Tax FAQ Series: I’m an S-Corp – Do I need to pay myself a wage?
A: YES! While there are a few exceptions, the short answer is a simple and resounding YES! When you make the S-Election, you get a number of tax benefits. But one important requirement to retain this election is that the owner/operator of the business must draw a reasonable W-2 wage. We recommend that you do so monthly (at least quarterly) and that it be “reasonable” given the services you’re providing the business (so for full-time work in the business, minimum wage would be the starting point). If your business isn’t profitable then the wage requirement is excused for the year. But in any case where the business shows a profit you should be paying yourself a W-2 wage from some of those profits.
What happens if you don’t? The risk of IRS scrutiny of your returns goes up and the IRS may revoke your S-Election status back to the beginning when it went into effect – which means that all those profits that were not subject to self-employment tax from past years may now be reclassified as self-employment income and your TAX BILL GOES UP A LOT! From our perspective, the increased scrutiny alone is not worth the risk. And the added potential cost of substantially increasing your tax owed (along with the interest and penalties that brings) are another important reason to make sure you’re paying yourself a W-2 wage.
If you have more questions, call us today at (480) 888-7111 to schedule your free consultation.
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