Human Resources

what is the reasonable amount of payroll that can be taken from s corp?

One of my s corp clients recently withdrawn $9K as payroll and this is the only amount he has taken in the year 2020.
I would like to confirm whether it makes any sense to withdraw lumpsum one amount as payroll for the whole year in s corp?
and secondly please also confirm what is the suitable criteria or amount and recommended procedure by IRS for the owner’s payroll?

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Answer

  1. 29 Answers
    This answer is edited.

    Active S Corporation owners are required to run payroll. The IRS says that S Corp owner/operators must pay themselves as employees of their own company. (This ensures that both the employee and the employer pays social security and medicare taxes. The advantage is that owners can take the remaining profits as dividends to shareholders of the corporation – which are not subject to these social taxes. This is a huge tax advantage over sole proprietors because they pay both the employer and employee social taxes on 100% of their net profits.) The IRS requires S Corp shareholder-employees to pay themselves a reasonable employee salary, which means at least what other businesses pay for similar services. I would take a look at similar businesses to your clients and see what they are paying. There does not seem to be any difference if you run payroll one time or a few times in a year, as long as it is properly run as payroll.

    As a heads up, if the IRS finds out that you tried to evade payroll taxes by disguising employee salary as corporate distributions, the IRS can re-characterize your distributions as salary and require payment of back payroll taxes and penalties. These can include payroll tax penalties of up to 100%, plus negligence penalties.

    As a general rule of thumb, if your small business is not making more than $40,000 per year or so, after expenses, then an S Corporation might not yet be appropriate. This is because the compliance expenses are generally as much as the tax savings.

    For reference, & for additional IRS guidance, I thought you may find this link helpful: https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself

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