As an S-Corp owner, what is a reasonable salary? What are profit distributions?
If you run your business as an S-Corp or think you may down the road, please read on…
In our last post we talked about what an S-Corp is and the main tax benefit of running your business as an S-Corp.
In order to save the 15.3% in payroll taxes, there are a couple components that you should know.
You need to pay yourself a reasonable salary. What is considered a reasonable salary? The answer is that it will depend on what your company industry and what you would pay someone if you were to hire someone to fill in for you. A common rule of thumb is that the salary should be in line with the average in your industry. A lawyer for example might make $200,000 a year, meaning that a salary for yourself should be in line with that. Another part of this is that your salary will be subject to payroll tax, so the goal is to make your salary as low as possible without drawing attention to yourself.
You pay yourself PAYROLL TAX FREE profit distributions. What are profit distributions? Profit distributions are essentially just checks being made out to the S-Corp’s shareholders. An example would be, your company makes $200,000 and you have a salary of $100,000. If you need more of the company profits to live on, you can take a distribution and write yourself a check for $50,000. That $50,000 is NOT subject to the 15.3% payroll tax.
Pretty cool stuff here! S-Corp's are very effective in helping you make more money and pay less tax. If you're in business or starting a new business, talk with your advisor(s) and see if an S-Corp would make sense.
We hope that this helps, and if you have any questions, feel free to reach out to our team.