4 Steps To Paying Yourself For Services To Your S Corporation
Are you going to provide services for your S corporation? For many entrepreneurs, this is a great way to be your own boss and build equity in a profitable business. But, you'll need to follow a few guidelines in order to avoid winding up in trouble with the IRS or receiving a big tax bill. Here are a few key steps to ensure that you stay on the right side of tax law when being compensated for your work.
1. Don't Avoid Wages
Some S corporation shareholders and owners are tempted to avoid incurring taxable wage income by paying themselves in other ways. They may classify the compensation as dividends (which are taxed at a lower rate) or reimburse themselves for personal expenses. Avoid this temptation at all costs. If your business is found to be skirting the law, both you and it could get in trouble with the IRS, Social Security Administration, Department of Labor, and your state regulatory agencies.
2. Research Accurate Compensation
The IRS expects anyone working for their S corporation to be paid an appropriate salary. While you may look at this based on what you need to take home in income each month, it is actually determined by the work performed. Research what others doing your type of work are being paid in your industry and at your business level. You can use online career calculators, talk to other small business owners, or research through a trade organization.
3. Work With an Accountant
The best way to keep your company's books in compliance with all applicable laws is to work with a CPA. A certified public accountant is trained not only in how to keep accurate records but also what rules you must follow and how to stay within the legal limits of your business type.
4. Pay Consistently
Once you determine how your job and number of hours should be paid, do so consistently from month to month. This can be challenging for new businesses, but it shows that you are handling your books in good faith and avoids triggering any red flags with state and federal oversight agencies. It also helps separate your compensation from dividends and returns of capital.
As an entrepreneur, you want your business and your personal finances both to succeed. By understanding and following the rules regarding shareholder compensation, you can help ensure that. Meet with a CPA in your area today to learn more.
