Employees

Employees

In most S-corporations, the work is done by the owners and maybe a few employees. Like C- corporations, it must have the employees fill out Form I-9, Employment Eligibility and Identity Verification, Form W-4, Employee's Withholding Allowance Certificate and withhold income from each employee's salary based on the exemptions claimed. 

The ordinary income that flows down to the stockholder from an S-corporation is not subject to self-employment tax. Because of this, many owners do not pay themselves a salary in an attempt to avoid payroll taxes or from simple ignorance of the law. However, the IRS does not allow this. If the corporation's tax return is audited, the IRS may reclassify some of the profits and hand the corporation (and thus the shareholders) a bill for the taxes that should have been paid. 

The Internal Revenue Service examines C-corporations to see if the owner-employees are paying themselves too much and examines S-corporations to see if the owner-employees are paying themselves too little. Therefore, when figuring the corporation's budget, it is best to determine what you would pay an employee to do your job in the current job market - and make that your salary.

The salary you pay yourself doesn't have to be that of a CEO, but should be at least be as much as you would pay a new employee doing your job. (If you search the web, you will find sites that list average wages per type of employment). Paying yourself a salary provides some withholding to pay your taxes for the year, reducing the amount of estimated taxes you have to send into the IRS quarterly. It also adds money to your social security/medicare accounts for when you retire.

But most importantly, it prevents you from being charged by the IRS with evasion of payroll taxes.