Owning an S-Corp can seem confusing as to how you get paid.
Properly utilizing the benefits of your corporation could potentially save you thousands of dollars in taxes.
There are steps to take in order to be properly compliant with the IRS.
These steps are:
- Become a W2 employee with reasonable compensation (Read our previous article on what qualifies as reasonable compensation for an S-Corp owner)
- The other way is to take an owner’s distribution, also called a draw from your corporation
When you are an employee and an active shareholder, these are the two different ways you can utilize funds from your business as income.
S-Corp Owner as Employee
So, what are the benefits of being a W2 Employee of your corporation, you ask?
- Obtain Social Security Benefits for retirement
A single social security benefit credit must equal at least $1260.00 per quarter for 2016 in gross wages for an employee.
- The Expense of Federal & State Withholding
You have the option of Federal and State withholding to curb some of the income tax at the end of the year vs paying estimated payments each quarter.
- Contribute to a 401K plan
Just as it would work, if you were employed for a business that you do not own. You, as an individual contribute an amount and the corporation can contribute a portion as well.
- Participate in a Medical expense reimbursement plan.
This is known as a Health Reimbursement Account (HRA). You can be reimbursed each paycheck for medical bills you have paid out of your personal account.
- Stay Compliant
Most importantly, being a W2 employee keeps things on track. You are compliant with the IRS when you take a reasonable compensation Your corporation has an expense of your wage and the company share of payroll liabilities
So, now you are an employee, that’s great! Next is your perk of owning your own S-Corp as an active Shareholder.
Shareholders can take distributions, or draws, from the company!
Yes, you read that right. The money you take out is YOUR MONEY. The tax is paid each year you file your tax return and you are simply taking profit from the company.
How do you keep track of it?
We have provided you with a spreadsheet to keep track of all distributions you take throughout the year. Please see link.
How much can you take?
You don’t want to deplete your corporation, and you want to be reasonable. Truth of the matter is you cannot take more than the company is making as profit.
The benefit to you.
The wage you take as an employee is subject to income tax, FICA and social security taxes.
Shareholder distributions that you take as an owner of the company are not subject to income tax. However, if you take more distributions than there is profit, then it is subject to income tax.
All the tools you need.
For your convenience here are is the forms for you to print off, fill out the W4 and I9 and submit to your payroll service provider. You should always have these current and on file.
Utilize this spreadsheet to track your distributions/draws.
If you have any questions about how to pay yourself, our team of professionals in Detroit Lakes, MN and Fargo, ND is here to help you.