63: Determining Reasonable Compensation And S Corporation Requirements Whether You Are Starting
63: Determining Reasonable Compensation And S Corporation Requirements Whether You Are Starting A Business, You Are Self-Employed, A Solopreneur, Entrepreneur, Small Business Owner, Remote Virtual Online Bookkeeper, Virtual Assistant Or VA
With the end of the year coming to a close, 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 just getting started with your business, you are a self-employed individual, a solopreneur, entrepreneur, small business owner, remote virtual online bookkeeper, virtual assistant or VA, 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:
With the end of the year coming to a close, 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 just getting started with your business, you are a self-employed individual, a solopreneur, entrepreneur, small business owner, remote virtual online bookkeeper, virtual assistant or VA, 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 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 is the amount 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 who 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 if you are looking for a payroll solution to process your payroll, I highly recommend taking a look at ADP. I am working closely with ADP so that you can get a 15% discount and take advantage of other specials. You can go to www.FinancialAdventure.com/ADP and sign up to receive this special pricing.
If trying to make sure you are handling situations like this the right way in your business, joining a mastermind is an excellent way to stay up to date and have other entrepreneurs focus on the growth of your business. I am in the process of creating two new mastermind groups that will be starting in the new year. The first is the Mastering Your Small Business Finances CEO Mastermind. This mastermind is an elite mastermind group for entrepreneurs & business owners like you who want to level up your business and reach your business goals faster and more efficiently with an experienced, trusted and knowledgeable board of directors you can call your own. The second is the Elevate Your Bookkeeping Business GROW Mastermind. This mastermind is for bookkeepers who want to grow and expand their bookkeeping business by leveraging the experience and knowledge from other like-minded bookkeepers and accountants. If you are interested in applying to either of these mastermind groups, please go to www.FinancialAdventure.com/Mastermind. As always, if you have any questions on these mastermind groups, reach out to me. I’d love to hear from you, and I personally respond to all my emails. I’ll post links for these and other valuable resources for business owners and bookkeepers where you are listening to this podcast and in the show notes.
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 need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.
