Right now, my profit before salary is $25k and it’ll likely grow to $30k by the end of the year. Since this is under $36k, I want to know if I should wait until December 31 to run payroll or if I need to do it earlier to make sure everything processes in time. Any advice?
There’s no set amount for what a reasonable salary should be for an S-Corp. If your profits are lower, you adjust down. Don’t wait until December 31, though, because payroll needs a few days to process or it could roll over into 2025.
Also, get your payroll software set up now if you haven’t already. Services like Gusto can take a couple of weeks to activate, and payroll itself usually takes 2–3 days to process.
@Caiden
My $36k reasonable salary is specific to my business. If I run payroll on December 20 to be on time, how do I figure out the exact amount for the year if I don’t yet know my total profit?
Rory said:
@Caiden
My $36k reasonable salary is specific to my business. If I run payroll on December 20 to be on time, how do I figure out the exact amount for the year if I don’t yet know my total profit?
If you pay yourself around 60–90% of profits, the IRS is unlikely to question it. For profits like yours, the IRS probably won’t even look at the return. No offense, but your numbers aren’t big enough to attract their attention.
@Caiden
The 60% idea doesn’t apply if all profits need to go toward salary. If my profit is $30k and the reasonable salary is $36k, then all $30k should be salary.
Rory said:
@Caiden
The 60% idea doesn’t apply if all profits need to go toward salary. If my profit is $30k and the reasonable salary is $36k, then all $30k should be salary.
There isn’t an exact rule for this. The law just says the compensation has to be reasonable. If you make $30k profit and pay $20k as wages, you’ll be fine. The IRS isn’t going to argue over small amounts like that.
@Caiden
I heard from someone who worked for the IRS that anything under $3k a month can trigger an audit if you take distributions without paying enough FICA.
Rory said:
@Caiden
I heard from someone who worked for the IRS that anything under $3k a month can trigger an audit if you take distributions without paying enough FICA.
In 30+ years of experience, I’ve never seen that happen.
Rory said:
@Caiden
So you’ve had clients with reasonable salaries under $36k who also took distributions?
Yes, for years. I’ve worked with small businesses where this happens. The key is to document everything and not worry too much about hearsay.
@Dawson
I see your point. I just feel like going under $36k is risky because that’s only about $17/hour.
Rory said:
@Dawson
I see your point. I just feel like going under $36k is risky because that’s only about $17/hour.
It depends on your situation. $17/hour might still be reasonable for some small businesses.
Rory said:
@Caiden
So you’ve had clients with reasonable salaries under $36k who also took distributions?
Never had an issue with small S-Corps.
Rory said:
@Caiden
The 60% idea doesn’t apply if all profits need to go toward salary. If my profit is $30k and the reasonable salary is $36k, then all $30k should be salary.
Reasonable comp doesn’t mean taking 100% of profits as salary. You might need to reclassify distributions later if necessary, but taking a reasonable percentage is usually enough.
Rory said:
@Cameron
The 60% idea works for higher profits, not for profits under $36k.
It’s just a guideline, not a hard rule.
When you say ‘run payroll,’ do you mean writing yourself a check or using a payroll service?
Nico said:
When you say ‘run payroll,’ do you mean writing yourself a check or using a payroll service?
I’m planning to use a service like Gusto.