365: Navigating Your Payroll Responsibilities Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Accountant, Bookkeeper, Virtual Assistant
- Financial Adventure, LLC
- Jan 14
- 8 min read
365: Navigating Your Payroll Responsibilities Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Accountant, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed
You want to make sure that you have everything done correctly in your business, right? One of the many important year-end tasks is to make sure that you are correctly paying and classifying wages. There are many different entity types that businesses can be set up as, and depending on how you’re your business is set up will determine how you pay yourself as a business owner, shareholder, or officer, especially if you are considered an S Corporation. In today’s podcast episode, I am covering the essentials of what you need to do when it comes to compensation, especially for the S Corporations who need to pay a reasonable compensation to officers and shareholder-employees. It doesn’t matter if you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances or if you are doing your bookkeeping manually with an Excel spreadsheet or even a Google Document, you need to make sure you are recording your payroll correctly. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper or accountant, a virtual assistant or VA, or other professional; listen in so that you are aware of how to classify and pay your wages as a business owner and avoid one of the major red flags out there…
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Show Notes:
You want to make sure that you have everything done correctly in your business, right? One of the many important year-end tasks is to make sure that you are correctly paying and classifying wages. There are many different entity types that businesses can be set up as, and depending on how you’re your business is set up will determine how you pay yourself as a business owner, shareholder, or officer, especially if you are considered an S Corporation. In today’s podcast episode, I am covering the essentials of what you need to do when it comes to compensation, especially for the S Corporations who need to pay a reasonable compensation to officers and shareholder-employees. It doesn’t matter if you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances or if you are doing your bookkeeping manually with an Excel spreadsheet or even a Google Document, you need to make sure you are recording your payroll correctly. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper or accountant, a virtual assistant or VA, or other professional; listen in so that you are aware of how to classify and pay your wages as a business owner and avoid one of the major red flags out there…
Welcome Back…Understanding payroll and compensation is extremely important when you own your own business. Avoiding issues with the IRS is normally something that all business owners work towards achieving, which is why today I want to make sure you understand how important compensation is.
Today, we are diving into the importance of wage compensation for S Corporation officers and shareholder-employees. With an S Corporation, corporate taxes are passed through to their shareholders. The shareholders then report this income on their personal return and pay the appropriate taxes. Corporate officers are considered employees under the Internal Revenue Code. When these officers perform more than minor services for the corporation and receive or are entitled to receive payments, their compensation is generally considered wages. When you are an S Corporation, these payments should be treated as wages and not distributions of cash and property or loans to shareholders. Since these officers or shareholders are considered employees, they should not attempt to avoid paying employment taxes by having their compensation as something other than wages.
The IRS states that distributions and other payments by an S Corporation to a Corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation. The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly, however, any cash or property or the right to receive cash and property that goes to the shareholder must have a salary amount determined, and that level of salary must be reasonable and appropriate and are subject to FICA taxes and other employment taxes.
Unfortunately, there are no specific guidelines as to what reasonable and appropriate compensation is. Some factors to consider when determining reasonable compensation are training & experience, duties & responsibilities, time and effort devoted to the business, payments to non-shareholder employees, and what other comparable businesses pay for similar services.
Making sure you set your compensation as reasonable and appropriate is important. The Internal Revenue Service can reclassify payments made to shareholders from other payments, such as distributions as wages. These wages are also then subject to FICA tax and other employment taxes. Depending on when this reclassification takes place, you could also be liable for penalties and interest for unpaid payroll taxes.
If you’re an accountant or high-stress professional, you want to start enjoying your life more, both at work and at home. You’ve likely built a successful career, but at what cost? The problem is you’re so buried in deadlines and to-do lists, there’s no time or energy left for the things that really matter. You’re great at managing clients, deadlines, and numbers, but your own stress, time, and well-being, well, they always seem to come last. The constant pressure leads to burnout, guilt, and feeling like no matter how much you do, it’s never enough. I see this all the time. As a CPA with over 20 years of experience and a Certified Coach, I’ve helped high-achieving professionals like you go from stress and burnout to a more integrated and balanced lifestyle using The RE*INVENTION™ Process. This process helps you reduce stress, reclaim your time, and finally build a healthier, happier, more balanced lifestyle without sacrificing your success. The truth is, stress doesn’t go away on its own, and eventually, the cost isn’t just exhaustion; it’s your health, your relationships, and your love for the work you once enjoyed. If you’re ready to build a life you don’t need a vacation from, it’s easy to get started. First, schedule your Complimentary Stress Audit & Clarity Session, where in just one session, I’ll help you pinpoint what’s really draining your time and energy, create a personalized action plan to help you simplify your life, reclaim your time, and increase your productivity so that you start living with more energy, focus, and freedom. You don’t have to keep doing this alone. I can help you customize a plan to stop the overwhelm and start enjoying your life again. Go to www.FinancialAdventure.com, click on the Work With Me button, and book your free session today. Let this be the moment you stop just surviving and start living with more control and finally enjoy a more integrated and balanced lifestyle again. In the meantime, check out all the other resources and solutions on my website that you can immediately apply to your life so you can stop being stressed out and feeling like you're never doing enough, and instead breathe a sigh of relief at the end of the day, knowing you've accomplished enough and can enjoy your life more.
If you are wondering what the difference between a distribution and a salary is, well, it’s pretty simple. Distributions are money that is distributed to you as an owner or shareholder. These distributions are not considered wages and are not considered income. Salaries, on the other hand, are the amounts of money you pay yourself or your employees. This amount is considered compensation or wages and is subject to employment taxes.
If you are an S Corporation, and you have not paid yourself or your officers or shareholder-employees, you want to make sure that you get this set up and paid by the end of the year so that you can file all the necessary payroll reports and pay your employment taxes on time. There are many small S Corporations that pay themselves on a one-time or annual basis. If you are paying yourself on an annual basis, you may want to think about changing your payments to a quarterly basis to distribute your taxes evenly over the year.
Processing payroll can be complicated. If you don’t feel like you have the knowledge to process your payroll on your own, make sure you contact someone who can help you with this. On the other hand, if you use a payroll processing software that is easy to use, you can certainly process your payroll on your own. If you have any questions about payroll for your business, you know you can always reach out to me by going to www.FinancialAdventure.com/Contact-Us.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you want accountability or support, visit www.FinancialAdventure.com. You’ll find links to join our private Facebook community, connect with me on LinkedIn, and discover more free resources to help you reduce stress, boost productivity, and build a business and life you truly enjoy. I’ll see you there.
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