Are you an owner/shareholder with a small business that has moved beyond the startup phase and become a profitable venture? If so, congratulations are in order! However, with this newfound progress comes some necessary changes to keep your company legally compliant and off the IRS radar. It’s time to pay yourself as an owner employee for your contributions via either a salary, owner’s draw, or distribution.
If you are an officer in a corporation, you must be on payroll and receive regular checks that include all standard withholdings. If your company is structured as an S Corp, you are still required to receive regular paychecks with standard withholdings but there is also an option to give yourself additional funds separate from your salary via an owner’s draw or distribution. These funds are free from withholdings and because of that fact, they have been the cause for countless audits by the IRS in recent years. A lot of the confusion on this topic comes from the question of how to decide what amount should be taken as salary and what amount should be taken as a draw or distribution. This is where reasonable compensation comes into play.
S Corporations must pay reasonable compensation to owners/shareholder-employees before paying them their share of the profits. There are a handful of different guidelines that the IRS suggests you utilize to determine what is a reasonable salary for your corporate officers. These guidelines include things like training and experience, duties and responsibilities, time and effort devoted to the business, among others. You are also able to reference salaries from similar roles in comparably sized companies to back up your salary figures.
Although this article may have further developed your understanding of S Corp ownership regulations, there are numerous details that must be taken into consideration to remain legally compliant by both state and federal standards. Here at Financial Accounting Services we are fully equipped and prepared to keep your S Corp compliant, allowing you to direct more focus toward your growing business.
If you would like to schedule a payroll consultation, give us a call at (951) 719-1515. We look forward to working with you!