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First of all, congratulations on taking that big step on your entrepreneurial journey by incorporating your business.
One of the key steps that you'll need to do is give yourself a salary by putting yourself on the payroll.
If you've incorporated and elected to be taxed as an S corporation, you'll need to give yourself "reasonable compensation".
Per the IRS' article on S corporation compensation, "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly...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."
Whoa. What does that mean?
- You must give yourself a salary for the services that you provide to your corporation.
- Then you can take non-wage distributions of profit from your corporation.
- It's NOT an option and you MUST take a salary first before taking a distribution.
What do I do if I haven't given myself a salary this year?
Don't panic. It's not too late.
Shop around ASAP for a reputable payroll company that you can hire to process your payroll. Unless you've had experience processing payroll for your employees when you were a sole proprietorship/Sch C, I would defer payroll to the experts. My top pick? ADP.
Next, use reasonablecompcalc.com to help you calculate your reasonable compensation.
Then let your payroll provider know what your reasonable compensation amount is for this year.
That wasn't too bad, right?
Now you just have to work on the other 50 items on your TO DO list.
Quoting that ancient Chinese proverb: "A journey of a thousand miles begins with a single step."
Wishing you a successful entrepreneurial journey!
