Got an S-corp? Here’s How to Avoid an IRS S-corp Penalty
What’s the #1 mistake S-Corp owners make?
Not taking a W-2 salary.
Almost everyone I know makes the same mistake in their first year as an S-Corp: not paying themselves enough or any amount as an employee.
As we slide toward the end of year, take this opportunity to make sure you’re not running afoul of any pesky state and federal rules.
3 Ways to Avoid an IRS S-Corp Penalty
Here are three tasks to complete so you can stay off the IRS’ naughty list:
- Payroll Requirements for S-Corps: It seems obvious, but a really common mistake is failing to pay yourself as an employee. Beyond writing a check or making that bank transfer, you need to complete a W-4, file with your state’s Social Security Administration office, and fork over the employer’s share of payroll taxes. If you’re wondering, “How do I do payroll for an S-Corp?”, consider a low-cost payroll service like Gusto. Starting at $45/month, Gusto can help you register with your state, calculate your taxes, and make your quarterly payments and employer tax filings. Here’s my referral code, which creates a $100 Amazon referral bonus for both of us! Not a DIY’er? We’re a Gusto partner and can walk you through setup. Click here to request an appointment.
- Reasonable Salary for S-Corp Owners: The IRS requires that you pay yourself a “reasonable salary.” You and the feds may define “reasonable” differently, so check out this deep dive from an accounting firm or pull your year-to-date income statement and reach out to your accountant with your revenue and net income. Critical to-dos: If you’ve had an S-corp all year and haven’t paid yourself yet, run payroll for the entire amount before December 31 and pay the employer portion of state and federal payroll tax by the January filing deadline, along with your Form 941.
- S-Corp Distributions: If you’ve got some extra cash in the business, first — congratulations! Second, consult your accountant about whether or not you can/should issue yourself a distribution (a/k/a an owner’s equity payment) or fund a SEP or 401k profit sharing in Q1. Pro Tip: When planning your 2021 compensation, talk to your accountant about using salary and distributions to make the most of your S-Corp’s tax benefits.
Want more advice on all things S-Corp?
- Watch the on-demand recording of my Should I Be an S-Corp? webinar with Jamie Szal of Brann & Isaacson, LLP.
- Download the Should I Be an S-Corp webinar PDF for more nuanced information by state.
- Sign up for my newsletter here.