If you want to get audited, try THIS!
Don’t pay yourself as an employee if you’re an S-corp owner.
If you’ve elected for your LLC to be treated as an S-corp, yay! That’s great, because you’re going to be able to capitalize on some real (and legal) tax savings in the form of reduction in self-employment tax.
But…
When you elect to be an S-corp, the IRS also requires the owner to pay themselves as an employee of the company.
Let me say that again…
Owners of S-corps have to pay themselves as an employee…like a real W-2 employee.
You have to be on payroll and you have to pay yourself a “reasonable compensation” (those are the IRS’ words, not mine)
A “reasonable compensation” is going to be specific to your line of work and the amount of work you do. It’s going to be different for every owner.
So what’s your “reasonable compensation”? Here’s a good start…how much would it cost to hire someone to do what you do?
How does this increase my risk of audit?
If I were an IRS agent and looking to find missed tax revenue I could have gotten, I’m going to look at all the S-corp tax filings and find the ones that have little or no payroll on their tax return.
It’s by no means a guaranteed audit, but not paying yourself as an employee (and in turn, not paying enough taxes to the government) will up your odds of an audit.
But this is no reason NOT to become an S-corp.
There’s no magic revenue or profit number that tells you when it’s time to elect to be an S-corp.
When you can consistently pay yourself a “reasonable compensation” for the work you do for your business, it’s time to start thinking about getting S-corp tax savings.
Sole Proprietor > LLC > S-corp
That’s your glide path.
Think you might need help with this? Shoot me a DM using the button on the top-right of this page and maybe I can help you via email or we can set up a 15 min call…on the house.
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