How To Pay Yourself As An S Corp
Introduction
If you own a small business, you may want to consider operating as an S corporation (S corp). There are many tax and legal benefits that come with operating your business as an S corporation. This article will explain how an S corp works and what are some of the things to consider before starting one.
What does S corp mean?
S Corp is a type of business entity. It's a subchapter of the Internal Revenue Code, which allows an S corp to avoid double taxation.
An S corp is not the same thing as an LLC (Limited Liability Company) or a partnership.
How does an S corp work?
An S corporation is a pass-through entity that pays no corporate income tax and instead distributes profits to shareholders as dividends. Shareholders pay taxes on those dividends, just like they would if their businesses were structured as sole proprietorships or partnerships.
The main advantage of an S corporation for small businesses is that it can limit the liability of its owners, who are typically not liable for any debts or other legal obligations beyond their initial investment in the company.
Who can be an S corp owner?
Now that we've covered what an S Corp is, let's talk about who can be an S corp owner. To be eligible to own part of an S corporation, you must:
Be a U.S. citizen or resident alien;
Be a sole proprietor, partnership, corporation or nonprofit organization; and
Have at least one shareholder.
Should I operate as an S corp or an LLC?
S corporations are more formal than LLCs. For example, they're required to have formal meetings, keep minutes, and file an annual report with the IRS. (The IRS doesn't require that LLCs do these things.)
An S corporation's profits are taxed as corporate income. In contrast, LLC profits are considered pass-through income and thus subject only to the personal income tax of its owners.
Ownership of an S corporation is restricted to individual shareholders who must each own at least one share of stock. Ownership in an LLC can be held by a single person or another business entity such as a partnership or corporation (or even another LLC).
What are some disadvantages of an S corp?
There are some disadvantages to operating as an S corp:
You have to pay yourself a salary. If you don’t, the IRS may consider your company a sole proprietorship or partnership, which means that it would be treated as a pass-through entity. In other words, rather than paying self-employment tax and income tax on your profits like an LLC would, the IRS will expect you to pay personal income taxes on any profits from the business.
You also have to pay self-employment tax. This is different from federal income taxes; it's a special type of payroll tax designed for small business owners who work in their businesses full-time. The amount you owe depends on how much money comes out of your business before deductions—so if there's not much profit left after paying salaries and bills, then this may not impact you negatively at all!
The same goes for spouse/family members who work in your business: they'll have their earnings taxed at ordinary rates instead of lower capital gains rates; so if they're not earning enough money yet (or ever), they might end up losing out financially by being hired by an S corp instead of being paid as employees/contractors
You will likely need to pay higher legal & accounting fees to operate an S Corp. Also you will need to hire a payroll company to process your payroll. However, the tax benefits of operating as an S Corp should outweigh these extra costs.
What is the process of starting an S corp?
To get started, you'll need to file Form 2553 with the IRS. Next, you will be able to file it with your state and local governments. This can be done by submitting it to a tax authority office as well as your business license office. It's important that this is done in order from most important (federal government) down to least important (your local government).
Can you have more than 100 shareholders in an S corp?
Yes, you can have as many shareholders as you want. That said, the IRS has a cap on the number of shareholders allowed in an S corporation: 100. If you go over that limit, then your company will be taxed like a C corporation instead of an S corp.
If you're just starting out and don't plan to grow beyond one hundred shareholders anytime soon (or ever), this isn't going to be an issue for you right now—but it's something worth keeping in mind if the need arises down the road.
Is there a limit to the number of employees in the S-corp?
There is no limit to the number of employees in an S-corp. However, you must pay them a reasonable salary for the work they do. If you're paying your employee less than $60,000 per year, this will be much easier to prove than if you're paying them significantly more.
Who do you file Form 2553 with?
When you file Form 2553 with the IRS, it is then sent to your local tax office. If you are a first-time filer, you will need to mail Form 2553 to the IRS and not file online.
You will also need to attach Form 2553 when filing your annual tax return for your S Corp business each year after submitting it for approval by the IRS.
How do I pay myself from my S corp?
The first thing you need to understand is that the options you have for paying yourself are limited. You can only pay yourself one of two ways: salary or bonus.
Let's look at each option in turn.
Salary: As your business grows and becomes more successful, it's possible that your personal income will increase as well. The IRS allows this by allowing you to take a salary for your efforts as an owner-manager of the business. So why would anyone ever want to pay themselves a salary? Well, if you have earned income from other sources such as investments and other work outside of running an S Corp then there may be no reason to issue yourself any additional compensation from the corporation itself (except possibly bonuses). But if all or most of your earnings come from running the company then paying yourself directly could save on taxes because companies pay taxes at lower rates than individuals do so by taking out some money before paying corporate taxes gives owners higher after-tax earnings than they would otherwise get by paying themselves through dividends or distributions once their corporation has been taxed at higher individual rates.
Bonus: Paying yourself a “bonus” is the easiest way to pay yourself as an S Corp owner. You always need to have a salary, but sometimes that salary might not be enough for you to pay your personal expenses. You will not need to pay self-employment tax on the bonus or distributions you receive from your S Corp. You can pay yourself by simply doing an ACH transfer from your business checking account or writing yourself a check. Just make sure that you categorize these withdrawals appropriately when you do your bookkeeping. These would not be considered salaries & wages, but they would be categorized as owner distributions.
There are many tax and legal benefits that come with operating your business as an S corporation.
You can pay yourself a salary.
You are not subject to self-employment tax.
Health insurance premiums are deductible, as well as retirement contributions and travel expenses for business purposes.
Employee bonuses are also deductible, as are other business expenses if they fall within the IRS's guidelines for deductibility.
Conclusion
It’s important to remember that there are many tax and legal benefits that come with operating a business as an S corporation. It’s also important to note that you can only have 100 shareholders in your S corp. So, if you have more than 100 shareholders then you will need to file a different tax return.
