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.

The "Reasonable Compensation" Requirement

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.

Smart Payroll Adjustments for Zero Surprises

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.

Flexible Year-End Bonus Strategy

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? Either way, we’ve got you covered.

Tailored Payroll Solutions for Your Situation

We also consider factors like how much time you dedicate to the business or its profitability in a given year. If you're working less or the business isn’t as profitable, there might be an opportunity to reduce your reasonable compensation—meaning lower self-employment taxes for you. We'll always provide you with strategic insights to help you save.

On top of that, we assist with setting up 401(k) contributions and self-employment insurance premiums in Gusto, ensuring they’re reflected correctly on your W-2, maximizing your tax benefits. Need 1099s filed? We’ve got that covered too.

Let us simplify your payroll and tax planning so you can focus on what you do best—growing your business!