How to Setup S Corp Payroll (Step-by-Step Guide) - How to Pay Yourself as the Owner

all right so you officially elected S Corp status for your business but but you have no idea on how to set up payroll to pay yourself as an S corp owner if that's you then don't worry in this video I'm going to walk you through each step on how to do this correctly so that you are in compliance with the IRS requirements for S Corp compensation [Music] hey it's Sherman with my CPA coach where we guide business owners to more tax savings and less stress we advise a lot of our tax planning clients to set up S corporations for one simple reason to avoid the 15.3 percent self-employment tax if you earn ordinary income from your business and you are not an S corp or C corporation then you may be subject to thousands of dollars more in self-employment taxes that could instead be reinvested back into your business for example if you earned one hundred thousand dollars in business income then technically you would be subject to over fifteen thousand dollars in self-employment taxes so the strategy to avoid this is normally to elect S Corp status and if you haven't done this already then make sure you subscribe to our channel for more information on how to do this now once you elect ask Corp status you are required to pay yourself a reasonable amount of compensation and that compensation must be paid through a payroll system which means that those wages will be subject to payroll taxes it's basically the government's way of recouping some of the tax they would have otherwise collected from the self-employment tax however instead of paying that tax on 100 of your business income you would just be paying it on the wages you are taking from your business which is normally much less than your business income with that being said if you're watching this video you are most likely interested in learning more about how to set up payroll to start paying yourself wages as an S corp so now that I've kind of set the stage here let's go ahead and Jump Right In All Right Step number one choose a payroll provider the three most popular payroll providers for small business owners are QuickBooks gusto and ADP and prices normally range from about twenty dollars to one hundred dollars per month depending on the type of payroll plan that you're interested in now regardless of the payroll plan you sign up for there is one big thing that I always recommend my clients to do and that is to make sure that your plan includes automated tax and forms this means that your payroll provider will take care of calculating fouling and paying your payroll taxes on your behalf and trust me when I say this this will make your life so much easier when you manually file your payroll taxes not only will it take more time for you to administer but it can also be extremely costly if you make one single mistake many years ago I used to manually file and pay my own payroll taxes which I normally submit it on time but one time I filed my payroll tax return turns us one day late like literally one day late and was charged over one thousand dollars in penalties so as you can imagine I immediately switched to a full service payroll plan and have not been late since I strongly recommend it to my clients so they can spend more time on their business and not on administrative tedious tasks step number two set up accounts with federal and state agencies once you pick a payroll provider and activate your account there's another big step to take and that involves setting up accounts with the appropriate federal and state agencies which will then provide you with an account number that you will then link to your payroll account as it relates to your federal account you will just need your employer identification number with the IRS and if your business has been in existence prior to forming your S Corp chances are you already have this number if if so you can easily find this number on your last year business tax return but if you do not have an EIN then you can simply apply for one right on the irs's website which I will link in the description of this video now regarding State accounts every state is different in Most states there are two accounts that you need to set up a withholding account and an unemployment account however in some states this is handled by one agency regardless your payroll provider should provide you with the direct links on where you can register for these types of accounts in your state once you register and complete your application you will either receive your account numbers instantly or receive it via mail once it's approved keep an eye out for this because if your account numbers are not added to your account the appropriate agencies will not receive the payroll taxes that you are withholding from your check in your payroll system step number three add account numbers to your payroll settings all right so once you have your federal and state account numbers you will need to add this to the payroll settings in your account here is a quick example on how to do this with QuickBooks and should be very similar to other payroll providers so you would simply log in and go to your payroll settings then you would click federal tax to add your federal EIN number and then you would do the same thing with your state and at your state account numbers as well now it is very important that you add the correct state tax rates here as well generally your payroll provider will add default tax rates which are normally accurate however sometimes your actual tax rates will differ from the default rates that are listed and if that happens this may cause you to overpay or underpay some of of the payroll taxes that you owe so you want to double check this to make sure it is correct to do so log into your state account directly to confirm the tax rate or review your approval letter from the state which will normally have the exact tax rates the state wants you to withhold from your paychecks this step is so simple but very critical to ensure that everything runs smoothly once you start running payroll step number four add yourself as an employee okay so now your payroll account should be configured and ready to go from there you will just add yourself as an employee and enter in your personal details here is a quick example from a dummy account I created in QuickBooks as you can see here you would add all of your personal information like your address birth date and social security number then you would insert your tax filing status and any additional withholdings you would like to withhold from your paychecks and you can also choose your payment method which is almost always direct deposit for most of my clients and finally you would add the salary you wish to take from the business as a reasonable compensation but this is very important so let's talk about reasonable compensation for just a little bit here step per five determine a reasonable compensation so look the IRS requires you to pay yourself a reasonable compensation as a shareholder employee in return for the services you provide to your company and they give you some general guidelines on how to determine reasonable compensation which include things like your level of experience the exact duties you're performing how much time you're spending on those tasks in your business and so on so this is something that our firm typically helps our clients determine on a one-on-one basis because there are normally a lot of factors at play here sure you can look at websites like Glassdoor to find a comparable job and use that as your salary but normally it is a little bit more complicated than that and that is because the IRS says that the key to establishing a reasonable conversation is to determine what services you perform for the business in relation to the grocery seeds of the company in other words your salary should also take into account the gross revenues of the business for example let's say you would normally make one hundred thousand dollars per year as an I.T specialist at a Fortune 500 company but you decide to open up a business and let's say that earns eighty thousand dollars per year in income well in that case you would not take a one hundred thousand dollar per year salary because number one you would not be able to afford that based on your business income and number two your salary should be in relation to your business income anyway in fact many S Corp owners pay themselves just a fraction of their business income as a reasonable salary which is the premise of this strategy because by doing so you are limiting the amount of self-employment tax that you pay so this is just some food for thought to help you determine this if you are not a client of ours at the end of the day you just need to make sure sure you pay yourself something as a reasonable salary because normally those are the individuals who get in the most trouble with the IRS they elect s-corp status and don't pay themselves anything at all for years on end and ultimately if you do that it can come back to haunt you so just be careful and try to comply with the rules of an S Corp in this compensation rule as soon as possible step number six start paying yourself once you have added yourself as an employee and determine a reasonable amount of compensation for your services you can start running payroll for yourself and it really is as simple as clicking a few buttons all you would have to do is log in Click run payroll and your paycheck should automatically calculate including the payroll taxes that are being withheld from your paycheck and then you would just do that on any frequency of your choosing weekly bi-weekly monthly or even quarterly if that is your preference and depending on your your payroll plan you may be able to automate this step so you are paid automatically without even having to log in to click run on your payroll it's all your preference but very simple to do step number seven make sure automated taxes and forms are on the last step here is to make sure everything is working as planned to protect yourself from any future headaches after you have ran your first paycheck take a look at your payroll tax reports to make sure that everything is set up correctly first you will want to make sure that automated taxes and forms are on remember this means that your payroll provider will be filing your payroll tax returns on your behalf and submit payment for the taxes you are withholding from your paychecks if this is not enabled then nothing would be filed and you would need to file these returns manually secondly you will want to confirm that your payroll system is calculating taxes and planning to actually file these forms for you in this screenshot you can see that the system is already planning to pay and file my federal taxes and my state taxes based off of running that initial paycheck you can also see the due dates and more importantly The Prompt that says paying automatically which further confirms that this will be handled by the payroll company this tells me that everything is set up correctly and that I no longer have to worry about this part of the payroll process once you set this up successfully for your business running payroll will be a piece of cake I promise you you'll just need to log in Click a few buttons and carry on with your business so I hope this guide helps you get started and if you enjoyed this video be sure to like And subscribe for more helpful guides like this to help you run your business in the most tax efficient way possible and if you're interested in becoming an exclusive client of mine for more support you can apply at mycpacos.com to see if we have any slots available thank you for watching and I will talk to you soon

Channel: Sherman - My CPA Coach

Views: 15,163

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Id: XpSiQ1y-I8E

Length: 12min 54sec (774 seconds)

Published: Wed Jan 25 2023