If you are an S Corp, or will be converting to an S Corp in the future, there are some important things you must know as the owner of this entity. When talking with potential clients, I notice a lot of the time these are being skipped over.
1. The owner should be paid a salary, if the business is profitable – Draws do not count as salary – you have to be paid wages where you also pay Social Security and Medicare tax. If you are an owner of the S Corp and are active in running the business it is a requirement by the IRS to have a salary set up. The salary amount can be determined through a reasonable compensation report that can be done online through a participating vendor, or your CPA may be able to run one for you. The risk: If you don’t pay yourself a salary, and take draws, the IRS could reclassify those distributions as wages and charge you the tax on that. Rule of thumb: If your business is profitable and you’re taking draws, set up some type of salary
2. Your accounting file should be adjusted accordingly. Each owner should have a “Distributions” equity account. There should be an expense account for Owners Salary and this should be separated out from any other employees payroll that is being paid. If you were a C Corp before, the Retained Earnings accounts will need to be kept separate from the S Corp Retained Earnings. Additional adjustments will possibly need to be made, depending on what your structure was before the S Corp.
3. “Minutes” Meetings – Board meetings are supposed to be happening consistently and notes be taken (for proof of it happening). Regardless of whether you are a solo owner or you have a few owners under the S Corp, you should be meeting and taking notes on what you discussed – this is a great time to review your monthly financials, forecast, upcoming large purchases, business goals, etc.
Did you know? That the requirement of the Board Meetings actually opens the door to a wonderful tax loophole where you can earn tax free income ?! If tax free income interests you, just hit “REPLY” to this email, and we’ll set up a call to chat more about you and your situation. Cheers! P.S. – I recently joined James Patrick on the FITposium podcast talking about business and taxes – check it out HERE