As the president and sole employee of a new S Corp (2017), what should I do if I failed to set up payroll and pay myself a reasonable compensation last year?

[ntd88]

All corporate earnings (about $35k) were kept in the corporate account (none withdrawn for personal use). I now realize I was supposed to pay myself a reasonable compensation through payroll, despite the relatively low earnings the first year the corporation was in operation. Now that it is past the calendar year, what options do I have to try to rectify this situation?

[TaxGuyBill · Accepted solution]

If you did not take any money out of the corporation for personal use, you don't need to do anything.  It is perfectly okay to keep the money in the corporation for future corporate use.

At whatever point you do withdraw money from the corporation, just keep in mind that $35,000 when you pay yourself salary.

As a side note, I really recommend going to a tax professional for at least the first year of the corporation, and pay for extra "consultation" time so the tax professional can teach you what is required for a corporation, and any other suggestions and recommendations the professional may have.

[ntd88]

Thank you for your response and advice! As a follow up, since the corporation's net income will all flow to myself as a distribution, could this potentially be interpreted by the IRS as taking a compensation without paying myself a reasonable salary via W2 (even though it is all still in the corporate account)?

I guess what I am trying to get at is how does the IRS distinguish between distributions for personal use versus for future corporate use if it flows down to the shareholder level?

[TaxGuyBill]

The income flows to you, but that is not a "Distribution".  A Distribution is what you actually receive.

Again, as long as you have not taken money from the corporation (a Distribution), it really isn't a problem, as long as whenever you DO take money from the corporation, you take that into account when determining your Salary versus Distributions.

[ntd88]

I see - thank you for the clarification!