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.