Small and mid-sized business tax preparation can be complicated, especially for those who have opted to run their business as an S Corp. Though converting to an S Corpenables businesses to save more money through taxation than a sole proprietorship, the IRS regulations around it are what makes it complex to navigate.
A benefit of an S Corp is the distributions you receive as an owner do not have payroll taxes withheld. However, the IRS requires the owner to become an employee for tax purposes, and, on top of that, take a “reasonable salary”. Over or underpaying yourself, or misrepresenting a salary as distributions, could result in costly penalties.
- Research Your Competition
To first get an idea of what to pay yourself, you need to look into what others get paid for the same services you provide. For example, if you freelance as a social media manager, you would want to find out what the usual salary is for a social media manager who is an employee of a company. In general, you want to pay yourself the same amount of money you would earn if performing the same services for another business of a similar size.
- List The Services You Provide
To determine your salary, you also need to have a firm idea of the services you provide the business. As an owner of a small business, this list might be pretty extensive. For instance, training, marketing, sales, and production might all be your responsibilities.
In this scenario, combine all of the rates typically paid for those services to determine your salary. We suggest adjusting your salary if your business makes less than your competitors or you only work at this business part-time.
- Consider All Factors
Just like many factors would be taken into account when determining an employee’s salary, you need to consider the components that generally affect employee compensation. Your experience, for example, might impact your salary, as well as the time and effort you put into the business. Payment to other employees will also affect how much you pay yourself.
As you go through the process of determining a salary and taking all factors into account, be sure to document how you landed on that specific salary. That way, if the IRS performs an audit, you will have the reasoning for your salary readily available.
- Contact a Local CPA Firm
Small business owners tend to have a lot on their plate, and adding the complexities of operating as an S Corp can bring may seem daunting. In that instance, it may be worth the investment to outsource to a small business tax accountant who is familiar with all IRS regulations. Reaching out to Scharf Pera & Co., PLLC, a local small business CPA in Charlotte, allows you to focus on what you do best–running your business.