How to Hire Yourself as an Employee || Owner-Employees in California

hey this is attorney Elizabeth Potts Weinstein today we're going to be talking about how to hire yourself as an employee of your S corporation in California in this video specifically about people in California about businesses in California and I'm going to be talking about hiring yourself as an employee of your S corporation so if you have created an LLC that you've decided to have it be taxes and escort or a corporation that you decided to have it be taxed as an S corp you are going to need to hire yourself as an employee to be able to pay yourself you can't pay yourself everything just as a distribution of profits you have to also hire yourself as an employee and pay yourself as an officer or whatever title you want to have for yourself as the owner employee of this business where you run a regular payroll and actually pay yourself just like you would if you were an employee somewhere else and the reason you have to do that is for tax purposes the IRS requires that so that way you're paying all the kind of things you used to do with self-employment tax so all the ficos and Social Securities and all that kind of stuff now the first thing you need to do is have an S corporation which can be an LLC taxed as an S corporation or a corporation taxed as an S corporation so that has to be set up first you can't have a sole proprietorship tax Corporation so if you if that's what you have a sole proprietorship you have to first form the LLC or Corporation and then elect to have it taxed as an escort and I have videos that I'll link up here down there about how you do that paperwork the next thing you want to do if you haven't done this already which you probably will have already done this but is make sure you have an EIN an employer identification number for that LLC or Corporation you're going to need that anyway and you will need it to actually file the S Corp election so I'm assuming that you did that when you set up the business originally but I just want to make sure we're all on the same page that you get the Ein from the IRS the federal Ein before you do any other steps so as I said you're going to need to be running payroll so you're going to need a payroll provider now there's a couple different ways you can go about this one is your bookkeeper accountant tax preparer whatever they could do this for you they could be the payroll provider another way you can go about it is to hire a service I'm actually going to do a video in the future that's going to have all kinds of different payroll providers and I'm going to look over all of them and explain which ones are appropriate in which situations I personally use Gusto I think Gusto is a great choice for a lot of small businesses however there are other ones out there and I'm going to be doing a review video in the future going through all these different ones but fundamentally you don't want to be doing the payroll stuff yourself I I really don't think you should I don't do it myself because man it is so easy to screw up there are so many files you have to do filings with the state filings with the federal government you have to do filings every time with the pay different pay a different schedules and months and quarterly ones and annual ones and all these different things and then schedule changes and I try to do it myself when I first started my first business because all these online payroll providers didn't exist back then and I was constantly messing it up and getting letters in the state or getting letters from the IRS telling them I did it wrong and I'm a lawyer okay I'm a lawyer it was just and I was using QuickBooks to do all the calculations I was still messed up all the time and I didn't have to like pay horrible fines or I didn't like get super big trouble but it was still wrong once I hired a payroll provider to handle it for me I'm not saying they're always perfect they don't ever mess anything up because sometimes they do and then they have to fix it but they're fixing it then they're fixing it then and most of the time they don't and most of the time Gusto hasn't messed things up so generally speaking I think it totally makes sense to hire this out so you're gonna need to decide what payroll provider you want and what the first decision is you're gonna pay a person or are you going to hire a service I personally really like working with a service and I use Gusto as I said before and the reason is is that I like going in there and deciding what my payroll is going to be and what I'm going to do it and I can make changes myself and I can decide well you know I actually really didn't make that much money this month it was a really bad month so I'm going to pay myself less this month I can make those decisions without having to like talk to some person and have it be awkward in that kind of a way now there are some accountants tax preparers people like that who instead of running payroll paying yourself every week every two weeks twice a month once a month whatever they have you do payroll once a year I personally don't recommend that because I think paying yourself on a regular basis is a very disciplined way to make sure that you're paying yourself the right amount of money and the taxes are coming out right and that you're looking at the finance of your business on a regular basis and if leaving it to the end of the year I think is very potential dangerous thing to do so I think it's much better do on a regular basis however there are totally people who do it that way and they haven't gotten in trouble with the IRS yet apparently so it seems like that's an okay thing to do I think running payroll on a regular basis even if it's just once a month which is how I currently run my payroll is a way to very very disciplined about making sure that you pay yourself making sure all the taxes are taken out and really looking at the finances of your business on a regular basis so let's assume you selected that payroll provider now a lot of times at this point you can go ahead and like sign up with them or however it works to get on board with them as your payroll provider but they're going to need a couple of things for you a lot of stuff they're going to do for you completely sometimes they will do everything for you but a lot of times they're going to need you to do a few things first and what they're probably going to need from you is to be register you to register as an employer so in California you register with the EDD so it's edd.ca.gov you go there to register as an employer and you get a number from them that is your employer tax account number and you're going to need to give that to your payroll provider and so that's something that you'll need to do on your end and then as employees get hired then they'll go ahead and file the paperwork for the employees including you as the employee you sometimes have to also register with the city some cities don't have any employment taxes but some do so you'll have to look at the city and see if you need to register and a lot of times the payroll provider will tell you you need to do this so you'll give the address for where your location is which could be your house if you're working from home or your office and then they'll tell you oh actually in this city there is a employment tax and so you need to register as an employer there so and then the reason they'll tell you that is because they need the number so they can do the filing that's one of the reasons I recommend to start out with a payroll provider because you need to see are they going to do these things for you or do they need you to do them and then they'll tell you what things they need you to do and they're like we need this number this number this number and then they'll give you the link and you go off and do it or they'll say oh actually we're full service and we do all that stuff for you so you have to find out so how do you actually pay yourself and the big issue here is is that how do you figure out what the salary should be for you now the rule is with the IRS that you have to pay yourself a reasonable salary what does that mean no one actually knows when it really comes down to it because that's incredibly vague what is reasonable you know it's reasonable for your job for the role that you have in the business and I mean the work that you do so like there's some of the work that you do in the business that's actually not in the business it's on the business it's you as the owner and there's some work that's like you just doing things you're making the things you provide the services whatever that's like a job that you have on the business versus you as the owner when you're thinking about like big picture planning things for the business that may be just you as the owner so you're doing the job what is the reasonable salary for the job part of that business but that has to be balanced with how much money the business actually makes so for example let's say you have a business that makes three hundred thousand dollars a year profit three hundred thousand dollars a year profit well you can't argue that you should be only paying yourself a salary of 10 grand because you know what you made 300 Grand you can't have your salary no one works for 10 grand full time like that's like not legal it's not minimum wage even so you have to have a reasonableness for how much is the salary versus The Profit that you just pay yourself as a distribution in that case let's say the job that you're doing if you had to hire someone else you would pay them a hundred grand a year so you pay yourself 100 Grand a year and the other 200 Grand you take as a profit distribution that would be one example and then you would want an argument you wouldn't have some like evidence that you get from somewhere that shows that 100 Grand is reasonable and they're gonna other hand let's say this business makes ten thousand dollars as profit Well normally I would say ten thousand dollars is not a reasonable salary to pay anybody but if that's all you got then that's all you got it only made ten thousand dollars last year then it's totally fine that you only pay yourself ten thousand dollars no one expects you to pay yourself more than the business makes that is reasonable and you totally have that argument so you see what I'm saying there so it really does depend on how much your business makes as well as what the job should get paid if you had to hire a stranger to do it and so what I like to do is look at it from like I don't like a sliding scale that okay so if I had all the money in the world I'd have to pay someone whatever 50 Grand 100 Grand some amount of money 35 000 a year it depends on what it is and now you're working full-time and how much would you pay someone to do that job and then you scale down them from there if your business doesn't make that much money and then if your business makes more money than that then that's just profit distribution now I highly recommend that you come up with a schedule and it's something that your resume you visit on a regular basis when on your payroll schedule to decide how much to pay yourself based on your profits and your business and kind of on that sliding scale so let's say you're thinking okay I'm gonna pay myself 50 Grand a year that's a very reasonable salary for this job in this location that I do in my business but I don't actually make enough each month right now to pay myself that so let's say you want to run payroll every week or every other week or every month let's just save every month then at the end of the month when you're getting ready to run the payroll you look oh how much money did I make last month did I make enough to pay myself the 1 12 of 50 000 or not and if you didn't then you pay yourself a reasonable amount you pay that that the reasonable amount is how much money that is but if you made way more than that then you can pay yourself that one twelfth of fifty thousand dollars I can't do that math in my head and then you could do another distribution if it makes sense in that situation or you could just leave the money in there and let it go from month to month and use it for research and development or buying new things in your business or whatever makes sense for you and I think that's really the the one of the biggest takeaways I want you to think about when you're doing calculating out how the payroll is going to work is that it's very important to have a schedule I think it's very important to have a regular schedule but the amounts of money can be different if that's all that you have so you're not forced to pay out extra for your business just because you happen to have NS Corporation again this is attorney Elizabeth Potts Weinstein if you have any questions about what we talked about today feel free to leave them in the comments below and I'll try to point you in the right direction thumbs up if you found this video helpful subscribe for more videos like this and if you have any more questions or would like more connection you can join the free Discord or sign up for the patreon links are below thanks a lot for watching bye

Channel: Elizabeth Potts Weinstein

Views: 2,185

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Id: RpMWvMpVzNk

Length: 11min 26sec (686 seconds)

Published: Thu Oct 05 2023