LLC Filing as S-Corp Salary. Can it be done annually to skip some of the payroll costs and overhead?

[Somedude12]

So I will be starting up a new LLC and possibly Filing as S-corp.   This is a side business. I have a normal W2 job already.

I am the sole owner. No other members.

I have read that the downside to S-Corp is the accounting you have to do because you must pay yourself a reasonable salary per W2 payroll and all the withholdings and estimated taxes that go along with that. There also seems to be some quarterly reporting requirements.

Others I see are using online payroll systems to do this. Which is what I may do if I have to.  

The thing is...  I don't need this income instantly. It can wait till the end of the year.  

Can I cut down on some of this accounting overhead by just signing up for a payroll system at the end of year and paying myself one bulk annual check and annual distribution?

[DanielV01]

Yes.  What the IRS requires is that you pay yourself reasonable compensation (which is wage or salary income), but outside of state labor laws, you are not bound to pay yourself on any particular schedule.  Since, as an "employee" of your own business, you have considerably more leeway, you might opt to do this.

Just keep in mind what "reasonable compensation" means, because the IRS defines it loosely.  The compensation must be in line with what a worker in a similar field would get paid for the services rendered.  Since you state that this business is part-time, you may wish to determine a fair hourly rate for the work you do that compares to what others who do the same work in your area would get paid.  (You can use the "lower-range" figures of such compensation, but it still must be within reason.)  Then, keep track of your hours.  As long as you are not working overtime hours (more than 40/hrs./week, for example), using the wage method (and documenting your hours) is an ideal way to determine "reasonable compensation", because it will reflect fair pay for the amount you worked.  If you were working more full-time with OT hours, a salaried-exempt model might be better.

If you keep track of all of this, you can pay yourself at the end of the year, but you still may need to file quarterly payroll reports (like Form 941), even though you report 0 income or tax withheld.

[tagteam]

Although there is a requirement to pay yourself a reasonable salary (or wages), there is no requirement that the payment be done with any particular frequency.

As a result, you can pay yourself once annually. However, note that there may be an obligation to file Form 941 reports (whether you have taxes to report or not) on a quarterly basis, so you should take that into consideration.

See https://www.irs.gov/instructions/i941#en_US_202112_publink1000294644

[Carl]

Laws differ from state to state. You need to seek professional help in your local area from a CPA experienced in S-Corp matters for at least the first year of business. Doing things wrong *WILL* cost you dearly in fines and penalties with the IRS. If your state also taxes personal income, then you can double those files and penalties.

For example, the corporate 1120-S tax return is due to the IRS by March 15th. The late filing penalty is $205 per month, per member.  You're required to file quarterly tax statements. You're required to take a minimum draw from the S-Corp each year, separate from any W-2 income (It gets reported to you on a K-1). There's a lot more too. So please seek professional help for at least your first year.

You wouldn't need to deal with all this corporate stuff, if you leave your business as a sole proprietorship or single member LLC.

[tagteam]

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@Carl wrote:

You're required to take a minimum draw from the S-Corp each year, separate from any W-2 income (It gets reported to you on a K-1).

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There is no requirement to take a "minimum draw" from the corporation. 

There is, of course, a requirement that a reasonable salary be paid for services performed for the corporation, but there is no requirement that additional distributions be made to shareholder(s) (obviously, if they are made, the distributions are reported on the K-1(s)).

[Somedude12]

Wow thanks!  This really good news on annual payroll issue. 

As for the reasonable salary. I had planned 60/40 to keep it off the radar but as a CEO shouldn't I be getting a unreasonable salary?  LOL

Ok for form 941 if I am not paying out anything. It seems useless to file since it would be all 0.  Do I just file it with all 0's?

This is in Ohio btw.

[f404]

What happens if the S-corp lost money for the year and you have not taken any distributions. In that scenario, my understanding is that, no reasonable salary needs to be taken. Am I wrong?

[tagteam]

@f404 

You are correct about sustaining a loss and a reasonable salary.

Your 941 forms (if required) need to be filed quarterly even if no tax is withheld (i.e., you file a zero return).