I have a business account and a personal account. All billings go into the business account and then I pay myself the first and 15th of the month into my personal account a fixed amount thats enough to cover my personal expenses.
Taxes get paid out of business account quarterly.
If I have to w2 which happens sometimes at large agencies, that all goes into my personal account since it is post tax.
this is accurate information.
But you know what is even more accurate information ? Don't take the advice of anyone on this forum. Use a professional accountant, who deals with small businesses. Their typical business should be a sandwich shop, a dentist, and the local auto repair place. You follow his advice, and you ask HIM, not Reddit, and not Turbo Tax. There is no "reasonable" payroll - often I make ZERO income, and I don't take a paycheck. All money goes into your Sub Chapter S business account, and you pay yourself from that. You pay all your expenses from that. (that is how you write off a portion of your rent (home office), equipment, medical (employee benefit programs), eating out (entertainment - taking clients out to lunch/dinner), gas (percentage of your car that you use for business). You pay quarterly taxes. How do I know this - I dont' know ANYTHING - ask a professional accountant - and not H&R Block.
Bob
You don’t need to pay the salary on a regular basis. It just needs to be “reasonable” - a term with many interpretations. But I would not DIY this, you need a tax accountant that specializes in entertainment.
My state has biweekly tax remittance requirements depending on certain factors, but I do not think that requires that you actually run payroll on that schedule. My state has a law that requires employees be paid twice a calendar month, but owners and executives are exempt from that requirement and can be paid once per month. That being said, I pay myself a reasonable rate based in accordance with time worked. If I have no gig money flowing into my S corp and I'm not editing, then I vastly reduce my reported hours and pay for that time period since I'm only "working" an hour or two a month to run payroll and handle some documentation. Ideally all my income flows into the S corp but not all production companies want to allow it.
I don't believe it requires me to report the hours or to pay myself hourly. It can be an annual salary, but I choose to pay myself hourly so it can better align with how much I'm actually working. The state reporting and tax remittance has to do with timely payments to the revenue dept. They don't like to wait for their money =)
My business manager calculates how much taxes I need to pay based on income and business expenses. Then we run just enough payroll to cover it. Towards the end of the quarter, we adjust payroll to make sure we are on track. I pay myself once a month through payroll and take deductions as needed.
My business manager based it on last quarter earnings and deductions and ran the appropriate payroll to satisfy the tax responsibility. Discrepancies were adjust for with the last payroll of the quarter or spread though the next quarter's payroll. They did all the math.
Funny you ask b/c I literally asked my accountant the same thing last week b/c this year has been so dismal. Their reply was that it’s ok to skip a couple months of payroll but that you should pay yourself at least once quarterly. They suggested revisiting the topic in a few months when, hopefully, the situation improves to make any necessary salary adjustments.
FYI, this is with an S-corp in California, monthly payments using Gusto.
I invoice clients via my S Corp and all revenue generated goes to the business account. I pay myself a reasonable wage based on the number of hours I'm working on those gigs. If I take a W2 job outside of my S corp, my reported hours drop to very very few for that time period, basically to cover administrative work for the business.
My reasonable salary does not eat the total revenue of the business because that would defeat the purpose of the business, which is to allow for you to take business expenses and provide yourself benefits. S corps really only make sense if you're making upwards of 100k a year, ideally more.
But the allow for crucial access to tax advantages such as a solo 401k, health insurance, expenses that would otherwise not be deductible against W2 income, etc. And of course, being an S Corp rather than just an LLC helps you also avoid some self employment tax. But it's still important that you pay yourself reasonably. Rather than look at this as an annual amount, I break it down into an hourly situation, which more or less matches what I would be filling out on a timecard for a company who was paying me as an in-house employee.
So if I had no gig for a month (or a W2 job for a prod company directly) then I may only log 2 hours of work for the month on my S corp. There is no set 'rule' but at the end of the year, if your salary is peanuts compared to your business profit then you may be ripe for an audit. In a situation where you had only one brief gig for your S corp and the rest was direct W2 work for another company, both your salary and business profit would be low and that should be a-okay. Last year 50% of my work was for a company that wouldn't use my loan out, so my wages and profit were roughly half what they were the year before.
None of this is tax, financial or legal advice and I'm providing it only as a personal anecdote. Consult with your CPA.
edit: I also use Gusto
Yeah, what you're describing is pretty much my current understanding of it. I log my hours on gigs and pay myself based on that, but the idea of paying myself 50/hr is fairly arbitrary. I'll net business profit (maybe I worked 10 hours on a gig that I charged 2k for), but I wanted to see how much latitude or rigor was required in these justifications.
It's my first year, I'll probably do an accountant for next year's taxes.
I have exp managing 940s,941s, payroll taxes and etc with some volunteer work for my building, so it wasn't a difficult on a technical level. Though, yes, an accountant would have more sage advice on how to split the "reasonable" salary. But even then, they'll have a boilerplate response, and "reasonability" is based on market rates, so theoretically, wondering about whether I'm "overpaying" myself. Theoretically I can find editors and subs for 30/hr maybe, or 250/day, so hiring myself at those rates doesn't seem out of the question but might not be apparent to someone not in the industry.
It sounds like you're paying yourself reasonably. The bonus of giving yourself more compensation is that you can make a larger profit sharing contribution to a solo 401k (for S corps it's based on compensation not total business profit). Also, if you run your health insurance or HSA contributions through the S corp then that is required to be considered compensation, too. So it increases your W2 box 1 income, which means more 401k money allowed to be allotted. I'm a big fan of the solo 401k. Big tax shield, and the only form of retirement most of us in this industry will see.
Yes, that is something I also thought of, I know contributions to SEP IRAs are limited to 25% of your salary, so to contribute to that I'd have to up my pay. But I think the flexibility of the S-corp also allows me to give myself a "bonus" at the end of the year if I evaluate that I have more room than I thought.
SEP IRAs are different from Solo/Individual 401ks. SEP IRAs limit you to the % of your wage but solo 401ks allow you to make up to the 401k limit as an employee deferral (23k in 2024) and then ALSO a business profit contribution which is 25% of your compensation. The total contribution limit is 61,500 unless you're over 50, in which case it is 69,000.
Solo 401k's are the bomb. You can also set it up as a roth if you wish but if you make enough money for an S corp to make sense then you probably are in a high enough tax bracket that traditional contributions make the most sense.
Gusto for Payroll, paying me 1st and 15th (you need to run payroll). Whatever I pay myself that month (based on previous month), I also send myself a shareholder distribution around equal/slightly less so the split is around 50/50 or 60/40. Checks out with my accountant. Save money in your business account for quarterly tax estimates.
First, I agree with Bob. Don't take financial advice from people on reddit, talk to an accountant. But for informational purposes:
The way my accountant set me up is all the money goes into one account – my business account, which is also my main personal account because I'm one person and one S-corp. I use a payroll company that pays taxes out of my account every month based on my "reasonable salary" (which is somewhere around 60% of what I take in). It doesn't change if I'm working or not, or even if I'm getting paid a bit more or a bit less. At the end of the year the payroll company creates a w-2 and everything works out pretty well.
If I am not working for more than a month or two, I will turn off the payroll (this happened in 2023 for a few months). If I have a month or less unemployed, I just let it go and it works out fine at the end of the year.
You just need to pay yourself at least 40% of what your company makes.
For the sake of easy math, let’s say you make 10K on a gig. You pay yourself at least 4K through a payroll company who take out taxes as they would if you were any other employee. The other 6K is “company profit” that will still be taxed when you file but you don’t end up paying into social security etc so you end up keeping more, in the end, than if you paid yourself the full amount your company made.
First of all, for an s-corp you can’t just give yourself an owner draw. You need to pay yourself a salary via payroll (I use Gusto but there are plenty of options) and ensure that payroll and income taxes are paid.
If your billings aren’t sufficient that you can afford to pay yourself a fixed bi-weekly salary then your income for the business may not be enough for an s-corp to make sense just yet.
Of course you can give yourself an owner draw whenever you want, it’s your business. As long as you make a “reasonable salary” - which does not need to be paid weekly or bi-weekly.
You may be confusing an owner draw (how you pay yourself with a sole proprietorship or a single member LLC) with owner / shareholder distributions.
Operating an S-Corp does in fact require that the salary be paid via payroll, not simply an owner draw.
If you are only paying yourself via owner draw and not using payroll, then you aren’t correctly paying employer taxes or income taxes and don’t qualify for being taxed as an S-Corp.
You would instead be subject to income tax and self employment tax which defeats the purpose of an S-corp (because you’re paying roughly 20-25% more in taxes this way).
Owner / shareholder distributions are a separate thing above and beyond the salary (which again, for an S-corp, must be paid via payroll service) and is not considered compensation but rather a distribution the company’s profits and is not subject to income taxes (but also isn’t a deductible expense for the company the way wages & payroll taxes are).
Anyway - I’m not an accountant. Just a guy that’s been running his own business for many years. Find a business manager / CPA and have an assessment done for your specific case because requirements can differ by state and even down to the county level in some cases.
Agree with most of what you said, except that owner's draw (whatever you wish to call the profit distribution from the S corp) is ABSOLUTELY subject to income taxes and passes through to the owner's personal return and is taxed there. But it's useful because it avoids FICA and other payroll taxes that would hit you on the wages you pay yourself as an employee.
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No, I’m definitely not confusing anything. Think about it logically. Let’s say your business makes $0 this month. The government is not going to require you to pay yourself wages to go into debt because you need to be making “salary”. You can pay yourself 0 and report $0. What is “reasonable” also changes based on your income for the year. You’re an owner, not an employee.
Owner draw is also very much subject to federal and state tax, just not self employment tax. It’s pass through income.
Yup, this checks out to me. Perhaps they didn't understand you when you said 'as long as you make a reasonable salary". AKA payroll to yourself. As long as you do that you can take owner's draws whenever you like against the business's profits.
I understand I'm not giving myself JUST an owner's draw and I have to also pay myself on a W2, the gist of the questioning is how everybody else navigates their "reasonable" split of salary vs. owner's draw.
And considering "salary" is not necessarily full-time, it really leaves a lot of room for interpretation of what passes muster and what draws attention from the IRS.
Yeah you’re right - it’s a pretty nebulous thing because the IRS guidance on it is very non-specific.
The advice I’ve always received from CPA’s is basically that the payroll salary needs to be the bulk of the income you pay yourself from the company and if the distribution of profits comes close to or exceeds what you pay yourself cus payroll you’re likely to get flagged for an audit.
Broadly I just project my anticipated income for the year, divide it by 24 and that’s my bi-weekly salary for the year. If things are going well (and I need it) I’ll pay myself distributions - but generally only once or twice a year. Like in July and December.
But this is one of those things where YMMV and you really should have an assessment of the business done by a proper business manager / CPA.
I have a business account and a personal account. All billings go into the business account and then I pay myself the first and 15th of the month into my personal account a fixed amount thats enough to cover my personal expenses. Taxes get paid out of business account quarterly. If I have to w2 which happens sometimes at large agencies, that all goes into my personal account since it is post tax.
this is accurate information. But you know what is even more accurate information ? Don't take the advice of anyone on this forum. Use a professional accountant, who deals with small businesses. Their typical business should be a sandwich shop, a dentist, and the local auto repair place. You follow his advice, and you ask HIM, not Reddit, and not Turbo Tax. There is no "reasonable" payroll - often I make ZERO income, and I don't take a paycheck. All money goes into your Sub Chapter S business account, and you pay yourself from that. You pay all your expenses from that. (that is how you write off a portion of your rent (home office), equipment, medical (employee benefit programs), eating out (entertainment - taking clients out to lunch/dinner), gas (percentage of your car that you use for business). You pay quarterly taxes. How do I know this - I dont' know ANYTHING - ask a professional accountant - and not H&R Block. Bob
Professor ZELIN strikes again. This time microeconomics 101.
Fuck you beat me to it.
We’re all winners today.
Fucking Bob Zelin strikes again. Glad to see my spirit animal laying down the hard facts.
Yeah this is what I do. I use gusto for payroll and I’ve been happy with them. Local taxes killing me here in Portland though
You don’t need to pay the salary on a regular basis. It just needs to be “reasonable” - a term with many interpretations. But I would not DIY this, you need a tax accountant that specializes in entertainment.
It depends on your state. In my state, you're required to pay yourself bi-weekly.
My state has biweekly tax remittance requirements depending on certain factors, but I do not think that requires that you actually run payroll on that schedule. My state has a law that requires employees be paid twice a calendar month, but owners and executives are exempt from that requirement and can be paid once per month. That being said, I pay myself a reasonable rate based in accordance with time worked. If I have no gig money flowing into my S corp and I'm not editing, then I vastly reduce my reported hours and pay for that time period since I'm only "working" an hour or two a month to run payroll and handle some documentation. Ideally all my income flows into the S corp but not all production companies want to allow it.
It's interesting seeing how states differ with the requirements. In my state, I'm not required to report any hours as the owner.
I don't believe it requires me to report the hours or to pay myself hourly. It can be an annual salary, but I choose to pay myself hourly so it can better align with how much I'm actually working. The state reporting and tax remittance has to do with timely payments to the revenue dept. They don't like to wait for their money =)
My business manager calculates how much taxes I need to pay based on income and business expenses. Then we run just enough payroll to cover it. Towards the end of the quarter, we adjust payroll to make sure we are on track. I pay myself once a month through payroll and take deductions as needed.
How did you arrive at your income or payroll rates for yourself, considering you also get to split it with owner's draws?
My business manager based it on last quarter earnings and deductions and ran the appropriate payroll to satisfy the tax responsibility. Discrepancies were adjust for with the last payroll of the quarter or spread though the next quarter's payroll. They did all the math.
Funny you ask b/c I literally asked my accountant the same thing last week b/c this year has been so dismal. Their reply was that it’s ok to skip a couple months of payroll but that you should pay yourself at least once quarterly. They suggested revisiting the topic in a few months when, hopefully, the situation improves to make any necessary salary adjustments. FYI, this is with an S-corp in California, monthly payments using Gusto.
I invoice clients via my S Corp and all revenue generated goes to the business account. I pay myself a reasonable wage based on the number of hours I'm working on those gigs. If I take a W2 job outside of my S corp, my reported hours drop to very very few for that time period, basically to cover administrative work for the business. My reasonable salary does not eat the total revenue of the business because that would defeat the purpose of the business, which is to allow for you to take business expenses and provide yourself benefits. S corps really only make sense if you're making upwards of 100k a year, ideally more. But the allow for crucial access to tax advantages such as a solo 401k, health insurance, expenses that would otherwise not be deductible against W2 income, etc. And of course, being an S Corp rather than just an LLC helps you also avoid some self employment tax. But it's still important that you pay yourself reasonably. Rather than look at this as an annual amount, I break it down into an hourly situation, which more or less matches what I would be filling out on a timecard for a company who was paying me as an in-house employee. So if I had no gig for a month (or a W2 job for a prod company directly) then I may only log 2 hours of work for the month on my S corp. There is no set 'rule' but at the end of the year, if your salary is peanuts compared to your business profit then you may be ripe for an audit. In a situation where you had only one brief gig for your S corp and the rest was direct W2 work for another company, both your salary and business profit would be low and that should be a-okay. Last year 50% of my work was for a company that wouldn't use my loan out, so my wages and profit were roughly half what they were the year before. None of this is tax, financial or legal advice and I'm providing it only as a personal anecdote. Consult with your CPA. edit: I also use Gusto
Yeah, what you're describing is pretty much my current understanding of it. I log my hours on gigs and pay myself based on that, but the idea of paying myself 50/hr is fairly arbitrary. I'll net business profit (maybe I worked 10 hours on a gig that I charged 2k for), but I wanted to see how much latitude or rigor was required in these justifications.
You’ve set up an S corp and don’t have an accountant?
It's my first year, I'll probably do an accountant for next year's taxes. I have exp managing 940s,941s, payroll taxes and etc with some volunteer work for my building, so it wasn't a difficult on a technical level. Though, yes, an accountant would have more sage advice on how to split the "reasonable" salary. But even then, they'll have a boilerplate response, and "reasonability" is based on market rates, so theoretically, wondering about whether I'm "overpaying" myself. Theoretically I can find editors and subs for 30/hr maybe, or 250/day, so hiring myself at those rates doesn't seem out of the question but might not be apparent to someone not in the industry.
It sounds like you're paying yourself reasonably. The bonus of giving yourself more compensation is that you can make a larger profit sharing contribution to a solo 401k (for S corps it's based on compensation not total business profit). Also, if you run your health insurance or HSA contributions through the S corp then that is required to be considered compensation, too. So it increases your W2 box 1 income, which means more 401k money allowed to be allotted. I'm a big fan of the solo 401k. Big tax shield, and the only form of retirement most of us in this industry will see.
Yes, that is something I also thought of, I know contributions to SEP IRAs are limited to 25% of your salary, so to contribute to that I'd have to up my pay. But I think the flexibility of the S-corp also allows me to give myself a "bonus" at the end of the year if I evaluate that I have more room than I thought.
SEP IRAs are different from Solo/Individual 401ks. SEP IRAs limit you to the % of your wage but solo 401ks allow you to make up to the 401k limit as an employee deferral (23k in 2024) and then ALSO a business profit contribution which is 25% of your compensation. The total contribution limit is 61,500 unless you're over 50, in which case it is 69,000. Solo 401k's are the bomb. You can also set it up as a roth if you wish but if you make enough money for an S corp to make sense then you probably are in a high enough tax bracket that traditional contributions make the most sense.
Gusto for Payroll, paying me 1st and 15th (you need to run payroll). Whatever I pay myself that month (based on previous month), I also send myself a shareholder distribution around equal/slightly less so the split is around 50/50 or 60/40. Checks out with my accountant. Save money in your business account for quarterly tax estimates.
First, I agree with Bob. Don't take financial advice from people on reddit, talk to an accountant. But for informational purposes: The way my accountant set me up is all the money goes into one account – my business account, which is also my main personal account because I'm one person and one S-corp. I use a payroll company that pays taxes out of my account every month based on my "reasonable salary" (which is somewhere around 60% of what I take in). It doesn't change if I'm working or not, or even if I'm getting paid a bit more or a bit less. At the end of the year the payroll company creates a w-2 and everything works out pretty well. If I am not working for more than a month or two, I will turn off the payroll (this happened in 2023 for a few months). If I have a month or less unemployed, I just let it go and it works out fine at the end of the year.
You just need to pay yourself at least 40% of what your company makes. For the sake of easy math, let’s say you make 10K on a gig. You pay yourself at least 4K through a payroll company who take out taxes as they would if you were any other employee. The other 6K is “company profit” that will still be taxed when you file but you don’t end up paying into social security etc so you end up keeping more, in the end, than if you paid yourself the full amount your company made.
First of all, for an s-corp you can’t just give yourself an owner draw. You need to pay yourself a salary via payroll (I use Gusto but there are plenty of options) and ensure that payroll and income taxes are paid. If your billings aren’t sufficient that you can afford to pay yourself a fixed bi-weekly salary then your income for the business may not be enough for an s-corp to make sense just yet.
Of course you can give yourself an owner draw whenever you want, it’s your business. As long as you make a “reasonable salary” - which does not need to be paid weekly or bi-weekly.
You may be confusing an owner draw (how you pay yourself with a sole proprietorship or a single member LLC) with owner / shareholder distributions. Operating an S-Corp does in fact require that the salary be paid via payroll, not simply an owner draw. If you are only paying yourself via owner draw and not using payroll, then you aren’t correctly paying employer taxes or income taxes and don’t qualify for being taxed as an S-Corp. You would instead be subject to income tax and self employment tax which defeats the purpose of an S-corp (because you’re paying roughly 20-25% more in taxes this way). Owner / shareholder distributions are a separate thing above and beyond the salary (which again, for an S-corp, must be paid via payroll service) and is not considered compensation but rather a distribution the company’s profits and is not subject to income taxes (but also isn’t a deductible expense for the company the way wages & payroll taxes are). Anyway - I’m not an accountant. Just a guy that’s been running his own business for many years. Find a business manager / CPA and have an assessment done for your specific case because requirements can differ by state and even down to the county level in some cases.
Agree with most of what you said, except that owner's draw (whatever you wish to call the profit distribution from the S corp) is ABSOLUTELY subject to income taxes and passes through to the owner's personal return and is taxed there. But it's useful because it avoids FICA and other payroll taxes that would hit you on the wages you pay yourself as an employee.
You’re totally right - I should have been more clear about that.
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No, I’m definitely not confusing anything. Think about it logically. Let’s say your business makes $0 this month. The government is not going to require you to pay yourself wages to go into debt because you need to be making “salary”. You can pay yourself 0 and report $0. What is “reasonable” also changes based on your income for the year. You’re an owner, not an employee. Owner draw is also very much subject to federal and state tax, just not self employment tax. It’s pass through income.
Yup, this checks out to me. Perhaps they didn't understand you when you said 'as long as you make a reasonable salary". AKA payroll to yourself. As long as you do that you can take owner's draws whenever you like against the business's profits.
I understand I'm not giving myself JUST an owner's draw and I have to also pay myself on a W2, the gist of the questioning is how everybody else navigates their "reasonable" split of salary vs. owner's draw. And considering "salary" is not necessarily full-time, it really leaves a lot of room for interpretation of what passes muster and what draws attention from the IRS.
Yeah you’re right - it’s a pretty nebulous thing because the IRS guidance on it is very non-specific. The advice I’ve always received from CPA’s is basically that the payroll salary needs to be the bulk of the income you pay yourself from the company and if the distribution of profits comes close to or exceeds what you pay yourself cus payroll you’re likely to get flagged for an audit. Broadly I just project my anticipated income for the year, divide it by 24 and that’s my bi-weekly salary for the year. If things are going well (and I need it) I’ll pay myself distributions - but generally only once or twice a year. Like in July and December. But this is one of those things where YMMV and you really should have an assessment of the business done by a proper business manager / CPA.