5 Easy Steps to Process Shareholder Payroll from WCG Inc.

Paying a reasonable salary to S Corp shareholders is an IRS requirement. But, you are a business owner and not a payroll specialist. Here are 5 easy steps to process shareholder payroll to keep yourself compliant and tax-neutral.

Here are 5 Easy Steps to Process Shareholder Payroll:

1) The first easy step is to estimate your net business income. Your net business income is all your revenue from the business, less expenses associated with running the business. If WCG processes your shareholder payroll, we will use the previous year as the springboard for the first half of the year, make an adjustment in July or August, and then again in November if warranted. We strongly encourage that net business income is estimated 2–3 times per year for the best accuracy. Compute your income tax projections. Bad news is okay, but surprises are BAD!

2) Step two is a tax projection. A tax projection should be done using your previous 1040 tax return, plus current income information such as paystubs, rental income, and other non-business income sources. WCG typically updates tax projections for our small business owner clients at least twice a year to avoid those nasty surprises. We want to avoid that feeling of having money in the bank, but not knowing how much is truly yours. Not sure if you can afford that monster truck? We can help!

3) Determine a reasonable shareholder salary. The third easy step is shareholder salary calculation… but it’s the squishiest and most challenging part of processing shareholder payroll. On one hand, we want salaries to be low to save on social security and Medicare taxes. On the other hand, we want salaries to be reasonable! You might also want a higher salary to allow for larger 401k contributions. WCG commonly uses RCReports to help determine a reasonable salary. We have another 5 Easy Steps video that outlines Reasonable Shareholder salary.

4) Increase withholdings to account for taxes. Next, you want to adjust withholdings. Payroll tables attempt to homogenize—to label your tax obligation based on marital status, salary, and dependents, using statistical data. But! You are unique and your household is unique…and you have the burgeoning business adding to the overall tax consequence. As such, when processing payroll, you will need to manually override the withholdings that are automagically calculated to land at tax neutrality. WCG defines tax neutrality as a $1,000 refund from the IRS and $500 from the state as a buffer. Tax Neutrality! Drop that line at the next cocktail party and wow your friends!

5) Process monthly payroll. Here we are…the last easy step to processing shareholder payroll. Once you have your salary and withholdings figured out, then all that is left to do is punch it into Gusto, ADP, Paychex, or Intuit, and click the big red button—or green button, or whatever button makes it go.

Learn more: https://wcginc.com/business-services/s-corp-salary/