S-Corporations are pass through entities, meaning their income and losses are passed to their owners through a K-1. This income is not subject to self-employment taxes.
So, the IRS is just letting you off the hook for employment taxes?
- Nope, S-Corporation officers are considered employees of their own company, so they must pay themselves wages and pay employment taxes on those wages.
How much should you pay yourself?
- How much would a normal employee doing your job make each year? What do other businesses in your area of expertise pay for similar services?
- If you are unsure, consider the following:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Timing and manner of paying bonuses to key people
- Payments to non-shareholder employees
- Dividend history
Keep in mind, this means you need to run payroll, file employment tax returns annually and quarterly, and file W-2’s. Filing a 1099 for your officers is not sufficient.