Why Form 1120 C Compensation 2023-2024

Hi everyone, my name is Natalia Ito, and I'm a CPA with Colorado Business CPA. Today, I would like to discuss W-2 wages and the importance of paying oneself a reasonable salary when you are a shareholder of an S corporation. In an S corporation, you are required to make a payroll when the corporation has income, which is the net income (gross income minus expenses). Additionally, you have to pay yourself when you take distributions, which refers to taking money out of your business by writing yourself a check or transferring funds from your business account to your personal account. These are called shareholder distributions. It is important to note that if you have no loans, meaning you did not lend your corporation any money, you have to establish a reasonable salary for yourself. This is because net income from an S corporation is not subject to self-employment tax. By having a reasonable salary, you can save on payroll taxes, which can be substantial. For example, if your net income is $100,000, and you take distributions of $100,000, the IRS suggests a 50/50 split. This means you would take $50,000 as shareholder distributions, which are not subject to payroll tax. The other $50,000 would be designated as W-2 income and subject to payroll tax. To properly establish a reasonable salary, you need to file payroll forms such as Form 941 or 944, Form 940 (federal unemployment tax), W-2 forms, and state and local taxes if applicable. Determining a reasonable salary can depend on factors such as the average salary for your profession, your living expenses, and the time and responsibility you have in your business. By having a W-2 wage, you can also take advantage of tax benefits such as contributing to retirement accounts like a solo 401(k) or...