Simple S Corp Salary Guide for Beginners
Sep 19, 2024In this episode, Shannon delves into the concept of a reasonable salary for S Corporation owners. If you're unsure how to pay yourself as an S Corp owner, this episode is a must-listen.
As an S Corp owner, you must pay yourself a reasonable salary through payroll during the year, as required by the IRS. However, the IRS doesn't clearly define what “reasonable” means, creating confusion for many business owners.
Shannon breaks down the process into manageable steps, focusing on both internal and external factors. Start by researching market salaries for roles similar to yours in your geographic area. For example, if you’re an accountant, look up local salaries for accountants. Shannon advises taking screenshots of job postings rather than just pasting URLs, as web links can change over time.
Next, assess how much of your time is spent working "in the business" versus "on the business." The "in" work is the hands-on technical work, while the "on" work involves strategic planning and management. For instance, if Shannon spends two-thirds of her time doing accounting work, she would prorate a reasonable accountant's salary accordingly.
Once you determine a reasonable salary, the remaining business profits can be taken as distributions. Shannon uses a memorable analogy comparing this to eating carrots before indulging in cookies; the IRS wants you to pay your salary first (which has higher payroll taxes) before taking distributions (which are taxed lower).
Documentation is crucial. The IRS may question your salary, and having well-documented evidence is essential. Gather job postings, detail your hours, and clearly explain your rationale for the salary amount. This meticulous documentation can make or break your case during an audit.
If audited, be prepared to negotiate. Shannon recalls negotiating between a $70,000 and $85,000 salary during an audit, successfully finding a middle ground. The key takeaway is to justify your salary with robust documentation and a clear rationale.
For additional help, Shannon offers a free resource called the S Corp Success Plan, which includes a reasonable compensation mini-course and tools to evaluate whether an S Corp is right for you. You can access these resources at scorpsuccess.com.
Paying yourself a reasonable salary as an S Corp owner may seem complicated, but Shannon’s advice simplifies the process. Assess internal and external factors, document everything thoroughly, and be prepared for any IRS scrutiny. By doing so, you'll comply with legal requirements and optimize your tax situation.
For more in-depth exploration and free resources, visit scorpsuccess.com and keep tuning in to the "Keep What You Earn" podcast. Shannon is here to make the financial aspects of your business as simple and understandable as possible. Until next time, stay compliant and keep what you earn!
What you'll hear in this episode:
03:26 Salary as an employee, profit as owner.
08:08 Job posting documentation: use screenshots, not just links.
10:39 Calendar shows business focus, justify lower salary.
If you like this episode, check out:
Think Twice Before Forming a Multi-Owner Business
Moving to a Tax-Free State - Worth it?
A Shortcut to Business Travel Deductions
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
