Our firm handles business owners' payroll filings (well, Gusto does the paperwork but we do most of the decision-making). One key requirement for S-Corp owners is to draw "reasonable compensation," which, in simple terms, means paying yourself fair wages. We keep this requirement in mind and work around it, simplifying our clients' tax situations in many aspects.

S-Corp shareholder wages are reported via a W-2 form and are subject to Social Security and Medicare taxes (or so-called self-employment taxes). However, the net S-Corp income that flows to the business owners through the S-Corp’s form K-1 is not subject to self-employment taxes. Regular taxes are still due on the K-1 income. Without proper tax projections, the S-Corp owner will owe additional tax on that K-1 income at tax season.

We adjust our clients' payroll withholdings throughout the year so that they break even (or close to it) at tax season. How do we know projected tax liability? We create mock returns and calculate projected tax, taking into account income from the K-1 form and other sources. This strategy also mitigates the risk of estimated tax penalties, which are caused by poorly timed tax payments or their absence. When taxes are withheld through payroll, the IRS considers the withholding as timely payment, even if the payroll withholding was made on the late date. This means that estimated tax penalties won't be imposed as long as the full tax was paid during the year.

Some S-Corp owners prefer to do their tax planning at the end of the year and pay the remaining tax liability by issuing themselves a bonus and applying this bonus toward their estimated tax liability for the year. This works well, and the only difference between the two strategies is your money management preference: do you want to part with your cash gradually throughout the year or keep it in your account until December and part with it then?

Another consideration we take into account is whether the business owner works full-time or if the business is profitable in a particular year. With reduced hours and profits, there may be a way to bring down reasonable compensation (read: paying less in self-employment tax). If we see that there is an opportunity to reduce or not pay W-2 this year, we will provide our opinion on the matter.

We also help set up 401(k) contributions and self-employment insurance premiums in the Gusto software, since these two items are tax deductions and should be reflected on your W-2. 1099 forms are another payroll service that we offer.We