I posted recently about how to pay yourself in a single-member LLC, and now we’re going to cover how to pay yourself in an S Corporation.
There are virtually zero rules or requirements when it comes to paying yourself in a single-member LLC. But paying yourself in an S Corp is a bit more complicated…
Refresher on S Corps:
Before we jump into how to pay yourself in an S corp, let’s review a few S Corp basics. (Check here if you want to learn more about S Corps.) An S Corporation is a tax election that an LLC or a corporation can make. This post is going to focus on single-member LLCs that elect to be taxed as an S Corp. However, these concepts will also generally apply to multi-member LLCs and corporations taxed as an S Corp.
Just as with single-member LLCs, all of the income in an S Corp is taxed as if it was personal income to the member. Except where the difference lies is in the self-employment tax.
When you make an S Corp election for your LLC, you become an employee of the LLC. So now not only are you the member/owner of the LLC, but you are also now an actual employee. Now that you are an employee of the company, you need to pay yourself as such. That means running payroll and withholding taxes just as would happen if you were an employee with any other company. The LLC will also issue you a W2, as it would for any other employee.
The idea with the S Corp is that, instead of self-employment tax, your paying FICA and all the regular payroll withholdings out of your salary. So it is only the salary that gets hit with those extra taxes, and everything above the member’s salary is taxed as a distribution, at the member’s ordinary income tax rate.
Comparing taxes in an LLC vs S Corp
Let’s say the business has a total taxable income of $100,000.
Taxed as a single-member LLC, all of the $100,000 income will be subject to self-employment taxes (15.3%) and ordinary income tax (for this example, we’ll say it’s 24%), for a total of 39.3%. That will result in a tax payment of approximately $39,300.00
Take that same situation but taxed as an S Corp, and the member takes a salary of $50,000. Now that 39.3% is only being applied to the member’s salary, and the remaining $50,000 income is taxed at just the 24% income tax rate. That will result in a tax payment of approximately $31,650. In this instance, the member will save around $8,000 with the S Corp election.
How To Pay Yourself
The primary benefit of being taxed as an S corporation is the potential to limit your overall tax liability. However, that benefit should not be taken lightly. Compared to a single-member LLC (access to a free downloadable guide is below), there is a lot more accounting and administrative work that goes into being taxed as an S Corp.
So the first step in the “how” to pay yourself is to set yourself up as an employee on payroll. In many jurisdictions, this is going to require you to apply for some kind of tax withholding license in your state or local jurisdiction. You may also need to get worker’s compensation coverage unless your state allows an exemption for the owner and employees.
Online Payroll Services
There are a lot of online payroll services that are easy and inexpensive to use. With most, you just give them your pay rate and they take care of all of the withholdings and tax filings, and you can pay yourself with a payroll check or direct deposit. I used ADP myself in the past and found it to be very easy. You pay yourself a salary via payroll, then everything else is considered a member distribution.
Novo is a great option if you’re looking for a banking option that will make it easy to pay yourself. The best part, of course, is it’s totally free. No monthly fees, no minimum balance requirements, no transaction limits, and no fees for ACH or wire transfers. (This is an affiliate link. We may get a commission if you open an account using that link.)
My recommendation, however, is to work with an accounting professional to help you with your payroll. Finding a CPA or other pro who can handle all of your tax needs, including payroll and tax filings, is really the best option.