because he’s not covered by Washington state’s unemployment taxes.
Regarding the mechanics of how the S corporation distributive share and distributions work, the 1120S if completed correctly takes care of things so you’re not taxed again on prior year profits you leave in the business.
The main things you need to do are (a) pay a reasonable wage (sounds like you’re doing that) and then (b) have the 1120S correctly prepared.
An idea: When the tax accountant prepares the 1120S, ask her or him to explain how the taxes on distributive share and distributions work. With that knowledge, you’ll find it easier to manage the finances.
Thank you, Steve for the information.
One more question for the accountants that I have consulted don’t really answer the question no matter how many different ways I ask. The account that completed the 1120s noted all the residual money in the companies account and this is what I am told that I have to claim on the 1040, but I have not taken the money out of the company so do I have to claim it on the 1040? Again, sorry if you have answered this question before.
So I think where you’re getting stuck is on the difference between what’s called a distributive share and the distribution.
The distributive share is the shareholder’s portion of the profits. E.g., if S corp has one shareholder and business earns a taxable income equal to $10K, that $10K is the distributive share. Also, that $10K is the taxable income value that goes onto the K-1 from the S corp. And that $10K is the income amount that plugs into the taxpayer’s 1040.
The S corporation may choose to pay out that $10K or retain it or pay out a chunk of it. But in general, this payment, called a distribution, isn’t taxable.
Only the distributive share gets taxed.
Here’s where this plugs into your questions, I think. You think that if the business makes $10K in year 1 and so pays taxes on the $10K that it maybe needs to be careful if it leaves the $10K in the business and only spends it or distributes it later on. But business doesn’t need to worry about that. Timing of the distribution doesn’t matter. Only the bottom line share of the profits, what’s called a distributive share matters.
Steve,
Thanks again for the information. One more question on the LLC S-corp’s taxable profits – do regular accounting practices apply as far as accounts payable/liabilities not being counted in the profits at the end of the year? E.g.: The employee works in December, but payroll isn’t made until January. Are those committed funds taxed because they are in the LLC’s account on Dec. 31st?
Steve,
To be clearer, the 1120S Instructions, Line 8, refer to “salaries and wages paid or incurred to employees” during the tax year. Are “incurred” wages those owed to the employee for work already performed during the tax year, but not yet actually paid to them during that year, due to the month-plus lag for invoice payment?
You’re surely a cash basis taxpayer so wages are what you’ve disbursed.
Would this work for a 2 person S Corp as well?
Not very well. Sorry.
Alright so I have been reading this and other info and this is what I understand for my first ever payment and tax processing. I plan to do this on a quarterly basis: Quarterly profit taking/payment/distribution/taxpayment:
1. I have signed up with a free payroll service which I believe will serve purposes of: documentation and tracking of tax payment responsible from my S-corp.
2. I established Two EFTPS accounts: one personal and one for my S Corp
3. My next steps will be to make quarterly payments of expenses using gains for the quarter. Payment will be made from my S Corp checking account to my household for share of utilities consumed and payment to business expenses such as tax tracking software, datacenter services, etc.
4. What is left over I will pay myself as salary. At this time, there wouldn’t be enough for a distribution but that could change quickly so I would like to have the S-corp up and running for that scenario.
5. My S Corp pays its half of the payroll tax through EFTPS using the same S Corp business account I used to pay expenses. This payment is based on calculated tax from the free payroll software.
6. I pay the other half of payroll taxes –AND– personal tax though EFTPS using my personal account which happens to be the account where I transferred my salary payment. Payroll tax I pay should simply be the remaining half not paid by my S-corp. I don’t know how to calculate the personal tax I would owe.
Does all this sound just about right? Two questions remaining so far:
1. How do I calculate the estimated personal tax? Just go by my tax bracket, right?
2. How does the payroll tax paid by the S-Corp factor in as an expense? Is that tax deductible? Where is it tracked? pretty confused on this part.
I think you’ve jumbled up the steps. Sorry. You probably want to go back and read the article again or maybe get the five minute payroll system e-book.
Another concern: If you’ll extract all of your business profits as wages, you get no benefit from the S corporation. You may want to delay the S election therefore until you have enough business profit to pay a reasonable shareholder-employee wage AND to also make distributions to the shareholder.
Ahh… step 4 looks a lot different than when I first read it. Hmmm… I must have been distracted when reading the first time.
I’m keeping the S-Corp election because I’m in a volatile sector and there is potential to rapidly exceed reasonable salary and I don’t mind the extra complication. Besides that, I am expanding my business daily so eventually my baseline should exceed the reasonable salary.
E book? I’ll check it out.
Thank you Steve!
Izzy
Hi Steve,
I have a specific question; I just filed 2553 to convert my existing 1 person LLC taxation status to an S corp on 03/15/18 (the deadline) and want the status to be for 2018, but it sounds like there is a chance the IRS does not accept it? I wont know for 60 days, but at that point I will have missed both quarterly filing requirements. What is the recommendation in this case? Hope it went through and file quarter 1 with salary info for myself and unemployment tax payments? Sounds like a mess if I get a denial letter and already filed various forms/operated as an s corp.
Amazing article by the way, best resource I have found so far.
Thanks!
You want to operate as if the 2553 will go thru. First, it probably will. Second, if you botched election, you can get late election relief if you act as if you’re an S corporation.
Tip: Call IRS in a couple of months. If they haven’t accepted your S election, have a CPA who does late S elections help you redo the election.
Ok thanks – and reading up on the 941 requirement, the first filing needs to be when wages are first filed. I havent paid myself a salary yet, so I will file both state/federal wage reporting for quarter 2 after things are confirmed.
Very informative website.
I have a single-person S-Corp. I want to take payroll just once a year on December 31st and make all my federal deposits at that time on a salary of roughly 140-160K.
Is this ok to do? Does the IRS require to take a more frequent payroll. Just trying to avoiding all the paperwork and deposits throughout the year.
Thanks,
Z
The rules just say you need to pay shareholder-employee reasonable wages. Paying once a year in December should work fine. (Lots of people do this.)
How should one handle this situation: have a full-time job and receive a W-2. Own an S-corp that has significant monthly income from services provided, but as the owner, do not provide services myself, just staff the projects with consultants. Do I need to pay myself a ‘reasonable’ salary thru the s-corp? My understanding is even though I max out on my soc security contribution by the end of Q3, my payroll for the s-corp would still be paying into soc security since it does not ‘know’ about the other W-2 that has maxed out on the required contribution.
You probably shouldn’t be an S corporation. You should operate, probably, as an LLC taxed as a disregarded entity.
More details here: https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/
Thanks so much for your reply Steve. I actually set it up when it was my full time job, but then accepted a full time position, but still had a few billable consultants that have continued to work under my s corp. Do you have any articles about switching from an S Corp to an LLC, or do you recommend I shut down my S Corp and start a new LLC?
Probably this is something you want to confer with a local CPA about. Possibly you’ve got some easy ways to simplify, but you want to be careful you don’t create an expensive tax mess when you, for example, liquidate the S corporation.