How do I pay myself from an S corp?
Two ways, and the IRS expects both. You pay yourself a reasonable salary through payroll, with taxes withheld, and take remaining profit as distributions. Setting the salary very low to avoid payroll tax is the classic mistake, and it is one the IRS looks for. Decide the split with a CPA.
What reasonable means
Roughly what you would have to pay someone else to do your job. The IRS looks at your role, your hours and what similar businesses pay. A salary far below that, paired with large distributions, invites questions.
Salary first, distributions after
Run your salary through payroll on a regular schedule, with withholding. Distributions come from profit that is left over, and they should not leave the business short of what it needs to operate.
Keep enough for tax
Distributions do not have tax withheld, so the tax on your share of profit still has to be paid, often through quarterly estimated payments. Set money aside as profit comes in, not when the bill arrives.
When an S corp is not worth it
The structure has costs: payroll, extra filings and accounting fees. At lower profit levels those can outweigh the savings. A CPA can tell you whether it makes sense at your numbers.
Also asked
- Can I take only distributions and no salary?
- Not if you work in the business. The IRS expects working shareholders to be paid a reasonable salary before taking distributions.
- How often should I pay myself?
- Salary on a regular payroll schedule, like any employee. Distributions when profit and cash allow, and not so often that the business runs short.
- Does this apply to an LLC?
- Only if the LLC has elected to be taxed as an S corp. Otherwise the owner usually takes draws, which work differently. Ask your CPA which applies to you.
Related
Written for your trade
This is the kind of thing Solomon works through with owners using their own numbers. See how it works →