Date: September 20, 2021
HOW MUCH TO PAY YOURSELF
Are You Paying Yourself Correctly?
If you are the owner of an S Corporation, did you know that you legally have to pay yourself a ‘reasonable compensation’? If you get it wrong, the IRS could reclassify your distributions as wages – meaning all the money you took out of the S Corp throughout the year could be counted as W2 income that you would have to pay payroll taxes on. One of the benefits of an S Corporation is that you get to avoid self-employment taxes, but only if you are ACTUALLY an S Corp (meaning you’re treating your S Corp like a separate legal entity). No co-mingling personal and business expenses (or you could ‘pierce the corporate veil’ and get ALL of your deductions disallowed). That’s right – you could get double penalized if you’re not following all the rules.
So how much are you supposed to pay yourself in order to avoid the disaster described above?
If you have an S or a C Corporation – you should be paying yourself what you would pay anyone else in that position. For our clients, we produce a ‘many-hats-approach’ report that stands up in tax court, that protects the business owner from ever having their distributions reclassified as wages. Our 20-part report is based on several variables affecting the owner’s compensation – without OVERPAYING payroll taxes. We help our clients find the absolute minimum required compensation to minimize their risk, and the total taxes paid.
If you don’t have a corporation and you’re a sole proprietor or a single-member LLC, you actually aren’t allowed (legally) to pay yourself a wage through W2 wages. Your earned income from the business is the net income (total money collected minus expenses paid). You actually pay self-employment taxes on the total net income of your company on your personal tax return. If you’re making more than $40,000 (after expenses) and are a sole proprietor or single-member LLC, I can promise you that you are overpaying your taxes.
If you would like a free tax assessment to see if you’re positioned to overpay this year (or in future years), or if you’d like a second opinion to assess your audit risk, click here to book a call.